The Real Reason Supply Chains Are Disrupted

It seems every industry and buying segment is experiencing its own sort of supply chain disruption.

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The question is: are empty shelves here to stay? We are still seeing them at major retailers for everything from electronics to hamburgers. Lumber and steel for construction companies. Toilet paper for consumers. Even ketchup in restaurant to-go bags isn’t immune. It seems every industry and buying segment is experiencing its own sort of supply chain disruption.

One easy culprit might be port congestion – the lines of ships stretching so long out from ports like Los Angeles and Savannah that they are visible from space. Wrong. The reality is that port congestion is one tiny piece of the overall puzzle. Whenever there is a major supply chain disruption leading to a shortage, we tend to blame transportation and logistics choke-points. Have you heard people say: “There just aren’t enough trucks on the road?”

Or, there are people who blame the “just in time” manufacturing model, believing it’s time manufacturers went back to keeping more inventory on hand as buffer stock in case of future shortages. But more often than not, the source of disruptions isn’t transportation and logistics, nor is it “just in time.” The real source of disruptions is constrained procurement.

The phenomenon we are experiencing is not a shortage – of either materials or labor.

To understand why, it is helpful to first define what a shortage is. A shortage occurs when demand exceeds available supply. One clear sign of a shortage is that it is impossible to get a material due to constraints on the underlying production capacity. Critically, when there are constraints on the underlying distribution capacity – the network that moves product from one place to another – that’s not a shortage. It’s a bottleneck.

The lumber shortage is a perfect example of this. It’s not as if we have run out of trees or saw mills. And in certain parts of the country it is challenging to find trucks and truck drivers – a distribution bottleneck. But the underlying reason why certain companies have no problem sourcing lumber and others find it nearly impossible comes down to a little-known administrative process: order approvals.

During a perceived shortage, the speed of the market picks up – people buy faster and faster, driven by the fear that they will miss out on a closing window of opportunity to secure available product. Consider this example from Dr. Elouise Epstein’s book, “Trade wars, pandemics and chaos: How digital procurement enables business success in a disordered world," relating to sourcing PPE during March 2020: “Employing our best sourcing capabilities we managed to secure a decent-sized supply. When we presented our results, the client said that the cost was three times the approved threshold for PPE. Additional approvals were required. Thirty-six hours later, those approvals were secured but the PPE was no longer available.”

This example highlights how the administrative process of order approvals can, under certain market conditions, create a fundamental misalignment between selling tempos and procurement tempos, a misalignment that makes the market inaccessible. That is - the speed of selling cycles in the market has suddenly picked up, but order approvals are so administratively complex and slow that sellers are able to find more efficient channels. And the scarcer a product seems to be, the faster cycles become - leading to a self-perpetuating, self-accelerating situation, which is perceived by the organization as a “shortage” but in reality is the result of an inflexible approval process.

The source of inflexible approvals is linked to inflexible labor capacity of procurement itself: there simply aren’t enough hours in the day. Consider this example: one Arkestro customer in the automotive space processes an average of 900 purchase orders per week. Now let’s imagine that a price spike required an additional approval that added a manual step to all 900 orders that took an additional minute. That’s 900 minutes, which is 15 hours, which is close to two full additional working days. How many procurement teams are able to flex their processing and approval capacity by two additional working days per week?

Unfortunately, this lack of processing capacity flexibility among procurement teams are leading to delayed customer orders, empty store shelves, lower profitability and perhaps worst of all, inflation for both businesses and consumers. In this sense, enabling a meaningful increase in procurement capacity is a down payment on preventing future supply chain disruptions, with all of the negative associated downstream effects. It’s all about taking a surge in demand and turning it into a surge in profitability – instead of a bottleneck-making mess due to overwhelming a single-threaded linear process that relies on manual human review steps. For any business that has weathered the recent turmoil in a sub-optimal manner, this represents a massive value creation opportunity.