How the Ag Supply Chain Has Lengthened in 2021
Think back to before COVID-19 when you were running low on some materials. You could pick up the phone and contact two or three registered suppliers. One of them would have the products, and you could get them six to eight weeks later, on average.
“Today, that same process takes three months – minimum,” explains Keith Holdsworth, a senior supply chain consultant with Perfection Limited, based in West Oxfordshire, England.
This is taking into account that one of those suppliers has the materials on hand. “Then, it’s one month before they can send the materials, and then the reliability of sailing time is all over the place,” he says. “There are still shipments being cancelled, especially to Europe. Or a shipment is going to a different port, and you have to pay a premium to relocate it to where you want it to go.”
This is certainly something Jiangsu Institute of Ecomones Co., located in Jintan in southern Jiangsu, China, is feeling. Our biggest impact on operations is “international transportation,” says Kong Weidong, general manager, import and export. “The shipping space is limited, and the shipping costs keep rising.”
This means planning ahead is the name of the sourcing game. “Shipments have to be booked one month in advance,” Weidong says.
Adapting sourcing approaches to navigate shipping delays and mitigate risks to secure inventory is a tricky, albeit necessary, game one must play amid COVID-19. Today’s smart companies are strategically diversifying sourcing, planning further ahead, and navigating sensitive supplier relationships to secure the best pricing.
Reduce Single Source Dependency
A Deloitte report on “Managing Supply Chain Risk and Disruption” says that companies better mitigating the pandemic impact have diversified their supply chains from a geographic perspective to reduce risks from any one country or region.
“They have multi-sourced key commodities or strategic components to reduce their reliance on any one supplier, and they have considered inventory strategy to buffer against supply chain disruption,” the report says.
The obvious way to address heavy dependence on one medium or high-risk source (a single factory, supplier, or region) is to add more sources in locations not vulnerable to the same risks.
The U.S.-China trade war has motivated some firms to shift to what some experts are calling a “China plus one” strategy of spreading production between China and southeast Asian countries such as Vietnam, Indonesia or Thailand. While the concept isn’t new, COVID-19 has accelerated it. But regionwide problems (an example would be the 2004 tsunami) may require broader geographic diversification.
Unfortunately, certain countries or continents make it easier to create multiple sourcing options, Holdsworth says.
Additionally, the agricultural chemicals industry, has another source diversification challenge. “Your universe of suppliers is made up of only those on your product labels,” Holdsworth explains. “There are expenses and paperwork that come with with accruing new trading partners, as well as state regulations to consider; it’s a three- to six-month process.”
If alternate suppliers are not immediately available, a company should determine how much extra stock to hold in the interim, in what form, and where along the value chain, says Willy Shih, the Robert and Jane Cizik Professor of Management Practice in Business Administration at Harvard Business School in Harvard Business Review. “Of course, safety stock, like any inventory, carries with it the risk of obsolescence and also ties up cash,” he adds.
Smart Sourcing: Beyond Just Diversification
Unfortunately, diversifying sourcing away from China alone doesn’t mean a company is safe from disruption.
Normal trade flows have been continuously upended from demand surges. This has stranded empty cargo containers in incorrect locations and bred bottlenecks stretching from factories to seaports.
More disruption could cause shortages and complicate global economic recovery even as the pandemic concerns lift, a Reuters story reports.
Those who have diversified sourcing so they are less exposed to U.S. tariffs on Chinese goods, for instance, are finding that not all sourcing diversification solutions are working out. One problem that emerged: Delays amplified because shipping companies routed empty containers to the top priority U.S.-China trade lane. So if you tried a different route, your delays amplified. Port staffing reductions due to COVID-19 safety rules didn’t help matters.
“We need to get the trade flow going to grease the engine for the whole world economy,” said Christopher Tang, a business professor at the University of California – Los Angeles, in the Reuters story.
“It’s a combination of strong volume and slower and less efficient operations,” added Lars Mikael Jensen, head of network with Denmark’s A.P. Moller Maersk, the world’s biggest container line. “This is the perfect storm for global container flows.”
The Price-Relationship Crossroads
Traditionally, supplier relationships are based on reduced pricing as the reward for long-term relationship stability.
This means a company can secure a 10 to 15 percent lower price because they inform that supplier of the materials they need over the long term, earning a better price committing to a volume purchase.
But as you try and add more sources to mitigate risk, you could sacrifice some cost savings as a result, Holdsworth warns. “This industry is trapped in the race to the bottom price; it’s transactional,” he explains, adding that, in some cases, companies are buying more than they need from one source to maintain those relationships – and prices. “The smart ones and those growing tend to be embracing a more shared risk model or collaborative model.”
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