Making Sense of the 2023 Supply Chain Outlook
By: Dean Simmons
When it comes to supply chains, the word normal is beginning to seep into the 2023 outlook for manufacturers. Although, in a survey recently conducted by SAP, a software and technology solutions company, slightly more than half of U.S. companies said that supply chain issues will persist into 2023.
For the past few years, the world has been dealing with the fallout of the Covid pandemic and the effect it has had on business operations. And now, a multitude of factors continue to impact the manufacturing supply chain, including geopolitical events and unrest, raw material shortages, and rising fuel, energy and transportation costs.
Good News, Bad News
The latest Logistics Managers Index report predicts a return to normalization in the supply chain within a year, which is good news. However, recessionary conditions are currently running high, leading to economic moderation in many markets, which may lower demand and result in oversupply, according to ING’s 2023 Trade Outlook.
ING also reports that shipping companies are adding new container vessels to improve supply chain capacity and may potentially lead to lower container rates and shipping costs. Unfortunately, in some parts of the world, climate issues are creating falling water levels in vital shipping lanes which could adversely affect deliveries of materials and goods.
In the SAP survey, two-thirds of responding companies indicated they are moving from a just-in-time supply chain to a just-in-case supply chain, a model that carries more inventory and uses suppliers closer to the U.S versus relying on Chinese manufacturing. These organizations are hoping by increasing the inventory they carry, they will be in a better position to meet customer demand, but this may increase cost.
The SAP survey also reports that businesses are fortifying their supply chains and are preparing for potential future disruption by adopting new technology to overcome challenges, implementing new contingency measures, and prioritizing U.S. based supply solutions. Technology allows manufacturers the ability to strike the right balance through greater real-time collaboration between trading partners and operating with more resiliency and sustainability.
While the supply chain is in the initial stages of improvement, challenges aren’t going away. There are companies still struggling with shortages of parts, materials, and workers. Labor issues are still prevalent in the manufacturing sector and many other industries, and also notably in the shipping industry.
Jason Miller, associate professor of supply chain management at Michigan State University, tempers enthusiasm for a speedy recovery citing the difficulty some companies are still having securing raw materials and components. Relieving the gridlock of shipping congestion is less of an issue these days but has not been fully resolved.
Then there’s China. The Covid pandemic and trade barriers have made this once dependable partner somewhat less so these past few years. To address supply chain apprehension, supply chain risk management solutions can be used to review alternative sources of supply, if necessary, to promptly secure new vendors if key vendors become troublesome or unreliable.
Leadership at manufacturers will have to factor in the impact of inflation on their business during their strategic planning efforts. This is where inventory management plays a crucial role as well as assessing the production costs of raw materials and components to determine if viable, less expensive substitutes are an option.
Current economic conditions have raised concerns for an eventual recession over the upcoming year. The challenge for many manufacturers will be to forecast demand during this time period. A supply chain trends article in Forbes magazine stated, “Companies that can monitor downstream demand signals and use that data to make more frequent forecasts will see their forecasting accuracy improve much faster than companies using traditional forecasting methods.”
Where Things Are Likely Headed
According to Bloomberg Economics Supply Stress Monitor, metric conditions like delivery times and producer prices that were flashing red in early 2022 are trending toward yellow and green as we enter 2023. An Oxford Economics Indicator is similarly reporting a slow and steady improvement of supply strains in the U.S., with Oxford’s lead U.S. economist Oren Klachin predicting supply chain conditions will stay on an encouraging trajectory into 2023 as weakening demand eases the stress in supply chains.
Scott Russell, SAP board member, concludes, “Managing the supply chain is a constant balancing act. Over the last couple of decades, the ‘just-in-time’ approach traded resiliency for efficiency and lower costs, which in turn made the supply chain fragile. The pandemic and the snowball effect of related disruptions exposed this fragility, which has organizations refocused on resiliency. Still, cost remains a factor, especially in the current economic environment.”
Despite the prevailing optimistic views of improving supply chain conditions, manufacturers should have a strategic plan in place, ready to implement recessionary measures, engage alternate vendors if needed, and regularly monitor inventory levels and materials availability to ensure optimum business operations.