Inventory Risks to Consider in 2022

Inventory risks

The Covid-19 pandemic continues to send shockwaves across the global supply chain even after 2.5 years, putting inventory levels at a lot of risk.

This is further exacerbated by other disruptive events such as the “Zero-Covid Policy” in China, extreme weather events, and the conflict in Ukraine. Consequently, this has put a lot of pressure on keeping inventory at optimal levels and put further strain on companies in keeping up with high demand.

In light of these events, what risks will businesses face in 2022? How should businesses seek to build resilience in their supply chains moving forward?

This guide aims to explore some of the major disruptions that continue to plague inventory levels and strategies that you can deploy today to help build resilience and agility in your supply chain.

Current supply chain issues in 2022

Logistics disruptions

Inventory levels are impacted by ongoing logistics disruptions that stem from the Covid-19 pandemic. The flow of goods into global markets such as North America, Europe, Southeast Asia, and India is impeded by the shutdown of major ports and airports, largely in China, South Korea, and the US.

Logistic disruptions have led to a snowball effect across the entire supply chain. Since freight containers arriving at major transit hubs are slowed down or diverted, global trade flow is restricted. Due to delays in shipment, businesses cannot restock their inventory to its optimum levels, facing out-of-stock situations. 

Impediment to product availability can be catastrophic to businesses. In a world that offers a wide variety of alternatives for any given product or service, businesses run the risk of losing their customers to their competitors if they cannot satisfy demand. 

Businesses also face higher shipping prices due to the global freight container storage. According to TIME, transporting a 40-foot steel container of Cargo by sea from Shanghai to Rotterdam port costs a record $10,522—547% higher than the seasonal average over the last five years. 

Labor shortage 

The workforce continues to take a heavy toll due to the pandemic. Because new variants of the virus are spreading at an alarming rate, many staff shortages persist as employees are taking time off for sick leave. 

Furthermore, governments and businesses are implementing rigorous safety restrictions to control the spread of the virus. China’s Zero Covid Policy focuses on stamping out every infection rather than mitigating the virus using vaccines. With employees confined indoors, this strategy continues to disrupt the production and transportation of goods. 

According to Goldmann Sachs, the country could stay shut down for all of 2022. As the world’s largest exporter of goods, this has global repercussions; if workers are unable to go to the factory, goods cannot be produced. According to Wu Jialong, a Taipei economist, companies have no other choice but to operate under limited capacity.

According to Dun & Bradstreet, 51,000 companies have one or more direct suppliers in Wuhan while 5 million companies have one or more tier-two suppliers in the region. As manufacturing plants cannot meet production demands, businesses haven’t been able to source sufficient goods to keep inventory levels above the recommended threshold.

Uncertainty in demand 

The inability of consumers to regularly purchase from businesses physically during the pandemic has triggered changes in consumption and shopping patterns, notably a surge in e-commerce which has transitioned into the post-pandemic world. 

At the beginning of lockdowns, consumers were anxious to stock up on essential items. In response to a surge of egg purchases in Singapore, retailers ordered more to satisfy demand. Once the demand died down, retailers found themselves having an oversupply of eggs. As a result, in the June of that year, approximately 250,000 eggs were discarded. 

The bullwhip effect occurs when demand for products fluctuates unexpectedly, and this effect magnifies with each tier of the supply chain as suppliers buffer their orders. Businesses run the risk of having dead stock and negative impacts to profit margins: increased costs in retail space, transportation, and loss in sales. 

Strategies to Reduce Inventory Risks with MRO Optimization

Introduce automation

Supply chain operations consist of repetitive, low-value tasks such as manual documentation regarding inventory levels, time-consuming analysis of reports, and fulfillment. 

Employing manual labor to execute these tasks runs the risk of human error. Furthermore, safety regulations limit the number of employees working at any given time. This, coupled with the labor shortage, means businesses cannot get maximum output in terms of productivity and performance. 

Businesses can turn to automation to overcome these issues. For instance, companies can use collaborative robots (cobots) to execute these tasks with a high degree of accuracy. These tools are integrated with powerful sensors and Industry 4.0 tools that can bolster efficiency in supply chain operations. 

For instance, cobots that have Radio-Frequency Identification (RFID) technology can easily identify and track tags attached to packages. This yields more accurate numbers in inventory availability and, unlike human labor, these devices can operate at their maximum capacity indefinitely. 

Implement new sourcing strategies

The pandemic raised new doubts about outsourcing production to China as the main supplier. Relying on a single supplier doesn’t allow businesses to be resilient in the face of disruptions. 

Businesses should consider multi-sourcing, whereby an enterprise procures its material from multiple suppliers to achieve greater responsiveness to market needs. 

When issues arise with the main supplier—manufacturing plant shutdowns, employee strikes, extreme weather events—businesses can quickly shift to their backup suppliers. Hence, supply chain operations continuously source items and maintain healthy inventory levels. 

Organizations should also consider moving away from offshore sourcing and bringing manufacturing close to home. Just-in-time manufacturing is a popular strategy where companies keep inventories such that it’s just enough to meet demand. This is a great way to cut down costs associated with shipping, offshore tariffs, and holding excessive inventory. 

Invest in digital technology

To cope with the inventory risks of 2022, consumers’ digital preferences, and high demand spikes, digitization is essential to optimize your MRO procurement. Cloud-based solutions are a great way to improve your inventory management strategy and mitigate the risks involved. 

Businesses are currently troubled by a lack of visibility because there are so many hidden nodes and participants within a supply chain. Digitizing procurement processes offers end-to-end, real-time visibility of inventory information because they aggregate information across multiple departments into a single, customizable platform. With access to accurate, up-to-date information about any given time, businesses can identify bottlenecks and take precautionary steps before a disruption occurs. 

For instance, businesses can leverage Industry 4.0 tools such as artificial intelligence and machine learning to predict demand for goods based on historical data without simply relying on guesswork. This data includes customer preferences, frequently purchased products, and market trends which can be used to find patterns and construct accurate simulation models to predict future demand.

Coupled with predictive analysis, businesses can determine how much inventory to hold to a high degree of precision. Instead of holding excess stock, you can not only prevent overstock situations such as the one that occurred in Singapore, but you can also save up on costs such as warehouse rent and shipping, which can now be reinvested back into the business.

Harness the power of materials management software 

In 2022, global supply chains face new challenges that make inventory management all the more difficult. From disruptions in logistics to labor shortages to uncertainty in demand, it can be difficult to supply chain managers to navigate these uncharted areas. 

However, it doesn’t have to be that way. 

Investing in the right technology can not only help you mitigate inventory risks but can also streamline your entire supply chain. To learn more about how materials management software can help mitigate inventory risks in 2022, download the white paper on MRO optimization today.

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