The UK is currently experiencing various supply chain problems, resulting in fuel shortages, bare supermarket shelves, reduced options in restaurants, and warnings of disruption for Christmas retail, amid many other problems.
The Institute for Government, a think tank focused on improving efficiency in government and public service, produced a really helpful explainer of the reasons behind the current supply chain problems. The explainer helpfully identifies a number of contextual and structural issues that conflated to create the present crisis in the distribution of goods. They are:
- Brexit, resulting in additional bureaucracy, delays, rising costs and staff shortages
- Covid, resulting in delays in driver training and testing, staff shortages and temporary staff unavailability due to having to self-isolate
- Structural issues, resulting decreasing relative incomes, worsening working conditions, and not enough new drivers entering the industry to make up for the increasing number of those leaving it.
A recent episode of the After-Hours podcast adds a few more variables to this complex puzzle. They are:
- Concentration in the shipping industry, due to very large fixed costs, resulting in reduced flexibility regarding the type of ships used and the ports served.
- Lack of slack in the global shipping system, due to a drive towards efficiency, resulting in inability to adjust to increases in demand or disruptions caused by external factors (e.g., climate change).
- Bottlenecks in the ports, due to the shortage of long-haul drivers and to the incentives system*, meaning that ships often need to wait to unload their cargo, with the average wait increasing from 1-2 days to 1 week. [*A significant number of long-haul drivers are owner-operators, meaning that idle time at the ports represents a loss for earnings and, therefore, they are unwilling to wait around for ships to arrive]
- Bottlenecks in warehouses, due to a spike in business and labour shortages
As these two sources illustrate, we have a series of interlinked systems, and we have problems occurring at various points in the system, making this a very tricky situation to recover from. To their analysis, I would like to add another perspective: consumers.
Consumers are, of course, part of this complex system, too, not just in terms of generating the demand that these supply chain players are trying to fulfil, but also in terms of how they react to the shortages (real or perceived). Here is how.
Change in consumer trends
Consumption patterns have change dramatically, as a result of Covid-19. For instance, Google is reporting that around 15% of search queries are for needs not searched before the pandemic.
This change in consumption trends puts pressure on the supply of some items (e.g., bicycles, outdoor furniture). Moreover, it reduces the efficacy of the predictive models used by many companies to decide what to produce and stock, because they rely on historical data.
Rise of online shopping
We are buying online, more and more. Moreover, there is a significant number of customers who started shopping online during the pandemic, and continued to do so even when stores re-opened. For some it is the convenience. For others, it is the ease of collecting information and comparing options. For others still, it’s the perception that online shopping is a safer option than going into the stores.
This increase in online shopping has two consequences for the supply chain. First, these products now need to be delivered to people’s houses in – you guessed it – small trucks and vans; as opposed to deliveries to central points such as hypermarkets or shopping centres, by a smaller number of bigger trucks. Second, online shopping often results in returns. According to Shopify, around 8% of customers return more than 50% of what they buy online. That’s a lot! Though, even those 25% that “only” return 5-15% of their online purchases are contributing to the operational headache that is reverse logistics. Reverse logistics are less efficient and more difficult to coordinate than deliveries (see comment about small trucks to people’s houses vs big truck to central delivery point). Plus, they put further pressure on already busy and short-staffed warehouses.
Risk avoidance behaviour
Service delivery – be it the delivery of fuel to service stations, or the delivery of chocolates to my local supermarket – is an opaque activity for end users. In services marketing terminology, it’s a possession processing activity. It mostly takes place “back stage”, with little or no visibility for customers. When things go well, this lack of visibility is not a problem. However, when there are hiccups in the system (either real, or perceived), this lack of visibility increases the perceived risk for consumers. Specifically, it increases the inherent risk, which is the perceived risk arising from the nature of the service in general, rather than whether it is supplier A or B delivering that service.
Marketers try to overcome inherent risks by offering warranties, and disclosing information about the operations supporting the delivery of that service. In turn, customers try to overcome inherent risk by reducing their exposure to this type of service – which, in this case, is translated in the stockpiling of toilet paper, fuel, etc… That is, customers stockpile the final product, so that they don’t have to rely on the (opaque) delivery service. Some may call this irrational. Others will call it sensible. I, just in case, started making my Christmas list. It might even help with my October blues 😉