Seeking solutions to supply chain snags

Two years into the pandemic, and global supply chains continue to sputter. The disruptions caused by choked ports and rising prices for raw materials show no signs of abating, and many analysts think it could be years before these issues are fully resolved. This means that time alone will not solve these problems. Supply chain issues have many causes, and bold, decisive actions are needed to address them.

The pandemic has exposed the vulnerabilities of many organizations, particularly those that depend on producers across the Pacific Ocean for raw materials, semifinished goods, and finished products. The pandemic has left these highly intricate and interconnected global supply chains in upheaval. A shortage of one commodity leads to shortages of others, creating a snowball effect that contributes to broad-based problems such as inflation and a slowdown in production.

Turmoil on the Docks

Some actions have already been taken. For example, the Biden administration recognized problems in procuring steel and recently announced an end to tariffs on steel from Japan, which is the fifth-largest steel exporter to the U.S. But increasing imports alone will not make these problems go away. Labor shortages, particularly on the West Coast, are exacerbating already clogged ports. Unemployment has dropped to 4%, and there are not enough crane operators, truckers, and warehouse workers to move goods out of ports.

Shipping companies have also increased rates, some as much as 500%. Maersk, the largest shipping company in the world, is breaking profit records but predicts that supply chain issues will continue into next year.

Where to Focus Next

Supply chain management has never been as critical as it is now. Fabricators traditionally looked at supply chain management as a cost reduction measure, but the current widespread shortages mean that getting a better supply of goods, even at higher prices, is now a matter of sheer survival for many businesses. The goal now is to focus on three key aspects of supply chain management that need to be prioritized.

• Improving Resilience. Planning for disruption is now more important than ever. That may mean establishing connections with other vendors, stockpiling necessary materials and components, or forming alliances with other companies.
• Reducing Dependence on China. More than 200 Fortune Global 500 firms have a presence in Wuhan, the industrial province of China where the COVID-19 outbreak originated. These companies, their direct and secondary suppliers, and the entire global supply chain faced disruptions when China went into lockdown. The pandemic also has shown that China's role as the "world's factory" comes with the risk that even a small disruption will have a ripple effect on global supply chains. There is now a movement to invest more heavily in reshoring and increasing production domestically to reduce the dependence on foreign raw materials.
• Building Reserves of Capital. Manufacturers need to ensure they have enough cash on hand to deal with price fluctuations. Many in the industry are taking advantage of federal refund programs that reduce the cost of taxes and provide cash to stock their reserves. The biggest and most effective such program is the Employee Retention Credit.

Consider how automakers are dealing with microprocessor shortages. The auto industry took a beating in 2020 as chipmakers redirected their supply to electronic goods producers. When demand for cars picked up, there were not enough chips to go around, forcing automakers to slash production. Shocked by the shortage, some car manufacturers formed strategic agreements with chipmakers. Others started stockpiling batteries, chips, and other key parts as a backup for future deliveries.

U.S. Commerce Secretary Gina M. Raimondo recently described the persistent chip shortages as an "alarming" threat to American industry. The International Monetary Fund (IMF) also has cited this as a threat. Citing supply chain woes, the IMF reduced its global economic growth forecast from 4.9% down to 4.4%.

Employee Retention Credit (ERC)

The ERC is a key tool that helps manufacturers deal with supply chain problems. It allows companies to receive lump sum cash refunds. Its goal is to provide companies with the means to recruit new employees or retain the ones they already have, build new relationships with American suppliers and vendors, and increase liquidity to shield against market volatility.

Manufacturers that have faced supply chain disruptions usually qualify for the ERC, as do companies affected by:

• Reduced hours of operation.
• Full or partial shutdowns.
• Interrupted operations.
• Inability to access equipment.
• Limited capacity to operate.
• Inability to work with vendors.
• Reduced services or goods offered.
• Disrupted hours due to COVID-19 precautions.

Revenue loss caused by these common business disruptions is another qualifying factor for ERC. For example, a manufacturing firm that experienced partial shutdowns and a reduction in output received $765,892 in credits for Q1 2021.

Manufacturers facing supply chain issues should make sure they are taking full advantage of the ERC as one of their first and most important steps to improve their supply chain profile.