Zach Zacharia on Supply Chain Risk - First Quarter 2021

In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Zach Zacharia about the new Lehigh Business Supply Chain Risk Management Index, or LRMI for short, which identifies the biggest risks supply chain managers should focus on in the first quarter of 2021. The report is based on surveys submitted by supply chain managers across the U.S., answering questions on whether they see the risk associated with each of 10 different categories increasing or decreasing for the next quarter.

Zacharia is an associate professor of supply chain management, and director of the Center for Supply Chain Research at Lehigh, which developed the LRMI with the Council of Supply Chain Management Professionals.

He spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.

Below is an edited excerpt from that conversation. Read the complete podcast transcript. 

Jack Croft: You've just released the first quarter 2021 LRMI report, which marks the third report you've compiled since you launched this earlier in the year. And I notice looking back at the three reports that customer risk, economic risk, and supplier risk have each ranked in the top four for all three quarters so far. What does that tell us?

Zach Zacharia: Actually, that's a great point you bring up. We get our respondents to do what's called a head-to-head ranking. So after they individually consider each risk, we tell them to select their four biggest concerns, four biggest areas of risk across all 10. And that's what you're referring to here, where there's a ranking. When you notice that customer risk, economic risk, and supply risk were among the top four, then that clearly indicates that those are areas of risk that supply chain managers are extremely concerned about. Are their customers going to buy their products? Are their suppliers capable of supplying the raw materials and parts that they need to make their products? And then how is the economy going to bear up? These are areas that clearly supply chain managers have thought had been very important, and it continues to rank among the top four biggest risks of all the quarters so far.

Croft: And in terms of customer risk, what are some of the factors that go into that?

Zacharia: So in each of these risk categories, we give examples of what are things that you would consider. And so for example, in customer risk, you're looking at fast-changing customer demand. Is it easy to lose customer loyalty? Is there a changing customer base demographics? Is it hard to predict customer behavior? Is it hard to service the customer? These are all examples that we get the supply chain manager to think about as they determine whether any of those factors are changing and therefore there's more risk associated with the customers they have for the next quarter.

Croft: And I can see, for economic risk, increasing energy costs, obviously is a big thing in there. What are some of the other things that factor into the economic risk?

Zacharia: Well, commodity price volatility, labor shortages. I mean this is a big issue for us in supply chain because with COVID-19, there's been many indications where manufacturers have not been able to get enough labor — warehouses, transportation companies — because when people become sick, they're not able to come and do the work. And then is the area that they're working in properly ventilated with enough social distance so people can actually work?

So many of the managers that I talk with at warehouses or talk about running transportation companies have told me some of the process they have in place. For example, a very simple thing that a manager at a very, very large warehouse actually told me is that for the first time when COVID hit, they had to make sure that there was no overlap of employees coming from one shift to the other. Because in the past, you would have people come together and explain, hey, this is what's going on, this is what you need to look out for. But clearly the space is not designed to have social distance. So here's another example of where a lot of companies have put changes in place because of COVID-19 restrictions, which also affects the efficiency of what you're doing, and the reliability. Do you have enough people to be able to do the work that you need to get done? So again, these are things that companies look at in terms of the economy. And they want to see, is there going to be enough demand? Are they going to be able to produce what they need? So all of these factors affects economic risk.

Croft: And I'm guessing the same is true for supplier risk, as well, that in terms of everything from personal protective equipment to the labor shortages, again, being a factor, certainly, on the supplier side as well.

Zacharia: Absolutely. And you know the other thing with the supplier side that it's worthwhile mentioning is that there is a huge imbalance in cost right now with bringing containers of products from China. Many of our companies rely on supplies or suppliers that are based in China. And you have got a significant increase in costs associated with getting containers, and they are running into bottlenecks all along the supply chain because we don't have that nice, easy flow. We're not putting enough containers back into China, and that's causing some sort of an imbalance with these things. And so when companies are relying on suppliers, international suppliers, it still has not reached the kind of ease that you had before COVID times where containers are flying or going on ships very easily.

Croft: For the new report, the fourth risk, which actually is number one this time around-- Transportation disruption risk tops the list, and it's been in the top four in two of the three reports to date. What is that telling us? You've touched on this some, and I know that transportation is one of your areas of expertise and research. So what is this telling us about the disruptions to our transportation network now?

Zacharia: The real big issue with transportation, clearly, it is Christmas time. Clearly, there has been a huge increase in e-commerce. And one of the things that you have to think about is that even though-- and I always tell this to my students, it's great that you can click on a button and you can order a product. But at the end of the day, some person has to take that product from whatever shelf it's on, put it onto the back of a truck, get it to some other warehouse, it goes into another product, and then some other person takes it out of another truck and puts it on your door. So there is-- and the only reason, of course, I mentioned truck, because of course there's obviously rail and air, but well over 85% of all transportation shipments end up on a truck somewhere.

So guess what's happening? You've got a huge increase, a significant spike in e-commerce because, again, it's Christmas and people have now started ordering. And Amazon tried to deflect some of this by saying that they have, I guess Cyber Monday prices a week before, because they're trying to move this demand earlier. Because remember, when you're looking at designing any kind of a system, you're always looking at capacity. And do you build for peak capacity? Do you build for running capacity? What happens if the demand goes over a certain amount? Well, the thing is that in every viable business, you can't necessarily build for just one week in Christmas. You have to make sure that, we have to look at maybe alternate sources of supply to handle that peak.

Here's the problem. Everybody's relying on that extra source of supply. Everybody's relying on UPS and FedEx to actually handle this kind of increase in demand. Supply chain managers realize that they have to get products on the back of trucks, and they're competing with everybody else. The retailers are trying to take advantage of the fact that it's the Christmas season. Also another factor is that the COVID-19 vaccine is being rolled out, which is a very separate supply chain on its own. So I'm clearly thinking that supply chain managers are seeing that these kinds of increase in demand is happening. And even though Amazon is asking for more drivers, more people to man their warehouses, so there's a real increase in trying to hire more people, it's limited capabilities. And so we're reaching past that point of capacity. It's full.

Croft: And I'm guessing just intuitively that the greater demand for online retail, online sales, has actually been going on at least since March, with people nervous about-- well, first of all, because stores have been closed for parts of the time in different parts of the country. Going into supermarkets, going into department stores, makes a lot of people nervous now. So it would make sense that the demand for products being shipped and delivered has probably been increasing all year and even before this tremendous end-of-year rush.

Zacharia: Absolutely. I do research in this area, and I've got managers, senior executives telling me that they had all planned to invest into e-commerce. But what COVID-19 did was, it is something that they're planning over the next five years or seven to eight years to roll out. They realized they had to put that investment in now. So they are putting in money to make that capability happen, this year alone. So when you have large retailers who are planning to roll out this capability, they all learn on the fly, because as you pointed out, customers were not walking into their bricks and mortar store. So you had to build that capability in. And so you've got a huge investment.

And one thing with COVID-19, it is clear to see that there are clear winners, and there are losers because of COVID-19. Several transportation companies have executives who have told me this has been their best quarter ever in their history because of the increase in demand and the way that the prices are actually, perhaps, sticking. UPS had one of their best quarters in the last 10-15 years, because the demand has really gone up. So what's happened is that this ability to switch to e-commerce has just been accelerated, and all the companies are realizing they need to invest, because that's the direction that it's going. And companies are scrambling, but the successful ones are the ones who are going to be able to adjust and adjust quickly.