In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Zach Zacharia about what the latest Lehigh Supply Chain Risk Management Index suggests are the biggest risks facing supply chain businesses in the third quarter of 2021. We also discuss the issue of manufacturers reshoring, or returning to the United States, which will be a hot topic at the Center for Supply Chain Research Fall Forum in November.
Zacharia is an associate professor of supply chain management and director of the Center for Supply Chain Research at Lehigh. He teaches graduate and undergraduate courses in supply chain operations management and logistics and transportation.
The Lehigh Business Risk Management Index, or LRMI for short, was developed in 2020 by the Center for Supply Chain Research at Lehigh University and the Council of Supply Chain Management Professionals. Based on surveys with supply chain professionals, the LRMI attaches a value for each category of risk that is a number between 0-100, where greater than 50 suggests increased risk, equal to 50 suggests the same risk, and less than 50 suggests decreased risk.
Zacharia 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.
The Center for Supply Chain Research at Lehigh Fall Forum is an in-person event November 4-5, 2021. The theme is Building a Resilient and Enduring Supply Chain. Sign up now!
Jack Croft: This is the first report we've talked about where you've got a little more than a full year's worth of results behind you. Looking at it across all of the five quarters that you've been doing the index, what are some of the most striking trends you've noticed over the course of what has been a very difficult and often even surreal year?
Zach Zacharia: One of the things that we noticed, so this is the first time one of our LRMI reports actually has a graph showing the values for each of the risks in comparison over the last four quarters. And one thing that just sort of leaps out at you is that for the first time in this particular quarter, the estimated risk for the third quarter coming up is-- three of the risks are the highest numbers we've ever seen since we started doing this risk index. The numbers of 86.02 for transportation disruption, 81.99 for economic, and 80.12 for supplier risk are our three numbers that are higher than any number we've seen so far across all the risks. So that is a significant change and that is a significant trend.
Croft: So let's focus on the third-quarter results. At 69.35, the average index for the third quarter is the highest it's been since you started, and looking at the individual categories, as you mentioned, I see an awful lot of red which indicates increasing risk. In fact, I believe seven of the 10 types of risk that you measure have increased, while only three have decreased. What does that tell us about the state of the supply chain, and how concerned should we be about that?
Zacharia: We should be very concerned. I mean, as I said earlier, three of the risks have been significantly higher than any other risk in the past. And as you correctly pointed out, seven out of the 10 risks are showing as increasing. What this tells you [is], in the economy, supply chain professionals are seeing that they're going to have a lot more problems with transportation, with the economy, with getting suppliers, with cybersecurity, with the idea of technology, as far as competitiveness is concerned, lower quality, greater operational risk.
So all of these kinds of things suggest that the general trend is for the third quarter, the economy, there is a lot of risk out there. A lot of the executives are very concerned about being able to meet customer demand, being able to get the products delivered. And all these areas sort of send a clear message that the third quarter is going to be even more challenging than the first and second quarter of this year.
Croft: It looks like we're in for a bumpy ride, certainly through the third-quarter. Looking ahead, do you expect the fourth-quarter report to perhaps show some stabilization or even improvement, or is it going to take a while for the myriad risks to the supply chain that we're seeing now to resolve?
Zacharia: I would be more optimistic. Everyone that I'm talking to is very concerned about the third quarter, basically because of labor issues and transportation issues, and so on. But many of the people that I'm talking to are suggesting that we're going to see, first of all, the kids are going to go back to school, more and more people are being vaccinated, more and more times COVID is being under control. So when the schools open and more people will come back to work, that should really help with our labor. Products still need to arrive for the fourth quarter. In fact, people are getting concerned that if you want enough products available by December, you need that product to come in August, September, so that it'll be ready by November when the big push comes in.
But overall, everyone is seeing that everything is sort of trending in the right direction. Lumber prices for the first time started to go down because we could see that we're handling the demand, availability is happening. So I would tend to be more optimistic that the fourth quarter should see a lot of these things reduce in severity. Doesn't mean they're going to go away, but I expect, overall, the risk numbers should be down in the fourth quarter.
Croft: I usually close by asking if there's anything we have not discussed that you think listeners should know about what's going on with the supply chain during these turbulent times?
Zacharia: The executives that I'm talking to, many of them are revisiting or re-looking at their strategy on outsourcing such a significant portion of their manufacturing processes to China. They are starting to look at reducing that exposure. And as you know, Jack, we have two conferences a year. We have the spring symposium and the fall forum, and in our next fall forum, which will be November 5th on a Friday, we have one of the top experts on reshoring, and that's the idea of bringing manufacturing back to the U.S. Harry Moser [founder and president of the Reshoring Initiative] is going to be coming and he's going to give us a great presentation.
I've had a chance to look at his data, and I've also been looking at some other data along this, and one of the things that we're starting to realize is that we might not be calculating the true costs of outsourcing your entire manufacturing process to countries outside the U.S. because it all relies on the fact that we have no transportation disruptions, no quality issues, no supplier issues. And once you start allowing a little bit of variability of probability that you are not going to have perfect transportation, perfect quality, perfect suppliers, then all of a sudden the cost is not that much of a saving. I would encourage people who are listening to this podcast to consider registering for our conference in the fall where we're going to be looking at this idea, or one of the presenters will be looking at reshoring.