Lehigh University’s Supply Chain Risk Index shows slight improvements, lingering concerns

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After a devastating collapse of the supply chain in many industries at the start of the COVID-19 pandemic, business leaders say they believe things are getting slightly better, but won’t be back to pre-COVID normal for quite some time.

Right now the supply chain is something everyone is keeping a close eye on.

“If it’s working no one knows what’s going on. When its stops working everyone is looking at it,” said Zach Zacharia, associate professor of Supply Chain Management and director of the Center for Supply Chain Research at Lehigh University in Bethlehem. “People who’ve never heard of the term supply chain are now paying attention to it.”

The Lehigh Center for Supply Chain Research has just released its Fourth Quarter Supply Chain Risk Index, which is down 2.5 points from the third quarter.

“People are starting to see that the risk in some sectors is diminishing. Manufacturing is returning, demand is coming back. Some industries, like the ecommerce space is really taking off,” Zacharia said.

However, the average Lehigh Business Supply Chain Risk Management Index is 66.97 [on a scale of 1-100] suggesting a high level of risk in the 4th Quarter. Anything above 50 would be considered higher than average.

The biggest areas of risk concern on the index were Economic Risk, Supplier Risk, Operational Risk and Customer Risk, Zacharia said.

Economic Risk

The biggest concerns industry leaders have for their supply chain is economic risk, Zacharia said. Economic Risk was a 78.26 on the index.

Issues such as labor shortages, commodity prices, government deficits, continued COVID-19 impact and demand remain concerns, but Zacharia noted that, while high, the Economic Risk index was down slightly from the third quarter.

“People see there’s still a huge economic risk, but it has gone down,” he said.

Some of the industry leaders surveyed for the index cited a concern over demand spikes, which necessitated purchasing additional product to augment the supply of products that they manufacture. He gave the example of Georgia-Pacific, a major supplier of toilet paper in the U.S. When COVID-19 hit, panic buying soaked up inventory in retail toilet paper, which is about 50% of the company’s market.

Meanwhile, commercial toilet paper demand, the other 50% of its business, all but disappeared. The company had to switch up its manufacturing to meet the demand for retail toilet paper, but changing manufacturing facilities to accommodate a different product line is costly.

There was a concern that the company would need to invest too much money to meet the changed demand, when they didn’t know if the unusual demand shift would blow over and the demand for their commercial line would return.

Supplier Risk

“Globalization is effective and it’s greatly improved our standard of living and lowered our costs,” Zacharia said.

However, by relying so much on suppliers from around the globe, and perhaps relying too strongly on certain individual markets, like China, risks were created in the supply chain. The Supplier Risk Index was 74.38.

Zacharia said many companies have been shifting away from lean inventory, keeping larger stocks of needed supplies and products onshore and have diversified their supply chain to avert any geographically centered shortages like they experienced with COVID-19. Still, he said, there are remaining problems.

“Some containers are still stranded,” he said.

Suppliers could not, in many cases, get products to retailers in time for the shopping season they were needed for. “The retailers are saying ‘you missed our season, what are we going to do with it now?’ But, the suppliers are saying ‘we want to get paid,” Zacharia said.

He said to look for a growing amount of litigation over supplies and goods that didn’t arrive on time.

Operational Risk

The Operational Risk Index was 60.00 “People are still waiting to see if there’s going to be another government handout,” Zacharia said.

An extension of enhanced unemployment payments, for example, could keep people out of the workforce. Zacharia noted that at one point the unemployment compensation was higher than some people were making at work discouraging them from returning to their jobs.

At the same time other government money from sources like the CARES Act, were a lifeline to keep many companies running and many industries – particularly those in hard hit areas like hospitality – are saying more help is needed to keep operational.

Homeschooling has been another factor that has affected companies.

“People didn’t realize what an important role schools had in the workforce,” Zacharia said. “It allows people to go into the office because they’re watching your children. If you have to take care of a child at home you’re not going to be as productive.”

Customer Risk

The Customer Risk Index is 70.66, fueled by a number of concerns over consumer and wholesale demand.

“What will the holidays look like? No one knows and this is the biggest risk to Q4,” said one respondent to the index survey.

Store closures are another major concern. So are COVID-19 related restrictions that may be keeping people from bricks and mortar stores, eating in restaurants or traveling. To adapt, many retailers are going to the customer. Ecommerce has skyrocketed, accelerating many of the plans many retailers were exploring to meet a changing demand.

Pricing is also a concern. Can retailers and suppliers sell products they promised at a certain agreed upon price when expenses, like transportation costs, have skyrocketed?

Unemployment also remains high, so there is a concern consumers won’t have money to spend.

Other factors

Other issues industry leaders cited as concerns on the Supply Chain Risk Index were cybersecurity related. With so many people working from home, there could be more gaps in security hackers could exploit.

The election has many concerned because it comes with it possible changes to tariffs and relations with China.

Transportation remains a risk, too. The truck driver shortage, which was a problem before the pandemic, continues to plague the trucking industry.

Air freight costs have gone up drastically, but that has benefited some in the airline industry. With passenger traffic down significantly, Zacharia said some carriers have taken the seats out of passenger planes and used them to ship cargo to take advantage of the income opportunities.

Productivity was a bright spot on the index.

Zacharia said most of those surveyed felt that the productivity of office employees working from home remained strong.

Any lost productivity was mostly in areas like manufacturing floors where safety and social distancing requirements impacted operations.

Looking ahead

While the fourth quarter Supply Chain Risk Index was down, Zacharia said those surveyed say risks remain significant and will remain for some time.

“Even my board thinks it’s going to be the second or third quarter of next year before we really start seeing any real recovery,” he said.