In today’s global economy, supply chain management is more important than ever. Of particular importance is understanding how to mitigate costly, disruptive and often inevitable supply chain bottlenecks. To do so, decision-makers must first understand what causes bottlenecks and how these holdups affect business. Then, with regular data analysis, companies can proactively identify bottlenecks and implement strategies to ensure business continuity and customer satisfaction — even in the presence of external disruptions and shutdowns.
This article will explore what causes supply chain bottlenecks, how to quickly recognize them and what companies can do to navigate imminent slowdowns.
What Is a Bottleneck?
In a process or system, a bottleneck refers to a congestion point that slows or limits output. To visualize a bottleneck, imagine a car accident that closes three lanes of a four-lane highway. The open lane will likely experience heavy traffic as drivers slow down and move into the open lane, creating a bottleneck.
Bottlenecks can occur in almost any business process and can crop up due to inefficiencies that are either internal or external to the organization. For example, an internal bottleneck might occur if a stack of financial paperwork reduces the only hired accountant’s productivity. A global shipping route shutdown, on the other hand, may be external to affected manufacturers and retailers around the world, but those companies could still be affected.
- Supply chain bottlenecks can increase costs and delays, leading to decreased customer satisfaction and hurting a company’s bottom line.
- Bottlenecks can be caused either by external disruptions or internal inefficiencies and limitations.
- External disruptions may be caused by transportation slowdowns and material shortages, whereas internal bottlenecks may be due to poor inventory management or limited production capacity.
- To prevent or mitigate the impact of supply chain bottlenecks, it’s important to proactively identify weak points.
- Businesses can use a mixture of modern technology and strategic planning to collect data and inform strategies to overcome potential supply chain bottlenecks.
Supply Chain Bottlenecks Explained
Supply chain bottlenecks are constraints that disrupt the flow of goods or services, resulting in delays and inefficiencies. Bottlenecks generally occur when process effectiveness is imbalanced. If customer demand exceeds a company’s production capacity, for example, a bottleneck is likely to occur. Unresolved bottlenecks can then lead to delayed order fulfillment and dissatisfied customers.
Supply chain bottlenecks can also lead to higher costs for businesses and consumers alike. For example, loading dock constraints that delay truck pickups can affect on-time deliveries and extend a company’s working hours. These costs are often passed on to customers through higher prices — especially when prices escalate due to global bottlenecks. If the global supply chain had not been exacerbated by COVID-19 bottlenecks, for example, inflation in the manufacturing sector “would have been 20 percentage points lower in November 2021,” according to the Federal Reserve Bank of St. Louis Review.
Early identification of bottlenecks can help businesses better manage supply chain challenges, maintain competitive prices, keep customers happy and minimally impact profit margins. But businesses must navigate bottlenecks holistically, as letting steam off in one process may increase pressure elsewhere. For example, ramped-up production could create a shipping bottleneck if transportation companies can’t handle the increased flow of goods.
Companies can often address internal bottlenecks by optimizing congested areas — for example, by increasing production capacity or streamlining workflows. But external bottlenecks, like shipping container shortages that curtail global trade, are often beyond a business’s control. Still, business leaders can and should create contingency plans for these situations, such as working with diverse delivery fleets and suppliers. Diversification can lead to a more resilient supply chain, giving businesses a better chance to outshine competition, earn customer trust and build brand loyalty that outlives external supply chain disruptions.
Supply Chain Bottleneck Causes
Supply chain bottlenecks can be caused by any factor that slows down an operation. This can occur within a business’s internal processes and workflows or it can be caused by external pressures, such as supplier quality issues or regulatory overhauls. Here are some common causes of supply chain bottlenecks.
Forecasting Errors and Demand Volatility
Bottlenecks are often caused by unexpected shifts in demand. If a sudden spike in consumer demand pushes retailers to boost inventory on hand, manufacturers may struggle to keep up with production requirements. Similarly, a drop in demand can leave businesses with excess stock, leaving less space and resources to house new products and creating a bottleneck within the warehouse.
To increase demand forecast accuracy, businesses can implement advanced data analytics that rely on automation and machine learning to assess past patterns, as well as current consumer research and online search trends. The better and more comprehensive the data inputs, the better the forecasting models — and the better prepared a business will be.
Production and Capacity Constraints
Production and capacity constraints limit the maximum output of a business. These bottlenecks can be caused by physical limitations, such as machine speed or number of employees. Time limitations can also lead to production and capacity constraints, for example, if there simply isn’t enough time in a workday to get the job done.
To successfully increase capacity, a business needs a well-rounded view of its workflows. This often requires collecting data at each step of every process to identify areas to increase internal productivity, whether by upgrading inefficient equipment, expanding the labor force or shifting to a 24/7 operation. It also requires careful attention to future supply chain steps. If a business ups its capacity but current delivery fleets can’t keep up with shipping needs, bottlenecks can occur at loading docks and delay shipments. In such a case, an effective supply chain planning strategy might factor in a third-party logistics (3PL) company to better manage demand.
Customers want high-quality goods. If a business doesn’t have an effective quality control process, inferior goods can lead to dissatisfaction and costly returns. But even businesses that take steps to improve their internal quality control procedures may face bottlenecks if inferior raw materials are delivered. For example, if production processes are up to snuff yet quality assurance analysts are suddenly finding issues with end products — or if customers are receiving faulty goods — it could signal supplier quality issues.
To prevent internal bottlenecks related to subpar products, businesses can implement quality control checks at multiple stages of production. Though it adds time to the production cycle, quality checks can ultimately save time and ensure customer satisfaction by ensuring that mistakes are caught early. Externally, businesses should work with vendors to source high-quality raw materials. Establishing strict quality standards can help ensure that suppliers deliver quality. This can contribute to consistent production output — and with it, fewer unsellable or unreliable goods.
Transportation and Logistics Challenges
Supply chain bottlenecks often occur when raw materials or finished products are shipped. Transportation and logistics bottlenecks can result from weather events, port congestion, political instability, lengthy customs clearance requirements and more. To mitigate these challenges, some businesses move operations closer to headquarters to gain control and reduce shipping times. In fact, over the next three years, 51% of suppliers are expected to either “nearshore” by relocating operations closer to their home country or “reshore” by fully moving operations back to their home country, according to the 2022 “Interos Annual Global Supply Chain Report.” Even those shipping domestically may want to diversify shipping routes and transportation methods to avoid potential bottlenecks caused by external logistics influences.
Inventory Management Issues
Effective inventory management requires businesses to balance on-hand inventory with carrying costs and available space. Stockouts or even just having too little inventory on hand can create bottlenecks if demand rises and production can’t catch up. Too much inventory may create a bottleneck of its own by cluttering warehouses and shipping containers — all while contributing to higher carrying costs and wasteful dead stock. To properly manage inventory and meet future demand, businesses must have — and correctly use — accurate forecasting tools that ensure that customers can quickly get the goods they need, without wasting resources on holding excess inventory.
Supplier Performance and Availability
Businesses must be able to trust that vendors will deliver supplies on time, as well as in the quantity and quality needed. But this isn’t always possible, as suppliers can experience shortages or bottlenecks of their own. This creates a domino effect throughout the supply chain and can compound issues; If manufacturers can’t rely on a steady flow of quality raw materials to create products, consumers won’t be able to get the goods they need when they need them.
To prevent supplier-related bottlenecks, businesses must maintain open communication with vendors. Businesses should also consider diversifying suppliers to mitigate the knock-on effect of disruptive events, such as weather disasters, labor shortage or raw material shortages. Businesses should also regularly audit their supply chains to make sure they are using the best available suppliers, for both quality and price — or risk falling behind any competitors that are using state-of-the-art and/or more cost-effective materials.
Regulatory and Compliance Issues
Changes in regulations can create bottlenecks as businesses work to comply with new standards. An automaker, for example, may have to quickly pivot to new equipment or assembly processes if efficiency standards change. This can slow or even halt production until new regulations are met. New regulations can also add costs for businesses, as once-relied-upon products may become unsellable due to updated rules. Changes in compliance standards may also lead to higher quality control requirements, choking the product inspection process. Otherwise, businesses may risk noncompliance, leading to legal issues or fines — either of which can compound bottlenecks.
Businesses in heavily regulated industries should collaborate with suppliers, partners and regulatory experts to stay informed of any potential changes. It’s also smart to invest in training and education to keep staff up-to-date on the latest information and requirements.
Metrics for Measuring Supply Chain Bottlenecks
The earlier supply chain weaknesses are identified, the sooner they can be improved. Here are some key metrics businesses can use to identify and measure supply chain bottlenecks.
Lead time refers to how long it takes for a customer to receive their order after it’s placed. Tracking lead time can be an effective way to identify changes in business performance over time, and identifying the causes of ballooning lead times can help decision-makers mitigate bottlenecks before they ripple outward.
For example, an increase in production time could point to internal inefficiencies that increase the time it takes for customers to receive their orders. To solve this, a business might need to repair faulty equipment, hire more workers or audit its suppliers to ensure that raw materials are up to spec. Similarly, if customers aren’t getting their products on time, it may signal transportation or logistics issues that need to be addressed. Or, if vendor lead times are increasing, it could point to an external slowdown; maybe the vendor is facing supply chain issues of its own. Businesses may need to seek out additional vendors to ensure that they’re getting the products they need when they need them — and that customers will get their goods on time as well.
Cycle time is typically used to describe how long a business takes to produce a good, but it can refer to other, more specific processes that contribute to the overall order fulfillment, such as the time it takes to load a shipping truck. By measuring cycle times, especially in a fragmented supply chain where businesses don’t always have a clear view into each individual supplier or manufacturer, businesses can see which tasks are falling behind schedule and make targeted improvements to resolve bottlenecks before they spread.
If a manager sees that the cycle time to produce a top-selling item is beginning to increase, for example, they can dig into the item’s specific production process to find what’s causing the slowdown. When the manager uncovers the cause of the bottleneck — such as unreliable assembly equipment — they can work to quickly address the issue to minimize customer impact.
Ideal inventory quantity varies by industry, and it’s important to contextualize the meaning of “high” or “low” inventory levels. For example, a print shop offering customizable orders likely wouldn’t keep high levels of finished inventory on hand, whereas a mass-market clothing distributor probably would. Once normalized for the industry, low inventory levels may suggest that demand is outpacing supply or that an inefficient production process is hindering the flow of finished goods. If demand is outpacing supply, better demand planning can help mitigate any bottlenecks. If inefficiencies are the issue, it may be smart to rethink workflows, schedule more workers or audit equipment. On the other hand, consistently high inventory may point to low sales or a bottleneck elsewhere in the supply chain, such as shipping fleets that are unable to keep up with customer orders.
Some common inventory metrics to track inventory are turnover rates, which track how quickly all inventory is sold; days on hand, which shows the average time inventory is held before sale; and backorder rates, the percentage of customer orders that cannot be filled immediately from available products.
Fill rate, or order fulfillment rate, measures how well customer demand is being met by immediate supply — i.e., orders met with on-hand inventory, not through backorders or split shipments. Because it directly relates to customer satisfaction, fill rate is one of the most important metrics used to understand how well a business is serving its customers. A low fill rate can harm a brand’s reputation and signify order fulfillment bottlenecks or production bottlenecks, either of which can delay shipments to customers. Fixing issues that contribute to low fill rates can help increase customer satisfaction and even boost sales.
Order accuracy, also called the “perfect order rate,” measures how often orders are fulfilled on-time and without errors. Accurate documentation, including invoices and product labels, contributes to order accuracy and is required to fulfill orders, track them and notify customers of any timeline changes. This key performance indicator (KPI) serves as a top-line measure of supply chain effectiveness, as any bottlenecks in or leading up to the fulfillment process can impact a company’s order accuracy rate. At best, low order accuracy may suggest delays. At worst, it may indicate incorrect shipments, which can kick off the costly product return process and exacerbate any existing shipping, order processing and inventory-related bottlenecks.
Capacity utilization refers to the extent to which a business is using its resources. If a manufacturer is already operating at full capacity, it may be at risk of a bottleneck if demand spikes and warrants increased production. But if the company were operating at only 80% capacity, it could increase output by as much as 20% without creating a bottleneck. If a company needs to increase its capacity to meet new demand, decision makers should study their capacity limits alongside forecasts. This can help maximize productivity without overstressing the supply chain.
Businesses need reliable suppliers in order to procure the materials they need to operate. Whether due to long lead times, inconsistent products or unpredictable availability, unreliable suppliers contribute to bottlenecks before finished products can even be manufactured. This promotes a rigid supply chain — one that cannot be quickly transformed to keep up with rapidly changing demand.
Businesses that don’t audit supplier performance as part of their risk management are less likely to be prepared during a supply chain breakdown, yet only “57% of suppliers, on average, are evaluated as part of an organization’s risk analysis,” according to the Interos report. Companies should regularly review supplier performance to ensure that they are getting the best materials available for the best price. These audits often include data like raw material quality, on-time delivery rates and responsiveness to questions and issues. Many businesses combine the measurements they value into an overall supplier quality index (SQI) metric to weigh vendor performance and compare different suppliers.
Transportation costs can suggest supply chain bottlenecks in a few ways. For example, transportation companies may begin to charge higher prices if shipping capacity is constrained or there are labor shortages. High or rising transportation costs can also indicate inefficient routing — a disadvantage to look out for, as unoptimized shipping routes can boost both fuel costs and transit times. A transportation management system (TMS), which centralizes and organizes transportation data, can help companies accurately measure transportation and logistics KPIs, such as cost per mile, create more efficient shipping routes and track shipments.
Regularly monitoring transportation costs can reveal such issues before they become severe, giving companies a chance to optimize shipping processes, consider alternative transportation methods and diversify logistics networks. Businesses with a resilient, varied transportation network may gain a competitive advantage over those relying on rigid, single-source methods, as more options present more ways to ship goods faster — and more ways to save money.
The ultimate goal of supply chain management is to deliver goods to customers as efficiently as possible. Aside from analyzing fulfillment costs, customer satisfaction is one of the best indicators of how effectively a business is meeting that goal. Data, such as customer feedback, online reviews and return rates, allows businesses to analyze customer satisfaction trends to see what’s going right and what needs to be improved. Feedback about unmet expectations — order errors, long shipping times, quality issues, etc. — can be a valuable tool to quickly identify bottlenecks and fix issues before they become major problems.
How to Collect Data on Supply Chain Bottlenecks
Collecting the sheer amount of data needed to effectively manage a company’s supply chain can be a challenge. These steps can help businesses develop a clear monitoring plan to a) gain visibility into each stage of the supply chain, and b) proactively manage and, ideally, prevent supply chain bottlenecks. We’ll use a hypothetical retailer, XYZ Electronics, to illustrate how collecting data can help a business ease a bottleneck.
1. Define the Objectives
Haphazardly implementing process changes can create new supply chain bottlenecks or worsen existing complications. These issues can be avoided by setting clear objectives. For example, let’s say XYZ Electronics receives negative customer feedback about long delivery times following a spike in demand. Rather than setting a vague objective like “speed up shipping,” XYZ Electronics first maps out its supply chain and notices that its third-party logistics (3PL) company can’t handle the increase in demand. The company then sets a specific plan of action: Communicate with the 3PL to let them know that high demand is the new normal. If the 3PL can provide additional staff and trucking, XYZ might be in the clear. But if the 3PL is already at capacity, XYZ Electronics will explore additional and/or alternative logistics solutions to fill the gaps. In either case, the company will transparently inform customers about possible upcoming delays.
When defining goals to track, it’s also important to assess the impact of any previously enacted supply chain improvement strategies. Assessing what worked and what didn’t can help inform the best path forward. For example, a short-term objective may have been met, but the “fix” could have created new problems that need bigger-picture solutions.
2. Identify Data Sources
While it’s important to collect as much data as possible, businesses must ensure that the information source is both accurate and relevant. Verifiable internal data, like vendor management metrics generated by an enterprise resource planning (ERP) system, is better suited to inform decisions than unverifiable information from external sources, such as spoken promises from suppliers.
After seeing how long it took to manually map out its supply chain, XYZ Electronics decides to invest in a time- and cost-saving ERP solution that will not only allow the company to clearly oversee the real-time flow of goods from suppliers to customer receipt, but also objectively monitor vendor performance and track transportation KPIs, such as supplier delivery accuracy and timeliness. The ERP system also factors in warehouse management, inventory management, order management, transportation management and customer relationship data to provide a complete, 360-degree view of the business.
3. Collect and Validate Data
Businesses relying on complex supply chains may have too much data to manually record, validate and analyze before it’s no longer relevant or helpful. And while data provided by suppliers, manufacturers, distributors and retailers can give insight into the state of the market and customer trends, it might not be wise to base major supply chain decisions exclusively on externally sourced data. Valuable outputs require quality data inputs, meaning business data must always be accurate and up to date.
As XYZ Electronics found, an automated ERP solution that collects, compiles and centralizes data is key to effectively leveraging supply chain management data. During ERP implementation, XYZ Electronics took the old adage "garbage in, garbage out” to heart. In turn, the company went the extra mile to develop a robust data migration strategy that prioritized clean and usable data.
4. Analyze the Information
Data alone cannot provide a roadmap for easing supply chain bottlenecks, but it can reveal meaningful insights into areas to improve. Data is especially useful when viewed in a larger context over time, as trends — such as falling order fill rates or increasing shipping times — can suggest bottlenecks early enough to take proactive measures. Many supply chain management or ERP systems can organize key supply chain data into easy-to-read dashboards and ad hoc reports to inform business decisions.
XYZ Electronics, for instance, uses its ERP system’s dashboards and business intelligence capabilities to analyze raw data and trends. This makes it easy for any decision-maker or business analyst to track metrics related to supplier performance, order fulfillment, transportation and logistics, and customer satisfaction — all of which can signal supply chain issues and reveal areas in need of improvement.
5. Develop Strategies to Reduce Bottlenecks
Strategies should be planned and developed with a big-picture view of operations, as focusing only on short-term gains can result in new bottlenecks. And because some bottlenecks ripple outward or evolve over time — and therefore require multiple mitigation strategies — supply chain management should always be viewed as a holistic, ongoing process. The exact strategies to reduce bottlenecks depend on a business’s unique circumstances, but the general idea is to build supply chain resiliency by increasing visibility, improving communication with suppliers and customers, optimizing inventory levels and developing contingency plans.
While XYZ Electronics solved slow-shipping issues by switching to a more reliable 3PL partner with greater capacity and more efficient routes, increased demand began to strain the company’s suppliers. XYZ could no longer get the raw materials it needed to keep up with customer demand, and delivery times again began to wane. To resolve this new bottleneck, the company partnered with an additional two vendors to ensure that they’ll always have access to the materials they need. Now, XYZ must ensure their warehouse has the space to store the quantity of raw materials and finished products necessary to keep up with increased demand. Otherwise, they may find a bottleneck elsewhere. If production outpaces demand, for instance, inventory may pile up and create bottlenecks within the warehouse. To keep customers happy and operations running smoothly, XYZ Electronics continually monitors its internal and external supply chain processes in case new bottlenecks appear.
Strategies for Navigating Supply Chain Bottlenecks
Although there’s no universal solution for resolving supply chain bottlenecks, these strategies can help businesses across various industries better navigate constraints.
Root Cause Analysis
Root cause analysis helps businesses get to and resolve the source of a supply chain bottleneck. Treating underlying problems rather than just symptoms helps businesses address the issue more effectively and prevent it from recurring in the future.
Say a manager notices a slowdown during a finished product’s final quality control check and blames it on an inefficient workflow. The manager initially plans to revamp the quality control process but instead decides to conduct a root cause analysis. They quickly discover that their vendor has been providing lower-quality raw materials. By switching to a new vendor with up-to-spec parts, the manager was able to address the source of the issue and avoid unnecessarily revamping the quality control process — both easing the bottleneck and supporting a higher-quality finished product.
In the context of supply chain management, process mapping involves creating a detailed visual diagram of a business’s entire supply chain, including exact material sourcing and shipping regions. Process maps are generally depicted as a flow chart. They should be easy to understand and they should give decision-makers visibility into vulnerabilities, inefficiencies, redundancies and bottlenecks. These maps can also provide a deeper understanding of the interlocking links of the supply chain and how bottlenecks can reverberate through an organization.
For example, if all of a business’s raw materials are shipped internationally and imported through the same port of entry, a process map may reveal that a shutdown at this port — perhaps from a natural disaster or labor strike — could slow down or halt necessary supply shipments. This could then affect production, potentially leading to stockouts and unhappy customers. In such a case, the company would benefit from supplier diversification to prevent rippling bottlenecks.
Agile Supply Chain Management
Supply chains are constantly evolving due to new strategies, trends and global pressures. This means that what works today may become an outdated and inefficient system tomorrow. Supply chain management must therefore be an ongoing and continuous process. Agile supply chain management prioritizes flexibility and responsiveness so businesses can quickly adapt to changes in market conditions. With an agile approach, businesses continually monitor and assess operations to prepare for new risks and address new bottlenecks, whether due to changes in customer preferences, supply and demand or socioeconomic shifts. Agile strategies generally rely on close communication with suppliers and partners, data-driven decision-making, supply chain diversification and a continuous improvement mindset.
Just-in-Time (JIT) Inventory Management
JIT inventory management emphasizes lean practices and seeks to minimize waste by creating only enough inventory to meet demand. JIT strategies can ease bottlenecks caused by excess inventory and cluttered operations. It can also shorten the time it takes to manufacture goods, spot defects and get products into customers’ hands.
However, JIT inventory management is not without risks. Although this practice can ease bottlenecks in the production process, it can leave businesses unprepared if the global supply chain is disrupted or demand unexpectedly spikes — say a product goes viral or consumer priorities suddenly shift. To be successful, JIT inventory management hinges on accurate forecasting and strong supplier relationships. Without complete and utter preparedness from all parties at all times, production and fulfillment can stall out.
Supplier Relationship Management
Businesses typically rely on some external suppliers in order to produce and/or sell goods. Through effective supplier relationship management, businesses can maintain strong networks and monitor performance. If a supplier is facing a bottleneck, for example, an open and honest line of communication can be used to give your company a heads-up. This way, you can proactively reach out to customers or find an alternative supplier in the meantime. Conversely, if a business expects an uptick in demand, it can relay that message to suppliers — giving them time to plan and adjust accordingly. Close, two-way communication can catalyze collaboration, making it easier to address supply chain issues and ideally prevent strain on long-term supplier relationships.
Capacity planning is the process by which a business determines what resources it will need to meet demand. Effective capacity planning relies on accurate demand forecasts and an understanding of a business’s production capabilities. This can help a business predict when and where bottlenecks will occur if demand outpaces capacity. Businesses can prevent capacity-related bottlenecks by making early investments to expand resources, whether by ordering more supplies, investing in new equipment or workers or adjusting production schedules.
Every industry has its own risks, not to mention the relevant contingency plans required to mitigate them. By identifying threats and implementing a robust risk management strategy, businesses can reduce the impact of supply chain bottlenecks and gain an edge over unprepared competitors. For example, if a company’s primary warehouse is in a tropical coastal area, it may be wise to keep more inventory inland during hurricane season to ease the pressure of making regular deliveries during storms. Or, if there’s a shortage of a crucial raw material, businesses should have a contingency plan in place to help stay afloat — perhaps by sourcing alternative materials or pivoting to produce valuable products that use little, if any, of the limited material.
Bottleneck Prioritization Tips
Improving supply chain bottlenecks can be challenging, especially for complex organizations with far-reaching or global operations. Prioritizing which bottlenecks to address first can help businesses optimize resources and get better results faster. Some useful tips can be found below.
Conduct a Cost-Benefit Analysis
It’s unlikely that any and every bottleneck improvement strategy will be equally cost-effective. Conducting a cost-benefit analysis is key to prioritizing which supply chain bottlenecks to address first. Before fixing a bottleneck, businesses should estimate the costs of the project, such as labor, equipment, supplies and potential loss of productivity. Then, assess the benefits of proposed changes, such as increased production capabilities, enhanced product quality, shorter lead times — even improved customer satisfaction. If the benefits exceed the costs, the project is cost-effective. It often can be best to prioritize bottleneck mitigation projects with the highest benefit-cost ratio, as this can help the company reap the greatest benefits relative to costs.
Consider the Urgency
Another way to prioritize bottleneck mitigation is to consider the severity of the slowdown. If a business lacks the resources to improve every issue at once, prioritize the biggest vulnerabilities first — determine which supply chain bottlenecks have the greatest negative impact. Look for the ones that may lead to major problems or deficiencies in the process or system. These tend to require immediate intervention, whereas other less-pressing bottlenecks may be addressed gradually.
Decision-makers should properly document identified bottlenecks regardless of size, however, as even low-urgency bottlenecks could still cause lost sales, reduce customer satisfaction or increase costs — and may even escalate over time. Regular analysis and assessment of every identified bottleneck are critical to ensure that the biggest threats are always at the top of the “to-do” list.
Evaluate Resource Availability
Resolving complex bottlenecks may require large investments or multiple process changes, so businesses should consider resource availability before prioritizing improvement strategies.
For example, let’s say a manufacturer is experiencing a bottleneck in its production process. To address the bottleneck, the company considers two potential improvement strategies: invest in new equipment that would increase production capacity or identify an alternative supplier that can provide raw materials with a shorter lead time. After considering the resources available to the manufacturer — such as available capital and available suppliers — decision-makers decide to prioritize the second strategy. In doing so, the company is able to address the bottleneck without requiring a large investment in new equipment. A quicker flow of raw materials improves production efficiency, ultimately helping the company better meet customer demand.
Best Practices for Measuring and Navigating Supply Chain Bottlenecks
Many businesses will likely experience some supply chain disruptions and bottlenecks throughout a normal business year. In fact, 90% of the period between January 2017 and January 2023 was classified as having “above average” supply chain pressures. To keep operations running in the face of adversity, it’s critical to employ and maintain best practices for measuring and navigating supply chain disruptions.
Collaborate, Communicate and Empower Employees to Speak Up
Effective supply chain management requires extensive visibility that is typically only possible through close collaboration and communication. The people involved at each link of the supply chain have different responsibilities: Suppliers manage raw materials; manufacturers produce goods; retailers manage finished products; transportation companies deliver raw materials and goods; and customer service teams gather feedback. Workers in each discrete touchpoint will therefore have the best chance of catching bottlenecks in their own process and, as a result, should be held accountable for calling attention to issues, if not quickly finding solutions.
To achieve this, staff should be trained to identify bottlenecks and encouraged to report problems, however small. Clear and open communication channels, such as through regular meetings or anonymous reporting, can help staff alert management to potential bottlenecks. In turn, companies are better able to proactively mitigate problems before they become major disruptions. Additionally, some bottlenecks are only apparent further along in the supply chain — negative customer feedback might reveal quality issues that trace back to faulty raw materials, for instance, while long supplier lead times might signal global supply chain disturbances, such as labor shortages or port congestion. Businesses that remain open to suggestions from customers, suppliers and other collaborators may be better able to find innovative ways to navigate supply chain bottlenecks.
Monitor and Measure Performance Regularly
Business operations must adapt as equipment degrades, new technologies become available, customer expectations evolve and external supply chain pressures take hold. To stay abreast of the latest developments, businesses should regularly collect and monitor a variety of supply chain KPIs: order fill rate, order accuracy, supplier quality index, supplier lead time, transportation costs, customer satisfaction rates, etc. Tracking metrics against clear performance goals can help companies identify potential bottlenecks and track progress toward improvement. For example, monitoring on-time delivery rates can highlight potential bottlenecks throughout the supply chain, whether due to slow supplier lead times, at-capacity production cycles or understaffed last-mile delivery services.
Many companies rely on ERP systems for their detailed performance metrics, customizable reports and easy-to-understand dashboards. These systems allow decision-makers to see exactly where bottlenecks are, address them and see the real-time results of improvements.
Make Data-Informed Decisions
To stay competitive, businesses need to make decisions and improvements based on accurate and up-to-date data, not hunches. Companies that collect and analyze data across the supply chain can identify potential slowdowns, find ways to optimize inventory levels and reduce costs — all of which can improve overall supply chain efficiency. This data can also provide the visibility needed to effectively conduct root cause analysis and ensure that bottlenecks are proactively addressed without wasting resources on rectifying collateral damage.
By tracking supplier lead time data, for example, companies can identify delays and take action to address them. Analyzing sales data and demand forecasts can help determine optimal inventory levels to reduce warehouse bottlenecks. And monitoring transportation data can clue companies into where transit times can be reduced, improving delivery times and cutting transportation costs.
Supply chain data should also include the results of any supply chain improvements made in the past. This can inform new decisions and prevent repetition of past mistakes. For example, say a company previously tried to streamline its production process, but the changes led to unintended consequences, like lower product quality. The company now has a record of that impact and is better prepared to maintain quality when refining production processes in the future.
Optimize Inventory Management
Inventory levels are an important metric to measure supply chain performance, but that data is of best use when viewed in various contexts: turnover rates, backorder rates, rate of returns, even put-away times and lead times. This is because different industries can have different inventory requirements — “high” or “low” inventory level, when considered in isolation, isn’t necessarily a sign of a bottleneck. Real-time visibility into various metrics is critical to effectively create accurate demand forecasts, pinpoint ideal safety stock levels and spot internal and external bottlenecks.
For example, if an electronics manufacturer lacks up-to-date inventory data, they may end up with a problem if they suddenly run out of a popular item and need to ramp up production quickly. This could slow the production process and delay restocking. With a dedicated inventory management system, however, the manufacturer could have the inventory visibility needed to better predict demand and maintain consistent inventory levels to prevent stockouts — and the bottlenecks they cause.
Prioritize Continuous Improvement
Supply chain optimization is more than a one-and-done project; navigating supply chain bottlenecks requires continuous improvement. This ongoing effort can help make companies more agile, putting them in position to proactively respond to disruptions and contribute to more efficient operations. What’s more, consistent monitoring and adjusting are critical not only to address new bottlenecks, but also track the progress of previously implemented improvements, make adjustments and learn from past changes.
For example, suppose a manufacturer invests in high-efficiency equipment to ease a production bottleneck, but due to the equipment’s high output, inventory begins outpacing sales — taking up warehouse space and increasing carrying costs. To address the issue, the manufacturer continuously monitors inventory levels and compares them with demand forecasts. They decide to temporarily pause production while demand catches up. During this downtime, production workers are scheduled to help out with order fulfillment, equipment maintenance and facility organization. This supports the company, contributing to a more efficient operation.
Modern supply chains are complex. Running day-to-day operations — and navigating bottlenecks — requires end-to-end supply chain visibility. Enter innovative technologies that can increase efficiency, reduce costs, increase transparency and ultimately enhance managers’, suppliers’ and transportation companies’ ability to spot potential issues before they occur.
Barcodes and mobile scanners, for example, can be used to share real-time warehouse and inventory data with manufacturers and distributors. This can help support accurate stock levels and improve lead times. Automation technologies, such as robotic process automation (RPA), can further streamline inventory tracking, freeing up employees to focus on higher-value tasks and reducing the risk of human error. Meanwhile, predictive analytics can be used to help companies quickly identify trends and patterns in supply chain data, helping them better anticipate demand, optimize inventory levels, improve production planning and manage logistics.
Cloud-based ERP systems, especially those with integrated warehouse, inventory and transportation management systems, generally feature the above capabilities, making them a necessary tool to garner more insight into entire supply chain networks and get a better view of how and when orders will be fulfilled.
Tools to Measure and Navigate Supply Chain Bottlenecks
Strong supply chain management practices are key to optimizing operations, minimizing disruptions and maximizing customer satisfaction. But without tools that enable companies to gather and analyze data, automate processes and improve communication and collaboration, successful supply chain management is highly unlikely.
Here are some tools and technologies that businesses can use to effectively measure and navigate supply chain bottlenecks.
ERP systems help businesses expand their supply chain visibility. For one, they can automatically track and monitor KPIs throughout an organization faster and more accurately than even the savviest team of manual analysts. ERP systems can also generate customizable reports with detailed supply chain metrics and display said data in easy-to-read dashboards. And, they can connect to various key business software and systems, such as warehouse management systems, inventory management systems, transportation management systems, accounting software, customer relationship management software and sales software. With accessible and current businesswide information, decision-makers can quickly identify and rectify bottlenecks — and track improvement efforts in real time.
ERP systems can also help break down siloed operations by integrating data from every step of the supply chain, from procurement to last mile delivery. This can help minimize errors, increase collaboration and ultimately contribute to a more efficient and resilient operation.
Warehouse Management Systems (WMS)
Warehouse management systems play a key role in minimizing and addressing warehouse-based bottlenecks. For example, a WMS can help manage warehouse organization to ensure that stock is stored safely and efficiently. Popular items should be stored closer to packing areas to decrease order packing bottlenecks. This technology can also be used to plan optimal picking routes, reducing travel time and making it easier for workers to breeze through the warehouse to pick orders. A WMS can also create optimal warehouse layouts, preventing traffic and bottlenecks caused by tight aisles or large equipment, such as forklifts. It's also possible to integrate a WMS with tools like mobile scanners and picking robots, both of which can streamline operations and further relieve common choke points.
Transportation Management Systems (TMS)
Transportation management systems help businesses more efficiently receive supplies and get goods to customers, thereby easing shipping bottlenecks. A TMS can be used to optimize shipping routes and adjust delivery schedules — even when managing interstate or international shipments that rely on multiple carriers and vehicle types. Further, the technology can automate necessary shipping documentation that can otherwise slow down the supply chain when handled manually — for instance, bills of lading, customs documentation, shipping manifests, compliance documents and freight invoices. A TMS can also help mitigate the effects of bottlenecks by automatically sending tracking updates to vendors, businesses and end customers.
Internet of Things (IoT) devices are equipped with network-enabled sensors that allow objects to communicate with each other and share information with users. Businesses can use this connectivity to monitor the location, status and even temperature of goods as they travel through the supply chain. IoT sensors are commonly used to identify bottlenecks because they can track products, as well as equipment failure rates, in real time and send automated alerts that notify relevant parties when intervention or repairs are required. If perishable goods like food or pharmaceuticals are being transported, for instance, tracking temperature can ensure that they’re being stored safely. If temperatures start to fluctuate, companies can be alerted quickly and take immediate measures to prevent spoilage — helping to circumvent potential bottlenecks associated with wasted goods that never make it to their destination.
Business Intelligence (BI)
Business intelligence tools collect, organize, analyze and present data in easy-to-understand visualizations, such as graphs and charts. This makes it easier for decision-makers to quickly identify trends and spot problems before they compound. And because they put clear data into the hands of any relevant party regardless of their technical knowledge or data analytics skills, BI tools can improve collaboration across the supply chain. The easier it is to share information with diverse parties, the easier it is to communicate and settle on the right course of action should any supply chain bottlenecks arise.
BI is also used to create more accurate demand forecasts and plan inventory, even in the face of disruptions and bottlenecks. By implementing BI tools, business leaders can achieve their goals through data-driven decisions based on meaningful and insightful analysis.
Navigate and Eliminate Bottlenecks With NetSuite SCM
Navigating the complexities of modern supply chains can present challenges for businesses, especially when it comes to identifying and dealing with bottlenecks. With NetSuite Supply Chain Management solutions, businesses can gain the visibility they need not only to successfully manage supply chains, but also to resolve — and even prevent — slowdowns. NetSuite’s scenario-planning feature, for instance, uses real-time insights and predictive analytics capabilities to identify and respond to potential bottlenecks before they cause serious downstream effects. In other words, businesses can uncover the best course of action for the worst possible outcomes.
And thanks to NetSuite’s cloud-based platform, businesses can access valuable supply chain management information, such as production data, financial reports, inventory records and more, at any time and from anywhere. NetSuite’s centralized single system allows for real-time collaboration and more informed decision-making throughout an organization, from procurement to final delivery and every step in between. By using these tools, businesses can reduce lead times, improve on-time delivery rates and ultimately enhance the customer experience.
The ability to identify and ease supply chain bottlenecks is crucial for any business looking to remain competitive in an increasingly complex and global market. By using new technology to collect information and monitor for potential slowdowns, businesses can gain valuable insights into supply chain vulnerabilities and take proactive, data-driven steps to optimize processes, reduce costs and improve customer satisfaction. Businesses must prioritize visibility and collaboration to successfully navigate supply chain bottlenecks and drive long-term growth and success. And with a focus on continuously improving supply chain operations, businesses can rise above today’s competition and be better prepared for tomorrow’s supply chain challenges.
Supply Chain Bottlenecks FAQs
What is an example of a supply chain bottleneck?
Here’s an example of a supply chain bottleneck: A manufacturer has high customer demand for a certain product, so they need to produce a large quantity of goods per day. However, the company doesn’t have enough shipping capacity to transport all the goods. Finished products begin to pile up in the warehouse, causing problems like higher inventory carrying costs, disruption in the production process and delayed order fulfillment — all of which can negatively affect customer satisfaction, business reputation and profitability. To address the bottleneck while keeping up with customer demand, the business would need to increase its shipping capacity.
Why is the supply chain bottlenecked?
Supply chain bottlenecks can arise from a variety of factors, including internal inefficiencies such as production delays, poor warehouse design and capacity constraints, as well as external pressures like fuel shortages, port congestion or natural disasters. To navigate these challenges and strengthen their supply chains, businesses must prioritize supply chain visibility and develop contingency plans. By doing so, they can stay competitive and ensure that they’re equipped to handle unforeseen disruptions.
How do you find bottlenecks in the supply chain?
Process mapping, a technique that uses diagrams to outline each step of a process, can be used to spot supply chain bottlenecks. A process map that isolates each phase of the supply chain, for instance, can help companies identify current or potential choke points, as well as how these issues may ripple outward. Decision-makers can use this data to plan improvements.
Supply chain bottlenecks can also be identified by studying trends in key metrics, such as order fulfillment rates and lead times. Low order fulfillment rates or rising lead times, for example, may signal an issue that needs to be addressed.
What are the risks of not addressing supply chain bottlenecks?
Businesses that do not address their supply chain bottlenecks risk being unable to keep up with increasing or changing demand. This could push unsatisfied customers to competitors. Bottlenecks can also lead to higher costs as inefficiencies compound and productivity suffers.
How can supply chain bottlenecks impact customer service?
Supply chain bottlenecks impact customer service primarily by delaying orders. This can harm brand reputation, reduce customer satisfaction and increase customer attrition. Delays may also result in new customers’ losing confidence in the business’s ability to meet expectations accurately and on time.
What are the five biggest supply chain issues?
Five of the biggest supply chain issues facing today’s businesses are:
- Managing transportation costs: Factors like rising fuel costs and labor shortages can increase transportation expenses. Those costs are often passed on to businesses and their customers.
- Keeping pace with demand: Demand fluctuates, often unpredictably. Businesses and their suppliers can be left unprepared if customer preferences — or external influences — shift demand at the drop of a hat.
- Meeting shipping expectations: Customers expect quick delivery, and businesses must be able to satisfy those needs to remain competitive. But rising transportation costs, increased shipping demand and labor shortages can leave customers feeling unfulfilled.
- Ensuring supplier reliability: Suppliers can face holdups of their own, whether due to rising costs, raw material shortages or labor shortages. This makes it harder for companies to do business and customers to get their goods.
- Adapting to new technologies: To stay competitive, businesses often need to leverage the latest in automation and ERP technology, but switching to new tech can be challenging without a solid implementation plan.