As supply chains impacted by the Coronavirus disease (COVID-19) prepare to recover, there is still a great deal of unknowns and future uncertainty. The pandemic has induced simultaneous and sudden drops in both supply and demand, resulting in deflation and creating a negative spiral, presenting new challenges for supply chain leaders.
The pandemic reveals weaknesses in the supply chain
To illustrate the current situation, think of your business as a river in which rocks are hidden under the water. The river flows over the rocks, and at times, those rocks shift. They can block water from moving or change the flow of the water completely. In this analogy, the pandemic has lowered the water level and exposed rocks you couldn’t see before because they were hiding under the surface, causing unexpected shifts and problems. With those rocks exposed, you are able to take a closer look at the issues behind the most important aspects of the supply chain.
The pandemic has raised the importance of building resilient supply chains in an increasingly integrated global market. Before the pandemic, supply chains were assessed on known and expected risks, which most likely failed to include the possibility of a global pandemic. Thus, as revenue generation has been halted or significantly delayed, the pandemic has destroyed liquidity for many. Those that have cash and can find a way to extend its life will come out on top.
The good news? While risk, resilience behaviors and partnerships are likely to be affected, the rules that guide supply chain management fundamentals still apply. To survive the crisis and its ripple effects, revisit and pay special attention to these supply chain fundamentals:
Inventory is critical to the crisis response because it ensures operating reliability, consumes cash and, in some industries such as protein or steel, can determine market share.
In a constrained business environment, you need to ensure the accuracy, relevance and accessibility of existing inventory. A targeted and prioritized risk management approach may include relocating some inventory to more accessible locations or suggesting other essential mitigating tactics. Develop a process that helps your teams understand the financial and operational implications of required changes in inventory levels.
An audit of your extended supply chain can help anticipate potential raw material shortfalls. Globalization and growth have helped tie supply chains around the world and across industries together, and as a result, the knowledge of what upstream supply chains are experiencing will help you forecast what they can do downstream. Facing severe time and resource constraints, it may be tempting to conduct this mapping by relying solely on intelligence from procurement personnel or trusted suppliers. While these perspectives are valuable, they can be impartial or incomplete. A more rigorous approach would be to start with the bill of materials for your top five products by revenue and then identify their component suppliers, working all the way down, if possible, to the raw materials manufacturers.
It’s also important to develop a realistic picture of future supply needs. There are numerous demand-forecasting strategies and tools to choose from. Regardless of which you choose, this is an opportunity to refresh your understanding of the voice of the customer (VOC), which has surely been impacted by current market uncertainties. In today’s situation, don’t assume a return to the status quo, either in demand or supply, post pandemic. Even if demand returns to pre-pandemic levels, a domestic supplier might not have their operations back up and running, or new tariffs could change the cost of sourcing internationally. Now is the time to diversify and consider all potential supply sources, including local suppliers and secondary sources in less-affected regions.
The pandemic has created nervous behavior in the market as purchasing habits have become unpredictable. Companies are seeking additional providers of critical supplies and as demand increases, experiencing the bullwhip effect as panic buying results in dramatic shifts in inventory, sending a ripple throughout the supply chain as manufacturers face volatile spikes in demand.
Evaluate the status of your relationship with key partners and rethink how you deal with suppliers and customers. Collaborative communication is a necessity. Inventory your purchasing needs and identify strategic partnerships with the potential to drive unit cost down and strengthen collaboration.
Buyers and suppliers should consider and discuss a variety of strategies to sustain operations and relationships as the crisis continues to unfold. These can include temporary price relief, volume commitments, delivery flexibility, payment terms, lead time adjustments and so on. If resources are available, you may choose to invest in bringing the most important suppliers into your scenario-building exercises. This could help build resilience to a variety of shocks, both for you and the supplier.
As cash flow decreases, evaluate the cash flowing out of your business to third parties and adjust your organization’s cost base. As a last resort, delaying payments to suppliers can provide immediate cash flow relief. With any of these options, it’s important that you carefully weigh the mid- and long-term impacts it could have on the relationship. It’s also a good time to review product specifications for alternate materials and identify new supply sources to fulfill demand.
Manufacturing and distribution
In order to thrive in this environment, businesses will have to ensure access to critical assets such as buildings and trucks even as lockdowns, border closures and absenteeism cause major disruption. For example, will changes in customs, roads or availability cause disruption to transportation modes? Refer to your business continuity plan to determine how you will continue to operate with the loss of one or all network options. If you don’t have a plan in place, now is the time to create one.
Product return flow is another liability for the rest of your supply chain. Take time to evaluate your return logistics. For example, it’s likely you’ve had to make adjustments to the physical aspect of returns from the general public that need extra processing and steps to decontaminate.
Determine if you have adequate resources to continue operations and enough people to run plants and supply chains. It is important that you take a hard look at the disruptions your company could experience if faced with a reduction in workforce.
More than ever, it is also important that you operate as lean as possible. If you don’t have to own an asset, don’t. From trucks and buildings to heavy equipment, consider outsourcing liabilities to third-party logistics to keep inefficiencies out of your organization. This is the time to embrace new changes and redesign your supply chain to work in the current climate.
As you create a critical inventory depletion or replenishment model, consider the bullwhip effect and the impact that changes in demand and supply will have on the efficiency of your warehouse and network. If you produce to meet a peak in demand and that demand drops sharply, you’ll need to stop producing to avoid carrying too much inventory.
COVID-19 is also a demand crisis. It’s always important to have a pulse on customers, but especially now. The drop in demand is more likely to have lasting effects that shouldn’t be ignored.
Here are five questions to help navigate the potential effects of COVID-19 on customers:
1. Are there trends your company should be prepared to address? Consider social trends, even those that are untrue and grounded in hype. In this pandemic, for example, Corona stopped beer production due to social beliefs that were untrue. Keep track of changes in legislation that may affect customer behavior. What is being said and how does it impact your brand, the industry, your growth potential and perception of your product?
2. How are the increases in digital services, remote working and technology adoption going to change the market? Working from home, even for an additional 10 percent of the population, means a shift in habits, behaviors and expectations.
3. How does social distancing change the market? Does it create new opportunity, either directly through products that you have or can contribute to, or indirectly through products and services that you could create?
4. Are there advantages to be gained with the redesign of your extended supply chain (supplier, service provider, immediate competition)? Consider how the customer perceives your business during the crisis and increase communications to ensure it remains relevant and stays top of mind. Effectively communicate delays or inventory shortages in a timely manner.
You may also need to invest in shaping demand for your product by, for example, offering a deep discount to new customers. Look for opportunities to capture market share as less resilient competitors drop out of the market or through acquisition of available assets such as materials and transport.
5. What can you do to gain new customers during this crisis? It’s important that customers know you care. Can you increase your social presence and contribute to the greater good by getting involved in local communities and charities?
Responding to transformation triggers
Assessing the fundamentals above are important, but you must also take stock of your business as a whole, evaluating access to core assets in relation to demand. Today, we see this manifest in four ways:
1. Radical. In this case, everything is up in the air. Access to core assets and demand are threatened, requiring leaders to act fast and take radical steps to sell assets and pivot to another business. If such organizations fail to act, they are set up to endure a slow death. As an example, this would apply to smaller players in the oil and gas, clothing or tourism industry.
2. Urgent. Relationships are fragile. Access to assets is not threatened, but demand is in a rapid decline. We’re seeing this in the airline industry which has access to planes, but few customers. In this case, leaders must seek loans or sell assets, doing whatever is necessary to protect the company until demand returns.
3. Critical. Assets are threatened but demand is not. In this situation, leaders must seek partnerships that will allow them to fulfill demand. For example, retirement homes will have to rethink and reposition their offerings.