Sunil Pandit, Director, Global Practices, Bristlecone
The financial crisis of 2007-08 was referred to as a black swan event because it caused catastrophic damage to the global economy and triggered widespread disruption to people’s lives. But the world recovered from it, and following that event, we experienced an impressive 11-year upswing. In fact, until recently, we were enjoying a booming economy and seeing overall improvement in the lives of people around the world.
Then came COVID-19, a healthcare crisis on a scale the world hasn’t seen in over a century – and another black swan event wreaking havoc in nearly every country on the planet. Businesses and communities everywhere are experiencing coronavirus-related disruptions. And we now live in a world where “social distancing” is the new norm.
During the financial crisis, supply chains that drive the modern economy were strong, but industries lacked demand. In this new healthcare crisis, we’re seeing the reverse. Supply chains have been hit hard, though demand remains strong in certain markets.
Over the years, globalization has led to increased supply chain interdependency, and in many ways, this has benefitted businesses and local economies. Some of the most effective supply chains have been those that leverage a global footprint, with China playing a role as the “world’s factory.” Increasingly, businesses are driven by the need to improve productivity, minimize costs, reduce inventory and drive up asset utilization.
The superbly optimized supply chain removes buffers and has the flexibility to absorb everyday disruptions, even mild to moderate disruptions. But COVID-19 is illustrating the dramatic impact an event of this magnitude can have on global supply chains, as evidenced by the fact that we’re seeing markets now completely out of sync in terms of demand and supply. With the disruption exposing vulnerabilities in even the world’s best supply chains, businesses are now rethinking global supply chain models, especially those that have a high dependence on a single source to fulfill their demand.
The demand-supply disruptions are likely to continue due to the imbalances in the material flows across the globe. China’s shutdown in late January to contain the virus caused material flowing into many supply chains to come to an abrupt stop. On the consumption side, in-transit material is being consumed more rapidly, especially in areas where consumers are buying in bulk out of fear or to ride out the lockdowns.
Some sectors that had beefed up inventories due to production slowdowns anticipated during the celebration of the Chinese New Year in mid-February were able to sustain, while others still struggle to manage the demand. Super-efficient supply chains with accurate forecasting and well-managed inventories worked fine until the virus hit us.
Though factories are slowly coming online in China, factories in other areas of the world are now shutdown or being run with reduced manpower in a bid to stop the spread of the virus. Other factories are being repurposed to produce goods to contain the spread or augment the production of critical healthcare products like masks and ventilators to reduce shortages. Some diagnostics and pharmaceutical companies are now in a race to fast-track their production and fulfillment in response to the fast-tracked approvals they’ve received from regulatory agencies like the U.S. Food and Drug Administration.
The disruptions we’re seeing today are likely to continue for some time.
How can organizations react to today’s dynamics and tide over current challenges while looking toward the future to evolve the supply chain as we emerge from this crisis?
Here are six key strategies aimed at mitigating COVID-19’s impact on supply chains.
1. Deploy technology that increases visibility into the supply chain.
- Visibility must involve all Tier 1 and Tier 2 suppliers around the world.
- Encourage your suppliers to have visibility into their suppliers.
- Provide tools to facilitate real-time collaboration across all tiers of suppliers.
- Review sourcing decisions and develop alternate sources for sole suppliers, particularly if you are too heavily reliant on a single supplier or geographic region.
Learn More: Supplier Risk Management
2. Take a close look at inventory management policies.
- Make sure locations where inventories are held are appropriate to reflect needs.
- Review current inventory numbers; plan to repurpose inventories where possible.
- Use modern forecasting tools to determine the right target inventory stocks at various nodes.
3. Consider making demand management improvements.
- Be prepared for fluctuations in demand. Some consumer products are seeing lower-than-expected demand, while demand for cleansers, paper goods and personal care products have skyrocketed. Find ways to manage this variability.
- Don’t underestimate the complexity of buying patterns; we’ve seen how distorted buying patterns driven by fear and lockdowns require demand forecasting fluidity.
- Monitor forecasts frequently to account for fluctuations in demand.
- Use advanced models to help generate a realistic baseline forecast.
- Build market intelligence into your demand forecasting models.
Learn More: AI in Supply Chain Planning
4. Incorporate S&OP best practices to further hone demand levels.
- Balance supply and demand against company strategies; position leadership to make informed decisions by uniting sales, operations and finance planning.
- Ensure products are available to meet customer demand by using scenario planning to help visualize various options that would best fit market requirements.
5. Leverage capacity management to ensure your factories can meet demand.
- Review labor management and production capacity plans to ensure factories can churn out enough product to meet demand. Government regulations and concerns over employee safety have severely impacted labor availability.
- Optimize production lines to reflect available labor and account for the health impact, while embracing contingency planning.
Learn More: SAP S/4HANA in the Manufacturing Industry
6. Tap into logistics capacity planning to ensure timely product delivery
- Recognize that logistics providers may also be constrained by labor shortages and, like all organizations, they must ensure health and safety standards are met.
- Take direct-to-consumer into account; with customers opting for more online deliveries to avoid going to stores, or because stores are closed, there has been a sudden increase on the direct-to-consumer impact to logistics networks.
- Gain visibility into logistics; delivery visibility is key both to the provider of the logistics service and to ensure positive customer experiences.
Events such as the SARS pandemic, the Japan earthquake and tsunami, flooding in Thailand, and others have helped organizations fine-tune supply chain networks. As we forge ahead in the days, weeks and months ahead, we’ll start to see supply chains being altered in dramatic ways. And while there’s still much uncertainty related to the COVID-19 pandemic, and when and how we’ll emerge from it, this much is certain:
Businesses are recognizing that there are lessons to be learned from this crisis, and many are already taking a closer look at their supply chains. As a result, the global supply chain network of tomorrow promises to be even more resilient, agile and reliable.