I am writing this article in a time when there are everyday challenges being posed to all my Business Partners in Supply Chain fraternity who are working on either side of supply or demand. The recent comfort zones of our models are shaken to the core as the world faces a one of a kind of challenge in form of a pandemic in a scale we haven’t seen since WW2.
The world is facing a situation of uncertainty, suddenly post this coronavirus debacle as it faces supply shortages, demand disruptions and overall consumer sentiment dampened due to widespread fear in minds and hearts to people. The novel coronavirus or COVID-19 is a disease that emerged suddenly and races ruinously across the world.
The impact of COVID-19 across the world has been as unprecedented as it has been devastating. Equally unprecedented has been the response of the nations of the world, with bans on travel, closure of borders, closure of businesses, and in several cases, complete lockdowns. The attempts at “flattening the curve” seem increasingly likely to lead to an international recession.
The current situation has challenged the very core of our supply chain operating models we have in place to manage our businesses and we have found holes in our own business networks. As we have witnessed an exponential growth in global trade flows and complex supply chain designs which have a host of third-party transactions, we need to go back to drawing board in some cases to really assess the inherent risks and efficacy of the designs in place.
Most companies across the globe had been working to make their supply chains leaner. The emphasis had been on minimization of costs and “just in time” deliveries. This has led to the reduction of inventory buffers and left no room for adequate buffers or safeguards. The vulnerabilities of this system have been brutally exposed by COVID-19. The present outbreak provides valuable lessons for companies in general.
Lean supply chain strategies, while increasing short term profits, contribute to supply chain vulnerability. COVID-19 has taught corporate decision-makers that in formulating future supply chain designs, apart from cost, quality and delivery they would also need to stress-test the chains on new performance measures including resilience, responsiveness and reconfigurability.
Action plan and preparedness
With learnings from the situation, supply chain operations are likely to move towards more proactive modeling of different scenarios and can do below to avoid hitting the wall during these situations. We have uncertainty, but we need to redefine supply chain capabilities and define the new normal.
- Ask difficult questions and perform self-assessment to uncover the challenges in this time of adversity.
- Deep dive into all the processes and sub-processes to uncover the weakest link in the supply chain. As advised in the book ‘Theory of Constraints’ by Goldratt that “a chain is no stronger than its weakest link”, identify the weakest links in your supply chains.
- Evaluate all the direct and indirect exposures to your supply chains by performing an assessment of all your suppliers and in turn their suppliers as well.
- Introspect all your transportation contracts and see if they are diversified enough to contain this adversity.
- Quantifying the impact of disruption relative to supply and demand changes — both in short and long term. This can be achieved through network design and the simulation of the supply chain to understand impacts. Only 10% of companies actively design their supply chain. We have a shortage of talent to complete supply chain design activities. Modelers are a constraint, but don’t let this stop you. Build your team and capabilities. Become data-driven. Actively model what is possible. Model monthly and quarterly plans and push to maximize the balance sheet based on market data.
- Performing an operational risk assessment on critical business functions. Build a war room and track supply. Use supplier development efforts to understand supply chain risks and map the locations and status of second and third suppliers. (Only 1/3 of companies know the locations of their second and third-tier suppliers.) Reach out to all suppliers and ask how you can help. Expect surprise. (The issues are usually a commonly used material from a second or third-tier manufacturer that is taken for granted until conditions like this happen.) Take steps. Form teams to help suppliers get back on their feet.
- Accessing critical supply chain data across all tiers to properly assess the potential damage.
- Preparing to set up a temporary inventory recovery and evaluation process, where applicable, and pursue alternative sourcing strategies.
- Communicating with key supply chain stakeholders on supply volume and changes to demand volume for the next few quarters.
- Conducting scenario planning exercises to understand the operational implications — financial and non-financial.
- Defer capital expenditures and even use force majeure clauses to get out of contracts with long-term paybacks.
- How much of your supply chain is localized is a big question we need to answer? With all international borders closed the localization is a key to secure supply chains. It is something like reverse globalization that organizations will look forward to.
- How to develop in house and rely less on 3rd parties will also be a re-think for many organizations?
- After all this evaluation is done, a different design will come into being which will be more localized, can be invoked during contingencies and is more reliable during tough times?
The point to start doing is in a phase-wise manner where we shift 20 percent of our business to this new reality, test the design, improvise and hence can increase this number depending on the efficacy and reliability of this supply chain. Companies would also seek to diversify supply chains from a geographic perspective to reduce supply-side risk from one country. Multiple sources of key commodities or strategic components would be identified, and protocols will be in place to activate alternative sources of supply in short notice.
It is likely that corporate strategy would also look to build a robust inventory as buffer against supply chain disruptions. This exercise will open gaps and will give an opportunity to re-assess the capabilities of our organization.