The Coronavirus (Covid-19) crisis is probably the most important test the world has faced in the 21st century up to now. In just a few weeks, we have seen the health situation and the planet evolve in a completely unknown direction. What is most striking is that the impact is considerable both on society as a whole (health crisis, economic effects), and for each individual in their daily life (containment measures, restrictions, partial unemployment, etc.).
For us, Supply Chain professionals, the impact is considerable; both in the short term and in the longer term. Things are changing so fast that it seems complicated to see the end of the tunnel. We’ve tried very modestly to think about it and give our ideas on what we see ahead in Supply Chain Management in the coming weeks/months.
What will the direct impacts and consequences on supply chains be? How can we respond to the short-term crisis and return to a stable situation as quickly as possible? How can we rethink the organization of our supply chains in the long term to make them more resilient and efficient in the face of such events?
Coronavirus is having important consequences upstream and downstream
In the short term, all you can do is manage the inevitable crisis: management of plant or workforce shutdowns, orders being canceled. “According to the Institute for Supply Management (ISM), 75% of American companies were facing supply difficulties at the beginning of March due to the coronavirus epidemic. The conclusion: not only are three-quarters of them affected by supply disruptions and delays from their Asian suppliers, but 44% do not have a plan B.” Newsletter SC Magazine – 23/03/2020
In the automotive sector, almost all European manufacturers have already stopped production. Airbus and others, on the other hand, have shut down their plants for four days before restarting, while safety measures were put in place.
In the FMCG sector, on the other hand, there are strong uncertainties on demand (cf. compulsive consumer purchases causing shortages in supermarkets vs. products with no demand at all). In the short term, a strong increase in demand has been observed before probably experiencing several weeks of very weak sales.
In conclusion, for all players, there is great uncertainty about the recovery in demand and the reliability of supplies over the next few weeks. At the same time, we can see the weak robustness of supply chains in the face of events as destabilizing as the Coronavirus epidemic. What can be done?
During the crisis, let’s quantify the risks, and review our safety stocks
In the immediate term, demand recovery scenarios must be specified and supply risks quantified.
Let’s look at demand first. Why are there shortages? As Lora Cecere says in one of her posts:
- Manufacturers who produce toilet paper usually have 14 days of inventory on hand at the plant.
- Retailers have 5 days in the warehouse.
- yet replenishment from the factory to store takes only 3-4 days.
The shortage is caused by the lack of velocity in the supply cycle: information does not circulate as fast as the physical flows which cause the shortage (the shortage in the store took place before the warehouse had the visibility over it, the shortage in the warehouse happened before the manufacturer is warned about it, …). This is the famous bullwhip effect. How to answer it?
First of all, it is a question of increasing the velocity of the information flow to have much more precise visibility on the demand. The first idea is to set up collaborative processes to get near-real-time data from point of sales. With visibility on the downstream of the chain, the manufacturer can be much more reactive and anticipate variations. However, these theoretical approaches are often not easily applicable in the field: several players may not have an interest in setting up perfect visibility. It is difficult to share your order book or production plan with a business partner with whom you are negotiating contracts. This makes collaboration difficult. Yet it is possible, we provide answers to this challenge in the last paragraph.
On the other hand, looking upstream, it is necessary to identify as quickly as possible the risks related to component or raw material supply. There are two ways to do this:
- Macro approach: identify countries, industries at risk using a tool such as the visibility kit of RiskMethods. This will allow you to rank your suppliers according to objective risk criteria.
- Micro Approach: Contact all your Tier 1 suppliers for information on the stability of their operations. This is the way to get more accurate information, but it doesn’t give you a view on the risks of Tier 2+ suppliers.
Both methods have disadvantages. But, by combining them, you can achieve better visibility and a good estimate of risks in the “near” chain. Based on this, identify the riskiest suppliers and establish action plans to deal with the potential disruptions.
In any case, the risks over the next few months are greatly increased regardless of the suppliers and situations. It is imperative to review the configuration of safety stocks in your ERP. Safety stocks are there to deal with risk. However, the vast majority of companies have not changed their configuration before and after the coronavirus… This is absurd: safety stocks no longer fulfill their mission: to protect against variability and risk. It is necessary to review the stock parameters and to make them evolve dynamically according to a precise calculation of the risks.
After the crisis, let’s build more robust supply chains
Once the crisis is over, it will quickly become relevant to think about the creation of more resilient Supply Chains. The time of ubiquitous globalization and the creation of supply chains based purely on cost optimization is probably over. The press articles and political interventions conveying this message over the last few days are a clear indicator that this is the direction we are heading to.
In fact, in this McKinsey study, we can see that the major challenge of the post-Coronavirus era is the construction of robust supply chains. This requires a complete paradigm shift in how we build and design supply chains.
Of course…but we cannot completely sacrifice economic efficiency and produce everything in Europe or in the US. Companies would be too uncompetitive. How can we build a Supply Chain that is both economically efficient and resilient? How do we find the right balance?
Here are a few ideas:
- Multiply dual-sourcing (even triple) for a reference to have more options available in case of failure. This is not always simple and it has a cost because the volumes are lower for each supplier. However, the gains in terms of robustness are important in the long term. Consider a choice of diversified suppliers (different countries, different sizes of companies, …).
- Obtain a better quantification of risks to be more agile and reactive to disruptions. How can we create supply chains where disruptions of toilet paper (or other more critical products) would not occur? This comes back to the need for extended supply chain management that goes beyond the boundaries of the company. Toilet paper shortages would never have existed if the different companies in the chain had been synchronized. All players lose revenue and increase costs by being out of sync with their suppliers and customers. In addition, the entire chain is much more fragile in the face of unpredictable events such as the Coronavirus outbreak.
How can Flowlity help you?
Flowlity is a SaaS solution that allows you to manage inventory and replenishments using AI and by being a trusted third party.
With Flowlity, safety stocks evolve dynamically using AI to adapt to a changing risk and environment. The risk of supply chain disruptions is not the same between February 15, 2020 (before the crisis) and March 15, 2020 (after), which is why we calculate different safety stocks. This allows our customers to be much more efficient and to reduce their shortages.
Moreover, by being a trusted third party, Flowlity allows different companies to synchronize without the need to share data between them. Thus, a toilet paper shortage would never have occurred for a retailer and a manufacturing company using Flowlity. Why not? Because Flowlity having access to both parties’ data has complete visibility and provides inventory and supply recommendations allowing to synchronize distribution and production with customer demand. Result: Less inventory 90% of the time but also fewer breakdowns when the situation becomes chaotic.
Flowlity is one of the essential building blocks to achieve more robust and efficient Supply Chains.
How can this apply to you? Please contact us (email@example.com) to find out more.