As medical professionals work to mitigate the toll that the novel coronavirus has taken on human health around the world, businesses are beginning to wage their own fight in the growing economic crisis.
This fight is multipronged, with companies facing concerns about operational viability in addition to worker safety and what has become a historic shock to supply chains. What’s more, certain supply chains are also integral to the adequate provision of critical goods such as medical supplies, pharmaceuticals, water, food, and fuel. Supply chains’ importance in modern society has never been clearer.
However, as a direct result of their importance, supply chains’ failure to adapt to disruptions and fluctuating needs could create further challenges, potentially turning a disaster into a catastrophe.
The need for quick and effective supply chain recovery planning is obvious, but nowhere near easy. Rapid, strategic mobilization is necessary in the short term, and comprehensive risk management in the long term. Here’s what leaders need to know to keep their businesses — and the societies they serve — afloat.
Immediate Response: Short-Term Supply Chain Recovery
When already in the midst of a crisis, businesses must initially think in terms of a short-term response in order to mobilize resources across the end-to-end supply chain. While worker safety and policy requirement compliance continue to be priorities, the following six actions are key to an effective immediate response.
In a multitier supply chain, creating transparency begins with identifying your operations’ critical components. Work with production and operations teams to review your catalog components and bills of materials (BOMs), perform a risk index for each commodity based on location and uniqueness of suppliers, and determine which components come from high-risk areas and do not have substitutes available.
After identifying critical components, assess the risk of interruption from suppliers from tier two and beyond. Ask tier-one organizations who their suppliers are, where they’re at, and what disruption they’re facing (if any) in tier-two organizations and onward. Manufacturers should be watchful of interruption by working with all their supplies to monitor inventory levels and lead times, and create a commodity-specific recovery plan for critical suppliers.
If any suppliers are located in severely impacted regions, which could increase operational costs or slow production lines significantly, try to identify alternatives in other regions. Keep in mind that travel restrictions, distancing requirements, and other location-specific policies can majorly impact the reliance on and availability of alternatives.
The only option if no alternative suppliers are available is to work in tandem with other tier-one organizations that have been affected to collaboratively mitigate the risk.
All of these efforts serve to help you better understand the supply chain’s vulnerabilities across all tiers, making it easier and quicker to return to normal later on.
Determine Inventory Availability
How much inventory is sitting in your value chain at any given time? Most businesses would be surprised at the high volume, which could be an inefficiency during normal times, but potentially a crucial resource during a crisis.
Estimating all inventory availability along the value chain is another key element of supply chain capacity planning, and should address all of the following components:
- Finished products stored in warehouses
- Blocked inventory reserved for testing, quality control, and sales
- Spare parts that could be repurposed for the production of new products
- Defective or lower-grade parts that could be fixed or enhanced to address supply issues
- Parts in transit, and particularly those in quarantine or customs, that may need to be redirected to speed up delivery
- Inventory that’s currently with dealers or customers, which could be returned
Organizations may also want to use after-sales stock and have a replenishment strategy in place to keep production running smoothly.
[Related: Inventory Management Secrets]
Estimate Realistic Final-Customer Demand
While this poses some obvious immediate problems, it also makes estimating realistic final-customer demand more difficult — and more crucial. Don’t take for granted that panic buying will continue and current demand levels will remain the same. Instead, work with sales and operations planning to get a reliable demand signal to determine necessary supply.
To assess demand from your customers’ customers, consider utilizing market insights, direct-to-consumer channels of communication, and internal and external databases. The following tactics may further help forecast demand:
- Define the time horizon and granularity of the forecast using a demand forecasting strategy to help make risk-informed decisions.
- Realistically forecast base demand using advanced statistical forecasting tools.
- Incorporate market intelligence into product-specific models for demand forecasting.
- Ensure quick responses to inaccurate forecasts with dynamic forecast monitoring.
And just to be safe, businesses can also make smaller, more frequent orders and create more flexible contracts to avoid waste.
Improve Capacity for Production & Distribution
The next step is to assess the impact on production and distribution capacity, and this starts with your workforce. Ensuring worker safety is the priority, so consider tactics for lessening the risk of infection and options for remote working.
Then, with both your worker capacity and available inventory in mind, use scenario planning and analysis to estimate the operational and financial ramifications of a prolonged shutdown. Operations, strategy, marketing, and sales teams as well as macroeconomic experts should all be consulted during this process to get as accurate a prediction as possible. If necessary, consider prioritizing products with the most strategic value, keeping in mind earnings potential as well as the products’ relevance to safety and health.
[Related: How Technology Affects Modern Distribution]
Determine Logistics Capacity
Estimating logistics capacity by mode of transport and understanding associated tradeoffs is even more crucial than usual during a crisis, as is prioritizing logistics requirements by delivery time sensitivity and necessary capacity.
As such, companies will want to prebook air and rail logistics capacity in case costs increase, ideally working with partners directly to achieve better terms. Monitoring airport congestion, border closings, and other changes will also be necessary in addition to the usual on-time status tracking of freight in transit in order to improve contingency planning. Overall, companies should be flexible, ready and willing to adapt to necessary changes.
Stress Test & Free Up Capital
Earnings and liquidity will become increasingly tight as the crisis evolves due to decreased margins, waning sales, and strained supply chains. Companies will need to put any and all forecasting capacities they have to work to perform weekly and monthly stress tests on their capital requirements — and hopefully free up some much needed cash.
In terms of where to pull this cash from, look beyond accounts payable and receivable to less obvious parts of the value chain. For example, consider the following strategies:
- Reduce finished goods inventory.
- Utilize more intelligent fleet management and other optimized logistics to defer capital costs without affecting customer service.
- Pressure-test purchase orders for every supplier and reduce or eliminate nonessential supply purchases.
- Negotiate supplier contracts to achieve better terms.
Creating a Resilient Supply Chain for the Future
Once you’re finished addressing the immediate risks to your supply chain, the bigger-picture work begins. If this crisis has taught companies anything, it’s that they need to be more resilient and prepared for unexpected situations — not only for their own financial health, but for the health of the greater economy and the actual health of people everywhere.
Creating a resilient supply chain starts with managing supply chain risk by assessing risk, regularly revising risk impact predictions and remediation tactics, and supervising risk governance. Luckily, the tools and processes you created during the initial crisis response need not go to waste; now is a great time to convert them into formal documentation for future use. If all supply chains not only work to improve their own resilience but also collaborate with one another, we can expect the supply chain ecosystem as a whole to grow stronger.
[Related: The Future of Supply Chain]
For some companies, becoming more resilient for the future may entail recognizing that they don’t have the technology, scaling capabilities, or other resources necessary to effectively manage their supply chain themselves. If this is the case, Hollingsworth is here to help with solutions ranging from warehousing to reverse logistics and state-of-the-art SAP ERP technology.
We pride ourselves on our ability to optimize supply chain management and save clients money during the normal times — while also preparing them for the unexpected. As an essential supply chain service provider, we’ll stand by and continue to support customers who are on the front line of this pandemic.