A Three Part Article Series from QAD DynaSys – COVID-19 and Resilient Supply Chain
In this series, discover how the COVID-19 pandemic gave us the keys to build a resilient supply chain and add value to our Supply Chain. In 2021, COVID-19 and Resilient Supply Chain will not be incompatible. Robert Drew gives you Takeaways to Future Supply Chain crisis.
Part One: The Greatest Supply Chain Drama Seen In 75 Years
Seasoned supply chain professionals will not be surprised by this: The COVID-19 pandemic is not the first global crisis to dramatically impact supply chains. Events like devastating weather, tit-for-tat trade policy decisions, and regional conflicts come every few years. Of course more prosaic disruptions, such as port closures, supplier problems, or competitive new product events, occur far more frequently.
The Real Reason Why This Crisis Has Been Different
Typically supply chain disruptions are regional or market-centric. Commonly, they center on one supplier or one set of suppliers, or one route, or one deficient commodity or input, or a collapse in demand for one product type. Companies can then manage disruption with a Resilient Supply Chain.
Normally they are also one dimensional. Large scale chemical plant explosions have caused revenue-impacting delays globally several times in recent years. Fires have seriously impacted the wine industry in the US, Australia and elsewhere. And, among numerous examples of competitive disruption, new product strategies, such as White Claw’s 2019 upswing impacting the beer industry, are similarly noteworthy examples of frequently observed disruptions limited to particular markets.
Yet explosions and fires impact supply in just one or a few industries. Demand is usually not dramatically affected; just the ability to meet it. When a new product blows up it disrupts demand for substitution products. However, overall supply (in 2019’s case overall beverage supply) usually accommodates demand.
COVID-19 impacted the industries on every levels
The COVID-19 pandemic, on the other hand, disrupted supply and demand to varying degrees. And across almost all industries in all global markets. And in a matter of weeks. Not since the Second World War has an event this global and impactful struck supply chains.
Many industries experienced dramatic collapses in demand, such as the luxury goods and hospitality sectors. Resulting in shutting down assets and causing layoffs. Others, such as food & beverage experienced earthshaking shifts in demand to which most players were ill-equipped to quickly adjust. And on the supply and production sides, disease flare-ups, imposed shutdowns. Sudden capital & cash shortfalls caused service levels to plummet and procurement and operations to scramble for alternatives.
The point is, almost everyone has received and is continuing to receive a hard lesson on the need to build resilience into their supply chains.
As of this writing, as we enter 2021, between Pfizer and Moderna products more than 4.2 million vaccines have been provided in the US, and over 12.3 million globally. Plus, other companies are far along in the development of their own vaccines.
In sum, there appears to be light at the end of the tunnel at last. And there is always solution for Demand Planning against Covid-19.
But there are a host of takeaways that everyone can absorb, to help weather the remainder of the pandemic-based crisis and to tackle inevitable future supply chain disruptions.
COVID and Resilient Supply Chain – What You Can Learn From It
Frankly, it seems like the future progression of the COVID virus does not appear to be a V-shaped or even a U-shaped recovery, but rather an opportunistic, highly virulent forest fire, dependent on the local behaviors, government policies, and medical infrastructure of each market. A company should expect irregular, unpredictable patterns of relapses, spikes, and possible business shutdowns and slowdowns for many quarters to come. These will affect each industry and supply chain in its own way.
So this global supply chain crisis is like no other that came before it. But there are lessons you may take from it that will serve you well when future crises come along.
Let’s review them one by one.
Truly Understand Your Customer
During these times it is essential you really understand your customers, their buying behaviors, and how they react to market and environmental shifts. When it comes to your customers and how they react to the pandemic crisis, what you find can also apply to some of the demand crises you encounter in the future.
Our markets have experienced COVID-19 demand shocks in three different ways.
1. Deferred demand, reasonably quick rebound
Examples: Apparel and other general merchandise, home repair, furniture. On the B2B side, MRO products as businesses see orders increase once again.
Two factors keep demand for these products down: Restrictions on business hours and consumers’ disposable income. As the former are lifted consumer products in this category should see a bump, even in the era of online sales, and as more furloughed and laid off people get back to work revenues grow further.
2. Deferred demand, long-term rebound
Examples: Luggage, restaurant equipment. In manufacturing, capital investments in new machine tools and materials handling equipment.
Large percentages of the population will wait to travel or visit restaurants indoors, even after COVID-19 may be abating locally. Many corporations will wait until there’s a vaccine and a consistent recovery appears imminent before making big-ticket capital expenditures.
3. Increased demand during the crisis
Examples: Packaged alcoholic beverages, packaged meals and frozen foods, bicycles, mobile collaboration software.
Did the demand for your products actually increase during the pandemic crisis? This places the focus on supply and inventories (see Takeaways section below).
4. FMCG and Food & Beverage products: Relatively stable demand, but major shifts in packaging and channels.
For example, F & B suppliers were geared up to move a large percentage of their output through restaurants and food service channels. Over half of every dollar spent on food in 2019 went to restaurants. Then the pandemic hit. Overall demand dropped only slightly, but home consumption demand skyrocketed in a matter of days while the restaurant channel dried up, necessitating emergency distribution network redesign.
Takeaways for Future Supply Chain Crises
There have been large scale demand side disruptions every few years – recessions, cyclical or from financial market duress. Most companies will find that if their products experience deferred demand with a long term or quicker rebound during the COVID-19 crisis, it mirrors the experience of recessions in general.
Above all, preserve your cash. When in crisis mode and managing on a week-to-week or month-to-month basis focus on cash flow. Your Finance department is minding this metric in particular. Supply chain needs to do this as well.
Cut costs as you are able, and investigate cost-effective distribution alternatives during cyclical recessions or pandemic-induced crashes.
If your demand spiked because of imposed closures or lockdowns, chances are it’s due to hoarding behavior or a temporary drop in substitute products or experiences. Certain medical goods such as PPEs sold out from sheer sudden need. You probably will not face this demand pattern again, barring future pandemics requiring large scale social distancing.
That said, it is always a good idea to diversify your supplier base for future issues. Try to establish multiple suppliers for all key inputs, and understand their own supply chains enough to feel comfortable that they also follow a supply base diversification strategy. Many companies are learning the hard way this year how important it is to understand who your suppliers’ suppliers are. Therefore this year is the time to start working on supplier base security for the future.
Fully understanding your customer base and its various segments, and how they behave through this pandemic crisis, will put you in a good position to adapt to future disruptions.
How to Evaluate the Progress of Your Supply Chain
On the Demand Side
1. Track key regional (state, city, province, or supraregion like EU), and national health and economic indicators.
These can include:
- New weekly COVID-19 infection rates
- Overall hours worked, weekly or monthly. Hours worked in your target industries, if you are a B2B company.
- New unemployment insurance filings
Choose a set of objective indicators to use as guideposts towards recovery, for helping you make decisions. Hours worked and unemployment filings can be useful for gauging regional financial crises, such as the Asian Financial Crisis of 1997-1998, or even for hurricanes hitting particular states. Freight shipments, home sales, revenues or units shipped by particular industries – be ready with a list of the most critical, telltale indicators for your markets and use it when disruptions occur.
2. How well are your geographic and target markets emerging from the pandemic?
- Urban vs rural: Urban locales hit earlier, have more experience and also more treatment facilities
- State-to-state differences in the US
- Wealthy countries vs emerging markets
- Age Demographics: Senior citizens, 20-30-somethings, and parental caregivers are impacted differently
- Industry (B2B): How have your customers’ operations been impacted by shutdowns and revenues/cash flow by the overall crisis?
In the earlier stages of the pandemic we believed that we need only observe those countries first affected, learn from their revival, and emulate what they did well. Then local realities and politics intruded.
Beyond objective indicators, forecasting now demands integration of government policy on social distancing, especially when comparing countries and, in decentralized markets like the US, the states. Later you will need to factor the availability of a vaccine into analyses. You should stay informed on how governments are approaching the crisis and how this will affect both demand and the viability of your suppliers.
When a vaccine is ultimately developed, approval rates will vary across markets, as will ultimate distribution – various geos and groups will receive it later than others. It will be impossible to simply deliver several billion doses overnight.
Takeaways 2 :
Forecasting can no longer just be about trend analysis, extrapolation from past demand and planning for routine exceptions. When it comes to disruptions, it is critical to assess how governments and society react and how it will affect demand and your supply chain in general. Political risk becomes a factor. Ultimately, the ability to adapt to change and manage the issues that present themselves can be facilitated by implementing a good scenario planning.
When natural disasters, riots or rebellions affect your market, how is the government supporting the response? With financial downturns, how are governments’ monetary and fiscal policy responses? Even at the more prosaic level, new product introductions, competitive plant expansions, and resources are affected by government response and regulation. Become a student of how the public sector responds to crises.
3. How are your customers’ customers handling the crisis?
- Potential volatility requires greater market sensitivity and transparency
- Develop a clear understanding of your channels, not just your immediate customers
- Diversified customer bases offer more stability through the rebound
You develop an understanding of your customers through order patterns, forecasts, and the relationships you develop. Take it one step further and work to understand your customers’ customers as much as possible. B2C companies who sell through channels understand this well, because they target consumers, at the final step in the channel.
B2B companies often need to put more work into this. Channel players may walk the thin line between being a good partner and protecting their customers, so accomplishing this may not simply be a matter of working together. But you can use a combination of market intelligence and public information to have a better understanding of downline order patterns and investment. This is especially viable in a tiered supplier system serving automotive, aerospace, or large industrial concerns.
Next week – COVID resilient supply chain :
Tune in to next week’s blog post, Part Two of this three part series, The COVID-19 Pandemic: Your Supply Chain’s Capacity to Add Value, to take in more lessons from the pandemic crisis. Your supply chain’s capacity to add value will be explored.