After the Coronavirus – supply chains and need for change | Daily News


 

After the Coronavirus – supply chains and need for change

While nobody could have predicted the scale, speed, severity, or timing of the outbreak, could businesses be better prepared to deal with the consequences? This isn’t the first time they’ve faced supply chain disruption. The COVID-19 outbreak is arguably more impactful than all these events combined because it hasn’t just created hurdles, it’s completely stopped production, something many supply chains can’t absorb. But the reasons businesses are struggling to deal with the fallout are the same: supply chains are fragile. Developing a cogent supply chain response to the coronavirus outbreak is extremely challenging, given the scale of the crisis and the rate at which it is evolving. The best response, of course, is to be ready before such a crisis hits, since options become more limited when a disruption is in full swing. However, there are measures that can be taken now even if you’re not fully prepared. And although its long-term consequences have yet to fully play out, the coronavirus outbreak already provides some lessons about how you can better prepare your company to deal with future large-scale crises.

“The full impact of coronavirus on supply chains might not become obvious until sometime in the next few months and beyond” What You Can Do Now Let’s first look at some actions that can be taken to mitigate the impacts of the crisis on supply chains. Start with your people. The welfare of employees is paramount, and obviously people are a critical resource. Maintain a healthy skepticism. Accurate information is a rare commodity in the early stages of emerging disasters, especially when governments are incentivized to keep the population and business community calm to avoid panic. Impact reports tend to be somewhat rose-tinted. However, local people can be a valuable and more reliable source of information, so try to maintain local contacts. Run outage scenarios to assess the possibility of unforeseen impacts. Expect the unexpected, especially when core suppliers are in the front line of disruptions. In the case of the coronavirus crisis, China’s influence is so wide-ranging that there will almost inevitably be unexpected consequences. Inventory levels are not high enough to cover short-term material outages, so expect cause widespread runs on common core components and materials. What came as a surprise to consumer-packaged-goods firms some six months later was that petroleum-based packaging was in short supply because impact on supplies of the raw materials needed to make these materials. Many firms scrambled to redesign packaging using old-style paper and cardboard. Create a comprehensive, emergency operations center. Most organizations today have some semblance of an emergency operations center (EOC), but in our studies we’ve observed that these EOCs tend to exist only at the corporate or business unit level. That’s not good enough — a deeper, more detailed EOC structure and process is necessary. EOCs should exist at the plant level, with predetermined action plans for communication and coordination, designated roles for functional representatives, protocols for communications and decision making, and emergency action plans that involve customers and suppliers. Designing for response. The coronavirus story will undoubtedly add to our knowledge about dealing with large-scale supply chain disruptions. Even at this relatively early stage, we can draw important lessons about managing crises of this nature that should be applied down the road. Know all your suppliers. Map your upstream suppliers several tiers back. Companies that fail to do this are less able to respond or estimate likely impacts when a crisis erupts. At that point any available capacity was gone. Similarly, develop relationships in advance with key resources — it’s too late after the disruption has erupted. Understand your critical vulnerabilities and take action to spread the risk. Many supply chains have dependencies that put firms at risk. Create business continuity plans. These plans should pinpoint contingencies in critical areas and include backup plans for transportation, communications, supply, and cash flow. Involve your suppliers and customers in developing these plans. Don’t forget your people. A backup plan is needed for people too. The plan may include contingencies for more automation, remote-working arrangements, or other flexible human resourcing in response to personnel constraints.

Revisit Your Supply Chain’s Design Until very recently, most global companies could base their supply chain designs on the assumption that materials flow freely globally, enabling them to source, produce, and distribute products at the lowest-cost locations around the world. Some t trade policy whiplash, Brexit, and now the coronavirus crisis have challenged the validity of this fundamental assumption. Specifically, the coronavirus illustrates the vulnerability of having so many sources located in one spot — and a spot that is far away from critical markets. We believe that a new kind of design is needed that enables companies to rapidly reconfigure their supply chains and be ultra-agile and responsive to rapidly changing global trade policies, supply dynamics, and disruptions. Therefore, the question is: How should companies design their supply chains to operate effectively in a highly volatile world where consumers are intolerant of tardy responses? There are many options, and each one involves tradeoffs between the level of risk that the enterprises can tolerate and the amount of operational flexibility it wants to achieve. Here are two examples: Redesign with second sources. This supply-chain design provides backup capacity for supply, production, and distribution outages. The backup capacity spreads the risk of a disruption across two sources (as long as the disruption does not also affect the second source location). Consequently, it is better to have a second source outside the primary source region. Although this supply chain design lowers risk levels, it incurs higher administrative, quality monitoring, and unit costs. Also, economies of scale vary according to the amount of supply allocated to each supply source. Redesign to source locally. This design calls for a company to have production facilities with local sources of supply in each of its major markets. Like the above option, it spreads the risk. Since these sources are dispersed, the economies of scale are lower and the capital costs are higher, but the transportation costs are lower. These are gross simplifications of many design options that the firm can take to reduce risk and ensure response capacity. A more detailed analysis and assessment is necessary. Obviously, in selecting a design, companies have to weigh the costs of each and how it will affect their ability to serve their customers and compete against other firms. Deciding which design is optimal is not a one-time process. Firms should regularly revisit and challenge their design choices and the strategies that underpin them. It’s impossible to anticipate the arrival of global crises such as the coronavirus outbreak, but firms can mitigate their impacts by taking supply chain preparedness to a higher level. They should act before a disruption occurs and adjust and execute new plans afterward rather than starting from scratch every time they are plunged into a new crisis.

As procurement teams struggle to cope with the Covid-19 global pandemic, most have been trying to keep up with the news about global response measures and have been working diligently to secure raw materials and components and protect supply lines. However, vital information is often not available or accessible across their global teams. As a result, their response to the disruption has been reactive and uncoordinated, and the impact of the crisis is hitting many of their company’s full force. In contrast, a small minority of companies that invested in mapping their supply networks before the pandemic emerged better prepared. They have better visibility into the structure of their supply chains. Instead of scrambling at the last minute, they have a lot of information at their fingertips within minutes of a potential disruption. They know exactly which suppliers, sites, parts, and products are at risk, which allows them to put themselves first in line to secure constrained inventory and capacity at alternate sites. Despite numerous supply-chain upheavals inflicted by disasters in the last decade most companies still found themselves unprepared for the Covid-19 pandemic. There are a number of reasons for this problem and potential solutions. The required resources for supply network mapping are expensive. Many companies and leaders talk about the need to do supply network mapping as a risk-mitigation strategy, but they have not done so because of the perceived large amount of labor and time required. Consequently, many companies continue to rely on human intelligence from top-tier and a select few lower-tier suppliers. But the information collected via personal relationships is typically anecdotal and often mere conjecture, and when procurement personnel leave, change roles, or retire, their knowledge leaves with them. It can take new employees years to get to know immediate suppliers, let alone the suppliers’ suppliers and their global footprint. The supply network mapping can be resource intensive and difficult. However, there is no way around it. Companies will discover the value of the map is greater than the cost and time to develop it. The most common approach is to use the bill of materials and focus on key components. It typically starts with the top five products by revenue and goes down to their component suppliers, and their suppliers, ideally, all the way down to raw materials suppliers. The goal should be to go down as many tiers as possible, because there may be hidden critical suppliers the buying firm is not aware of. The map should also include information about which activities a primary site performs, the alternate sites the supplier has that could perform the same activity, and how long it would take the supplier to begin shipping from the alternate site. A new breed of services companies can help acquire and analyze supply network data and organize the results in a user-friendly way. Their services typically do not map the supply networks all the way down to raw materials, but they may provide a start. The procurement function is measured by cost savings, not revenue-assurance. Most of procurement’s activities are centered on cost savings, which means obtaining supplies at the lowest cost possible, provided they fall within specified quality parameters.

When the procurement function has to resort to extraordinary measures to secure supplies on time (e.g., by expediting shipments or purchasing parts or materials at a premium), the higher costs are assigned to other parts of the organization (the logistics function in the case of expedited shipments, and the finance function in the case in the case of premium prices for raw materials and parts). Often, no one asks: Why was expediting or paying a premium necessary in the first place? People from procurement, logistics, and supply-chain financing need to come together to talk about what key gaps (tools, information, people, processes, etc.) need to be fixed to protect the company from disruptive events in the future and how to align the goals of procurement with the overall business objectives. Supply chain disruption is often not part of supplier performance metrics.

When a disaster strikes, everyone suffers: buyers and suppliers alike. Therefore, it only makes sense that firms should incorporate disruption-related metrics in their evaluations of suppliers. For example, when selecting a supplier and writing the initial contract, many leading companies include language that requires the supplier to participate annually in its supply-chain mapping efforts. When force majeure events like the current pandemic strike, those supply maps can be used as a roadmap to solutions to the crisis. Contracts should also spell out expected recovery times and methods during such events. After the Covid-19 crisis dissipates, we will see companies fall into one of two categories. There will be those that don’t do anything, hoping such a disruption won’t ever happen again. These companies will be taking a highly risky gamble. And there will be firms that heed the lessons of this crisis and make investments in mapping their supply networks so they do not have to operate blind when the next crisis strikes and rewrite their contracts so they can quickly figure out solutions when disruptions occur. These companies will be the winners in the long term. Once the initial impacts of the crisis are mitigated, it’s all about foreseeing the next “when.” Supply chain leaders and their teams can, for example, conduct a scenario planning exercise and develop action plans. This is the time to discover or develop alternative sources and diversify value chains.

Tackle strategic and concentrated supplies with high value at risk where internal risk capacities to absorb, such as alternative sources, routes, inventory and cash reserves, aren’t sufficient enough to mitigate any major disruption. Being better prepared than the competition might even open new opportunities when the next disruption comes around. The frequency and intensity of shocks to the global economy are increasing. The Covid-19 outbreak has exposed just how vulnerable far-flung supply chains have become. What long passed for adequate flexibility is now subpar. Companies that begin investing today in a resilient supply chain will be best positioned to weather the next event that obstructs the global flow of goods.

The writer is Retired Wing Commander of the SLA, Former Procurement Specialist in World Bank and ADB Projects, Head of Logistics in International Cricket Council, present CEO of the University Collage Ratmalana and Senior Lecture of MILODA, Academy of Financial Studies and Institute of Supply’s and Material Management (ISMM)


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