Supply Chain Issues
Despite the obvious health consequences of the SARS-CoV-2 virus, which causes COVID-19 coronavirus, spreading, the economic and livelihood implications of the crisis are becoming more apparent. Businesses need to respond on multiple fronts simultaneously. They must not only protect workers’ safety but also ensure their operations are viable, which is increasingly at risk from the historic supply chain shock.
Many businesses can mobilize quickly and establish crisis-management mechanisms, ideally in the form a crisis centre. The common focus is on the short-term. How can supply chain leaders prepare for the long and medium term, and build the resilience to get through the other side?
What Should You Do Right Now?
We see that the current landscape requires a comprehensive short-term solution. This means that six sets of issues must be addressed across the entire supply chain. These actions must be done in tandem with supporting the workforce, and conforming to the most recent policy requirements.
- Create transparency in multitier supply chains by establishing a list and identifying critical components, determining origin, and identifying alternate sources.
- Estimate the inventory across the value chain – including spare parts and after-sales stocks – for use as a bridge between production and delivery.
- Determine realistic final-customer demand to respond to (or contain) customers’ shortage-buying behaviour.
- Ensure employee safety by optimizing production and distribution capacities, including providing personal protective equipment (PPE), and engaging in communication teams to share information about infection-risk levels and work from home options. These steps will allow leaders to assess the current and future capacity levels of both workers and materials.
- Identifying and securing logistics capacity, Estimating capacity and accelerating, being flexible on transport mode when necessary.
- Manage cash and net work capital by running stress checks to determine where supply-chain problems will have a financial impact.
Transparency is Key in Dealing with Supply Chain Issues
To create a transparent view of your multitier supply chain, you must identify the most critical components that are essential to your operations. Reviewing your catalogue components and bills of materials will help you identify high-risk suppliers and those that lack substitutes. An index of risk for each BOM commodity is calculated based on the uniqueness and geographic location of suppliers. This will allow you to identify parts that are most at risk.
After identifying the key components, companies can assess the likelihood of disruption from tier-two suppliers and other onward suppliers. This stage should involve asking direct questions to tier-one companies about their suppliers and creating information-sharing arrangements to determine if disruptions are being experienced in tier-2 and beyond organizations. Manufacturers should work with their suppliers from all levels to create a series joint agreements to monitor inventory levels and lead times to establish a recovery plan and early warning system for disruptions.
If tier-one suppliers don’t have visibility into their supply chains or aren’t forthcoming with data, companies can formulate a hypothesis about the risk using a variety of information sources. This includes facility exposure by industry, parts category, shipment impacts, as well as export levels across countries. This triangulation can be performed using databases provided by business-data providers. These databases can be quickly analysed using advanced-analytics and network mapping to identify the most important lower-tier suppliers.
These hypotheses, along with knowledge about where components were traditionally sourced, will result in a supplier risk assessment that can be used to guide discussions with tier one suppliers. To identify potential tier-two or onward suppliers in the affected areas, this can be supplemented by an outside-in analysis that uses multiple data sources.
For risks that could stop or significantly slow production lines – or significantly increase cost of operations – businesses can identify alternative suppliers, where possible, in terms of qualifications outside severely affected regions. Businesses will need to be aware that local policies can have an impact on availability and the need for alternative suppliers. Businesses can collaborate with affected tier-one organisations to identify alternative suppliers if they are not available. It is important to understand the extent of the risk across the multitier supply chains in order to speed up the recovery process after a crisis.
Estimate Available Inventory
Many businesses are surprised at how much inventory is in their value chain. They should calculate how much, including spare parts, is available. As a bridge to keep production going, it is important to have after-sales stock.
This exercise should be completed during the supply-chain-transparency exercise previously described. It is important to estimate all inventory in the value chain. This helps with capacity planning during ramp-up periods. The following are some examples of categories you should consider:
- Finished products kept in warehouses and locked inventory used for quality control and testing.
- Spare parts inventory could be used for new product production. This is considering the trade-off between maintaining customer support and maintaining new-product sales.
- Parts with lower quality ratings or issues which should be evaluated to determine if the rework effort is justified to resolve quality problems or remanufacture using used stock could address supply concerns.
- Parts in transit should be evaluated to see what steps can be taken to accelerate their arrival – particularly those in customs or quarantine.
- Supply currently with customers or dealers should to be considered in order to determine if stock could possibly be bought back or if transparency could be created for cross delivery.
Assess Realistic Final-Customer Demand
An increase or decrease in demand for certain products may cause a crisis, making it more difficult to estimate realistic final-customer demand. Companies should ask themselves if the demand signals that they receive from immediate customers (both short- and long-term) are real and reflect uncertainties in their forecasts. Using industry knowledge and the available analytical tools, the demand-planning team should be able find a reliable demand signal that can determine required supply. The result should be discussed in the integrated sales and operations planning (S&OP).
In order to assess the demand for your products and services, you can use direct-to-consumer communication channels and market insights as well as internal and external databases. Open communication with customers directly can help fill in the gaps when data sources are scarce. Forecasting demand is difficult because of these factors. It requires an exact process to successfully navigate unpredictable and changing conditions. These are the steps organizations can take to prepare for these situations effectively:
- Create a demand-forecast strategy. This includes delineating the time horizon and granularity of the forecast in order to make informed decisions in the S&OP process.
- Advanced statistical forecasting tools can be used to forecast base demand.
- Integrate market intelligence into product-specific demand-forecasting models.
- To quickly react to any inaccuracies, ensure that forecasts are constantly monitored.
Many end customers engage in shortage buying to make sure they have a greater share of what is in short supply. Businesses can ask themselves if the demand signals they receive from their immediate customers (both short- and medium-term) are real and reflect the uncertainties inherent in the forecast. By making orders smaller and more frequent, and allowing for flexibility in contract terms, suppliers and customers can achieve better outcomes. This helps to smooth out the valleys and increase costs. It is important to protect commercial relationships by using a triaging process that prioritizes customers based on strategic importance, margin, revenue, and other factors.
Optimize Production and Distribution Capacities
The next step in the S&OP process is to optimize production and distribution capacity. To understand the financial and operational implications of different production and capacity scenarios, scenario analysis can be used.
Safety is the first step to optimizing production. This involves sourcing crisis-communication teams and engaging them to communicate clearly with employees regarding infection-risk concerns, as well as options for remote or home work.
Next, scenario planning is required to determine the financial and operational consequences of a prolonged shutdown. This will be done based on the available capacity (including inventory) as well as the impact. The S&OP process will determine which products have the greatest strategic value. This is done by considering the importance of earnings potential and safety, as well as the importance of health and safety. This analysis will involve a cross-functional team, which includes sales, marketing, strategy, and operations. They also include people who can adjust updated macroeconomic forecasts to reflect the business’s expected impact. A digital, end-to–end S&OP platform is a better way to match production and supply chain planning with the expected demand under different circumstances.
Identify and Secure Your Supply Chain Logistics Capabilities
Understanding current and future logistics capacity per mode and the trade-offs that they bring will be more important than ever in times of crisis. Prioritizing logistics requirements in terms of required capacity and time sensitive product delivery will also be crucial. To minimize potential price increases, companies should plan for their logistics capacity in order to increase production and time in value chains. Partnering with other companies can help you gain priority and increase your capacity at more attractive terms.
Real-time visibility is essential for contingency planning in rapidly changing circumstances. This includes tracking freight status and monitoring wider changes such as border closures or airport congestion. It is essential to be flexible in logistics management to adapt to changing situations and environmental conditions.
Manage Net Working Capital and Cash
As the crisis progresses, tight supply chains, slow sales and reduced margins will all add to the pressure on earnings. Businesses are known for projecting optimism. Now they need to be realistic in order to free up cash. To stress test their capital requirements on a weekly and monthly basis, companies will need to use all of their internal forecasting capabilities.
While the finance function focuses on accounts payables and receivables, supply-chain leaders can concentrate on releasing cash that is locked up in other parts the value chain. With clear, achievable targets and strong governance, it is possible to save substantial amounts on finished goods inventory. Companies can also save significant capital costs by implementing smarter fleet management. Instant cash infusions can be made by pressure testing every supplier’s purchase order. Minimizing or eliminating nonessential purchases can also be possible. The supply chain leaders must identify the root causes of nonessential supplier purchases and mitigate them by adhering to consumption-based stock models and manufacturing models.
Building Supply Chain Resilience for the Future
After identifying the immediate risks to a supply network, leaders need to design a resilient supply system for the future. This starts with the creation of a supply-chain risk function that is responsible for assessing risk and continuously updating risk-impact estimates, remediation strategies, as well as overseeing risk governance. The documentation and tools that were created during crisis management should be documented. The crisis centre should also become a permanent fixture for continuous monitoring of supply-chain vulnerabilities. For greater resilience, stronger supplier collaboration is also possible.
The process of digitizing supply chain management increases the speed, accuracy and flexibility of supply-risk management. A digitized supply network strengthens the ability to anticipate risk, coordinate across supply chains, and manage issues related to product complexity.
As an example, estimating a medtech company’s degree of connectiveness helped it expand its supplier base by 600 percent, while an industrial-tools maker identified request-for-qualifications-ready suppliers for highly complex parts that it had been previously unable to source.
Companies and governments need to examine their supply-chain vulnerabilities, and any shocks that could make them vulnerable in the wake of the crisis.
Detailed responses can reveal significant opportunities. For example, scenario analysis can be used to examine the structural resilience critical logistics nodes, routes and transport modes. This can reveal weaknesses even though individual components (such as rail hubs or airports) may seem resilient.
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