When the Covid-19 pandemic struck the vast majority of companies and institutions were simply not ready for it, despite the multiple warning signs that began months prior.
What started as a disruption to supply chains in medical products and equipment at the beginning of 2020 has progressively expanded into all industries to a level that now the chip scarcity has forced the automobile industry worldwide to stall or temporarily idle production.
The severity of the disruption is such that in anticipation of what might come later, on February 24th 2021, the US President signed an Executive Order to review supply chain risks of high-priority industries to avoid future shortages of products affecting strategic areas of defense, communications, technology, food, and public health. In the light of the severity of the crises, the Biden administration is even considering subsidizing semiconductor manufacturing facilities. Europe has not been any luckier. The EU is studying the possibility of creating semiconductors to reduce dependence on Asia, aiming at 20% of the world’s production by 2030.
However, the disruption goes far beyond the car manufacturers, beyond affecting personal computers, electronics, home appliances, and again threatening medical equipment suppliers. Learning from the supply chain difficulties that companies faced during the hardest time of the pandemic and the still visible consequences, is key in preparing for the numerous vulnerabilities of complex global supply chains. There are five areas to pay attention to adjust quickly to the volatile market conditions.
The Importance of a Flexible Supply Chain
During the pandemic, many companies earned the hard way the importance of a flexibly designed supply chain. By deploying responsive capabilities, production can be adapted to a sudden demand fluctuation, customization needs, or changes in product design. For example, a modular production approach at the design, organizational, and manufacturing level can avoid the failure of one part affecting the entire system. By standardizing components and the interfaces between components, product design can embed coordination and avoid coupling while reducing cost and improving response time. This is a much-needed strategy for companies that rely on single sourcing for key components or with main suppliers that are concentrated in a particular geographical area.
There are multiple examples of successful flexibility practices that were in response to Covid-19. With the aid of digital tools, Ford Motors was able to quickly repurpose one of their UK engine production facility to produce medical ventilators. This required the company to both expand its already existing supply chain and to go through the re-certification process for the new product design. The luxury conglomerate LVMH reconfigured its perfume production lines in France and started to manufacture hand gel in just 72 hours, while Nike rerouted products that were aimed at brick-and-mortar stores to e-commerce channels.
However, companies also found there is a limit to flexibility. Managing a large variety of options comes with its own set of difficulties, for example adjusting to demand of different product options when that demand becomes unbalanced, it is not always possible or it would simply consume too much time. In this situation, companies should consider the trade-offs between product variety and flexibility and limit. This may reduce the company’s offerings but it will help streamline their production facilities, reduce downtime in the logistics chain, and maintain a satisfied customer base. In fact, companies like Procter & Gamble, Mondelez, and Coca-Cola are reevaluating their product complexity by focusing on the most important SKUs and investing in making their supply chain simpler in response to the disruptions suffered by the pandemic.
The Importance of a Revenue Assurance Supply Chain
Rethinking the way supply chains evaluate their suppliers and inventory policies is required discussion that can help in the trade-off between efficiency and resilience. By considering additional variables of sourcing strategies, such as cost of quality, lead times, technological value, and logistics costs, companies can prepare themselves to respond in times when their competitors may struggle. However, companies may need to review inventory policies or sourcing strategies because, although these measures increase the resilience of supply chains, they may do so at the expense of efficiency. Supply chain managers may find compromise in holding an intermediate inventory, especially when there is no alternate supplier, or by securing strategic stocks through pre-arrangements with their main and alternate suppliers.
Kellogg’s, for example, gained market share during the crisis by responding faster than their competitors. The company’s nimble reaction was possible thanks to its inventory holdings of grains and quick shift to a previously identified local provider of cardboard. While this preparation might have seemed redundant or unnecessary in quiet times, it paid out during the pandemic disruption by buying them time to quickly reorganize their supply chain. Some companies are shifting manufacturing steps to more local suppliers. This not only makes supply chains shorter but allows a much faster ramp up in production and delivery times.
The Importance of a Visible Supply Chain
Having a visible supply chain starts by identifying all players involved and determining critical components as well as origin of supply. Traditionally, most companies have limited supply chain mapping to tier-one suppliers, underestimating the impact of a disruption on a tier-2 or tier-3 supplier. During the Covid-19 pandemic, Dun & Bradsteed identified that at least five million companies, including almost all Fortune 1000, had one or more tier-2 and tier-3 suppliers in the affected region of Wuhan. Mapping should not stop with the identification of sub-tier suppliers.
To maximize supply chain performance and decision making, suppliers’ inventory status should be visible in real-time, as should production schedules, shipment information, and any disruptions. Visibility is not only about a deep knowledge of one’s own supply chain, but an understanding of industry competitors and adjacent industries. Why? Because the long-term success of supply chain depends on a collaborative business ecosystem. For example, during the months of lockdown, gasoline demand decreased and this not only resulted in a sharp fall on gasoline production but on the availability of one of its byproducts: ethanol. Ethanol is a key component in the production of CO2, which is required for the carbonation of soft-drinks and beers. As a result, CO2 suppliers increased their prices by about 25% and some breweries had to go on allocation.
The Importance of Logistics
Having goods manufactured by suppliers is worthless if the product cannot reach consumers. That’s why it’s essential to also work with the logistics and transportation partners within the supply chain. Covid-19 is an example of a global disruption that impacted the transportation of both components and end-products, with supply chains being impacted by events such as port congestion, border delays, decrease in the recurrent transportation mode capacity, driver shortage, and unprecedented delivery surge. Agreements with strategic logistic partners to secure both capacity and priority can help protect a dexterous strategy during periods of disruption.
Technological and automotive industries are among those that have suffered the most as they rely heavily on air-cargo shipments – a transportation mode that has massively dropped its cargo capacity due to travel bans and unprecedented passenger flights cancellation that have translated in fare increments of up to 220%. Similarly, the drop in demand resulted in less ocean cargo routes and with higher unpredictability. Companies that had the flexibility to change to multimodal alternatives have been able to outperform their competitors. For example, now that the medical emergency has subsided, PPE and other related medical equipment is being transported by train between China and Europe. Lockdown products, such as laptops, fitness equipment, printers, and other electronic goods, have experienced a huge surge in rail transportation because they were not suitable for air transport but were in high and urgent demand. Real-time visibility of what is happening in the transit period, such as tracking time, airport congestion and border closures, can allow companies to dynamically manage the supply chain in order to quickly react and anticipate disruptions like a change in transport modes or a rerouting.
The Importance of Supply Chain Risk Management (SCRM)
Companies with a mature risk management approach are better prepared to respond to disruptions regardless of the depth of the crisis. However, even though many organizations have implemented some sort of SCRM or Business Continuity Plan (BCP) process, few actually understand where the risks truly lie and thus their SCRM is limited to a few reactive measures. A proactive approach to risk management would involve all functions of the supply chain with a dedicated multidisciplinary risk management team. Some of the proactive strategies could include real-time event monitoring and supply chain visibility, multi-sourcing and buffer strategies, investment in manufacturing capacity of critical elements, evaluation of partners based on their SCRM plans, development of solid communication channels, and creation of awareness and transparency of the entire supply chain vulnerabilities. While the existence of a SCRM plan cannot completely avoid the impact of a global crisis like Covid-19, the past reveals that only those companies with mature SCRM plans that combine proactive and reactive measures can overcome the consequences of disruptions in a fast and favorable way.
Beatriz Acero is a postdoctoral researcher at IE Business School. Elena Revilla is a professor of operations and technology management at IE Business School where she is currently analyzing the integration of knowledge into collaborative supply chains.
This article was originally published on IE Insights, the thought leadership publication of IE University, in June 2021.