Supply chain rebuilding strategy – Post COVID-19

Supply Chain Rebuilding Strategy – Post COVID 19

For the industry, the effects of the coronavirus (SARS-CoV-2), which causes COVID19 disease which started to take hold in January of 2020 in China have put the global pace to a halt  —a critical link in the global supply chain started reporting an increase in several cases week after week.

In the present situations as the country’s early lockdowns and quarantines are slowly beginning to lift, the pandemic’s international expansion is leading to new restrictions across the globe that are weighing on business activity.

Consequently, the supply chain now faces a new set of challenges. China itself poses several operational questions. Over the past few weeks, major progress in reducing labour constraints in China occurred. It was estimated that by March 24, 2020, around 75 per cent of the country’s workforce had returned to work. That is a major improvement over the situation in February 2020, when less than 20 per cent of workers were back on the job. But many workers are recruits who require training, which will likely take several more weeks. And Wuhan—the major manufacturing centre where the outbreak began— remains far behind, with just around 24 per cent of labour having returned to work.

Supplies of materials and components, especially those that are highly labour intensive, are also limited, potentially creating a second wave of disruption— even assuming that labour shortages continue to abate. For global manufacturers- highly customized, low-automation components may remain out of stock, if Chinese suppliers cannot recover quickly enough.

The logistics shortfalls mean that supplying even made-to-stock components to production lines overseas is likely to take longer and cost more than it did in the past. Thereby, liquidity challenges loom, particularly among small and medium-sized enterprises (SMEs). These companies, which mainly produce labour-intensive products which are crucial in the upstream of any supply chain, so their shortfall to the capital makes them exceptionally vulnerable to cash crunch.

Precedent shows that those sorts of problems are solvable with the right interventions. A Japanese manufacturer’s experience in recovering from the 2011 Tohoku earthquake, tsunami, and nuclear disaster illustrates the critical elements. Even though virtually all of the company’s productive capacity was in Japan—much of it near the earthquake’s epicenter— A mix of short-term to mid to long-term actions were put in place which started to restore all production within a month while building flexibility and resilience against further shocks.

Short-term Recommendations:

In the short term, the priority for companies today is to restart and ramp up production. The question hovering is how to do so while minimizing further disruption and keeping workers safe. A few notes –

1.      A Control Tower as we call in Supply chain – This will enable us to create the transparency required for agile decision making and to oversee the implementation of both strategic and tactical actions.

2.      It enables better scenario planning. Eg: the company analysis demand with critical notes, understanding customers’ tendency to over order, and seeks opportunities to manage demand to match supply better.

3.      In co-ordination, specialists must assess demand for criticality and risk by going as deep into the supply chain as possible to create scenarios.

4.      From those scenarios, it’s possible to optimize limited production capacity.

5.      Follow-ups will flow on a circular basis through the Control Tower to continually assess parts availability and demand.

(A) Build a Control Tower

By bringing top management together in a singular agile structure, the Control Tower empowers the companies to work more smartly through buoyant times ( COVID 19 ), supporting the entire organization to be AGILE, ALIGN, AND ADAPT inappropriate TAT.

For the supply chain matrix, the Control Tower should cover multiple facets and uncertainties for the system –

1.      Creating scenario-based sales and operations planning to foresee material availability.

2.      Logistics, and supplier qualifications. All these activities, however, the Control Tower acts as a single, authoritative source or point of contact, and decision-making venue.

The Control Tower can thereby break the ice on ambiguities, especially the ones at the outset and between functions. Eg: the Control Tower could bring supply-chain, procurement & finance heads on one table to seek the most urgent material contracts which require renegotiation to secure the financial approvals to enable the delivery of the component.

They also resolve questions about which manufacturing sites should be started first & to what capacity vs fulfillment keeping the supply constraints.

(B) Conduct scenario analyses –

This is to identify specific actions the data/information that the Control Tower brings collaterally which will be crucial in conducting scenario analysis to navigate the supply chain with clear goals. The most likely scenarios for the COVID-19 pandemic’s further global development appear to be those in which the COVID-19 spread is eventually controlled, and catastrophic structural economic damage is restored. Though, as predicted by several renowned economists and pundits the road to recovery may be slow or muted rather than strong, as the virus reoccurrence wave is also predicted by W.H.O.

Moreover, the cases describe a global average, with situations varying by country and region.

In a slow-recovery case, China and East Asia countries continue their current recovery and control the virus by the third or fourth quarter of 2020, while European recovery has started to inch

U.S case-count growth has risen rapidly through April and we see a steady or a decline in some cities like Nw York which have been hit severely by COVID. As a result, the supply-chain scenario in China and the Asian subcontinent have started to reopen but the road to recovery,  as supply chains remain impaired, especially by the unavailability of raw materials coming from Europe or the United States and by logistics bottlenecks (especially in air routes).

European and U.S massive quarantines, travel restrictions, and social distancing measures have driven a huge drop-off in consumer spending and business sentiment of investment in 2020 for FMCG products.

If the virus reoccurs (which has been prescribed) by WHO via scenario build-ups, China & the Asian sub-continent face a surge of reinfection as they attempt to restart economic activity. The disruption of the supply of critical raw material from Europe and the United States happens across the board over an extended period. Under a possible, more negative scenario, China and Asian economies experience double-digit slowdowns, global supply chains are almost completely disrupted, the bankruptcy of smaller suppliers becomes a critical case due to global procurement shifts and diversification becomes immensely critical.

The above macro-level scenarios will require fine-tuning and adaptation for each company’s unique situations and being mindful that the underlying drivers for the scenarios may have end-to-end variable implications. Also not forgetting the factors such as a company’s primary sources of demand & supply. As we have seen that the economic impact has almost covered 2 quarters partially and the possibility of its entering into the 3rd is very likely as per several economists, it will be essential to understand the interdependencies of the Supply Chain and their dominoes effect on each other, which will be more critical.

Analyzing & reattributing the demand to fit supply at times of uncertain times, also allows customers to have every incentive to inflate demand in a bid to improve their odds of getting the amount of supply they need. This also allows now with the changing scenario to build in buffers as well so demand planning teams essentially should work in tandem with sales departments and data analysts to identify and correct the inflated demand.

A few key steps –

1.      Step 1 – Compare each customer’s current order with past purchases to see just how inflated the current requests are.

2.      Step 2 – Additional refinement can yield further opportunities to reduce order sizes and production runs. Using adjoining regression models with machine learning, forecasters can build a range of different demand curves that would apply under the existing economic circumstances.

3.      Step 3 – A strong coordination with the sales department to review advertising/ selling plans alongside budget allocation can help spread high demand over a longer period and reduce abnormal demand.

4.      Step 4 – Final stage is to work cohesively with other stakeholders, such as manufacturing, marketing, and sales functions, to evaluate demand-reshaping curves. Be mindful to include product alternates available in their product range, which would improve productivity and reduce duplication of specs. Eg: A football manufacturer should focus more on making footballs in a limited spectrum of designs so that more products can be made catering to demand to keep basic quality aspects the same. This would enable the maker to enable to restart capacity. On the flip side, this would require persuading customers to accept a different model perhaps at a lower margin, this would mobilize the wheels.

 (C) Assess components for criticality and risk at every Stage

It is of critical value that companies are mindful of the risk exposure of raw materials and vendors at each stage to calculate the risk of upstream value chain disruption. Quantifying the risk and weighing the most critical parts of raw material, supply chain teams can thereon build up critical inventory, with help from distributors, brokers, or alternative sources, despite the potential cost increase.

A detailed tree, populated by BOM data, allows supply-chain staff to see each component down to third- and fourth-tier suppliers. For each item, the team then estimates risk along the dimensions of product technology, logistics, supplier landscape, and safety relevance—for each dimension, the more specialized the product’s requirements, the higher the risk. Eg: a Basic mobile handset using relatively generic technology, its parts are easily available locally from several suppliers would require requiring not much safety testing as they come in easy vs the high-end mobile set which needs specialized parts made in an overseas location which would need high ends testing protocols /measures, would be a priority.

Rationalizing the limited production capacity after getting the revised demand figures, shop floors should be in a position to allocate capacity resources based on a highly integrated, quantitative production-priority matrix. This all is the work of the Control tower which is balancing the between customer demand and production efficiency/output. Also important to note is the strategic importance laid on the customer service needs which are directly in coherence with the raw material availability & limited production capacity at hand.

Commercial considerations matter most wherein a supplier needs a critical component which is the core product lines but at an early stage of assembly. The stock-out at his plant is crucial for this part so in order NOT to lose the relationship, the Manufacturer then enters the equation. The priority order is produced, and the remaining available capacity goes to the next three orders for the same product type but needed the following day. The day is salvaged to save buyers downtime and improving on supplier relationships.

The remaining orders above the daily capacity fall into the backlog for next-day production, unless pushed again by new prioritization from customers or changes in the availability of parts—illustrating an urgent need for frequent (ideally daily) sales and operations planning.

Quantitative calculations come in handy by calculating the Value at Risk

Value of Risk = Cost of a single unit not produced * No. of units not produced daily basis * Shortage Cycle * % of Reoccurrence

Medium-term Recommendations:

Following the progression of time, suppliers in a period of the next two to four months the second set of actions should be taken.

1.      Conversion of the Control Tower into a midterm risk-management process, with business continuity, tested regularly.

2.      Establishment of daily task managers teams in reliable risk management. – As organizations have created a few short terms processes to manage daily firefight of the short-term key actionable nodes, into the medium terms those teams to be converted into a more formalized risk-management process.

3.      Application of data gathered from the short term into a centralized control tower to build a long terms more resilient supply chain.

4.      Assessment of supply-chain risk, with a clear information cascade.

5.      Applying Porter’s value chain principle, regular open communication with other functions, including sales and marketing, finance, HR, R&D, and IT, to ensure and encourage a high awareness of the importance and implications of proper supply-chain risk management.

Additionally, the team should communicate frequently with other stakeholders, such as policymakers, investors, and others, to ensure that they are aware of any changes that will affect them as early as possible.

The team should also identify any relevant new tax and government incentives that could support the company, either directly or indirectly through impact on others in the supply chain.

Part of building a more robust supply-chain risk management process will also include building structural flexibility. When possible, companies should implement a multi-source approach for critical components, along with local supply-chain monitoring supported by local sourcing hubs.

Support financially troubled SME suppliers as few SMEs would need cash on hand—or other easily accessed forms of liquidity— the disruptions that have already occurred are likely to have a huge impact on their financial health. The early signs point to sustained pain. As one will notice during or after this economic downturn that a lot of suppliers may face high penalties from international customers after failing to fulfill committed orders.

Suppliers can often provide essential support at comparatively low cost and risk to themselves –

·        Increasing accounts-payable periods for the suppliers most in need of cash.

·        Providing low-interest loans in exchange for supply exclusivity and stability can help both sides achieve important objectives.

·        Work on a stronger buyer/ supplier relationship in various technological & collaborative approaches.

Long-term Recommendations:

Building resilience will require suppliers to invest in two interconnected, longer-term supply-chain partnerships via managing supply chain-footprint risk while increasing supply-chain planning agility/ speed.

Managing supply-chain-footprint risk starts with the familiar task of optimizing production footprints to

·        Reduce cost.

·        Mitigate risk.

·        Encashing trade benefits ( If Possible

Manufacturers operating a global supply chain, the most critical requirement is to build a Robust, Agile & Centralized footprint-simulation capability based on AI-enabled data-driven advanced modeling software. This new capability will enable leaders not only to understand and measure the risk in the current supply chain but also to simulate and run multiple scenarios to model the impact from geopolitical events, such as trade disputes, major disruptions of manufacturing assets or logistic routes, and supplier defaults. While most companies historically reviewed their footprints every year (at best), we believe that developing a footprint-simulation capability will be key to coping better with uncertainty and being able to adapt to a fluid environment in an agile way.

Once the risks are identified, measured, and ranked, companies can consider hedging and other mitigation options, such as acquiring extra tooling or cold assets and negotiating buy options with key suppliers. Careful application of advanced analytics can also help companies identify qualified suppliers in days rather than months—and then redesign transport networks to move the supplies more quickly to factories and customers.

Increasing supply-chain-planning agility by using digital tools allows rapid preplanning of the supply chain from end to end, including breaking down information silos and enabling real-time, concurrent planning of demand, manufacturing, parts, and logistics. The result is to accelerate the sales- and operation-planning drumbeat from quarterly or monthly to biweekly—or even daily.

New technologies play a critical role, allowing manufacturers to build robust data links among logistics, manufacturing, procurement, planning, and sales functions, with the ambition to get real-time visibility on the end-to-end supply-chain situation and ensure faster and better decision making.

Investments in the integration of four areas

Data sources + Automation + New algorithms+ Ubiquitous access will not only enable increased agility of supply-chain planning, but will also drastically improve and accelerate decision making, automation can improve productivity and provide risk mitigation, new algorithms can enable accuracy in planning, and ubiquitous access can reduce reaction times. These four investment areas are neither interdependent nor sequentially required, but a coordinated approach is necessary to reap maximum impact at scale.

Early adopters of innovative manufacturing methodologies are making their entire value chains more resilient, integrating production and supply into a seamless whole that responds rapidly to changes in demand and supply.

While the coronavirus pandemic is the widest-reaching crisis to affect supply chains in recent memory, it is not the only incident that will have an impact: Brexit, international trade disputes, natural disasters, and other events are all affecting today’s complex supply chains to varying degrees. Additionally, the COVID-19 situation is continuing to evolve daily. While recovering from this current crisis is crucial, it is more important that organizations act now to mitigate against future shocks. Companies should design and build their future supply chains with risk management firmly in mind.

This is the time to stand and gear up for future resides post-pandemic conditions rather than discussing what are the cause and effects?? Make a strategy and rebuild the Supply Chain…

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