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A Reinvigorated Supply Chain Is The Need Of The Hour in COVID-hit Times
The best way forward is to optimise the existing network and make it more agile, low-risk concentration across the nodes and the processes with the full-scale visibility of the supply chain network of organisations
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Most economies have undergone unprecedented disruption because of Covid 19, irrespective of their size, scale and stage of development. The invisible virus has caused havoc on humanity leading to nationwide lockdowns, sealed borders and closed airspace. These barriers have strained the global supply chain, seemingly affecting flow of goods across the world. Developing a cognitive shock-proof global supply chain response to the outbreak of Covid-19 is tedious due to the magnitude of the crisis and the pace at which it is evolving, which takes a toll on the global economy.
A reinvigorated response to this crisis around the supply chain would, to a great extent, depend on the ability to identify the exposure to risk associated with the parts and suppliers. It would also depend on prioritising and allocating resources effectively. Finally, investing in mitigation strategies such as booking logistics capacity would be an effective and apt response to the supply chain crisis.
Focus on the Processes
The expeditious recovery of a company would be directly linked to how robust the supply chain is and its response to the changing paradigm. Companies need to focus on the processes, structure and governance around supply chain mechanisms. An honest introspection needs to be done in terms of efficient real-time processes for accurate decision making, solution development, issue identification and reporting. Also, an adroit human capital aspect of the supply chain response would be a pivotal deciding factor, such as if the teams are sufficiently staffed, equipped with skills and focused on the task assigned. It is very important for a team to have access to all important decision-makers ‒ especially board members ‒ for expeditious response and better results.
The future supply chain strategy should be in line with a well-crafted approach focusing on certain defined timelines in the short term ie. one month and medium term i.e. three months to six months. At the nascent stage of the crisis, the fundamentals should revolve around protecting employees and suppliers, understanding the underlying exposure and then taking appropriate steps to address the issues. In the medium term the focus should be to build a collaborative relationship with potential partners, initiating the design for a resilient supply chain for the future and continuously optimising the material supply stability.
Success to a great extent would depend on how enabled the organisation is. It is extremely important to know if all the important resources are available to support the supply chain beyond organisational boundaries such as engineering, quality and transportation. Every member of the operating team must have the perquisite skills and must be encouraged to support the transparency solution development and implementation and creation of transparent models.
It is mandatory to make robust plans to guide solution development with the standardised set of levers. Back-up plans for the response team must be in place through discerning introspection, on any possible new parts of the supply chain likely to be affected. It is highly recommended that possible back-up plans be in place for solutions that have not yet been implemented. There should be expeditious mitigation to manage risks with a clear framework on how scarce resources can be prioritised for the management’s attention. The focus of the solution development should be on the most critical aspect, including short time impacts.
Crisis management teams need to be equipped with the leadership authority to take requisite decision in order to solve any possible disruptions. Correct updated information is mandatory at scale that might have potential impact on other parts of the business. Senior management needs to be constantly updated on challenges and the current status and progress in solution implementation. The overall success would to a great extent, depend on the transparency of factors affecting the supply chain. Analysis of any possible impact on the existing supply chain with the potential to adversely impact other businesses financially can possibly save damage to business. Cognisance of the customer’s supply chain with its impact on business would give a perspective on how to proceed with the crisis for better results.
If we look into the risk concentration across the supply chain design, cost effective manufacturing capability is of paramount importance. China specifically, has interdependent supply chains across the globe and hence, businesses directly impacted by Covid-19 have links with Chinese busineses.Take the example of Hyundai, one of the largest auto makers, which had to stop manufacturing due to its over-dependence on supply of auto parts from its Chinese suppliers. And this happened within a month of the outbreak of the pandemic. The larger part of the problem originated from distribution and transportation issues. The global network of transportation is well integrated for the Chinese. The redirection and reorganisation of this flow has a significant effect on the cost of various industries. The global shipping index has shown a plummeting trend in vessel leasing rates.
Startups operating in supply chain domains such as Kobo 360 in Africa and Kargo Technologies in Indonesia have leveraged this opportunity to help companies struggling with supply chain issues, by offering unique solutions. They are acting as a catalyst to improve logistics effectiveness and efficiency across the board. The Kobo 360 has expanded its footprint in various countries in Africa, backed by funding from Goldman Sachs and 1.2 million active drivers as their current client base across reputed transportation MNCs. Kargo Technologies formed by a former regional executive of Uber, recently received funding of $31 million to expand capacity across South East Asia with the goal of keeping supply chains intact.
The best way forward is to optimise the existing network and make it more agile, low-risk concentration across the nodes and the processes with the full-scale visibility of the supply chain network of organisations. Certain factors are exposed to risks such as a single-sourcing point of the raw material, adopting outdated forecasting techniques and a majority of the production capacity being confined to one location. Understanding the trade-off to a great extent depends on the ability to gauge the risks.
To become shock proof, any dependencies on a particular node in the network or particular process needs to be analysed. Hence, making smart decisions becomes imperative to avoid any possible disruption. Artificial intelligence is enabling in building virtual models, capable of pre-defined scenarios. These stimulations are enabling business leaders in understanding the sensitivities at the node and to strategically plan the core.
The Bullwhip Effect
The bullwhip effect is another major source of concern across the supply chain ecosystem. Apples’ production has been hampered due to the over dependence of its supply chain on Chinese markets. The bullwhip phenomenon overestimates the fall in market demand, which starts with the retailer on the minor scale and then amplifies as it passes through the supply chain. It is observed that multiple industries at the moment are witnessing the bullwhip effect in demand forecasting. The actual demand forecast from the retailer who sells on the ground becomes more than the actual demand forecast that the producer or manufacturer receives. Owing to errors from the bullwhip effect, there would be a possible revenue loss or loss in stocked capital as a result of the error in the demand forecast. Leveraging technology and advanced forecasting techniques will enable the best fit forecast which balances out resource utilisation, lost sales of the demanded products and inventory management. Surge in demand is expected in online retail. Factors such as movement restrictions, supply outages for varied and the empirical data suggests that demand across geographies is precarious in the days to come.
Supply lead time would also be impacted due to the disrupted network. About 22 million businesses have directly impacted 56,000 companies across the world with integrated suppliers either directly or indirectly. Self-quarantine and lockdowns during the second wave of the virus would only increase the magnitude of the problem, such as shortage in the inventory of intermediate and finished goods. The current problem is to accurately predict the safety stock level in the disrupted network including for non-functional warehousing and factories. This must overlap considering mid-term, long-term planning and decision-making. Optimal sourcing strategy hence, is of paramount importance, which determines the right inventory levels. Many US and European countries have already started to move their sourcing base from China to South East Asia with the objective of de- centralising the supply chain. It is highly advisable to have a proactive optimised distribution channel which enables right inventory levels and an appropriate inventory mix. Based on accurate demand forecasting, it avoids major problems such as the bullwhip effect and through the alternative optimal sourcing strategy. This helps in knowing the alternative place of sourcing and through which supplier to order from and how much of order to meet during the uncertain demand, keeping cost optimisation in mind.
An appropriate set of communication channels should be established, focusing on demand planning techniques. The next game changer would be securing capacities for distribution, warehousing space and manufacturing. The backbone would be the cross functional teams with erudite expertise in demand forecasting and macroeconomic forecasts with impact- driven analogy on the business. It is highly recommended to have an advanced O &OP platform which can be in tune with supply planning, production and forecasted demand in different situations. With blocking of the capacity and the required set process in motion, the next step should be product prioritisation to be strategised in coherence with manufacturing processes, leading to high demand.
Cognizance of the mode capacity of the logistics with potential trade-off is a must for prioritising the logistics needs and timely product delivery in sensitive times. Companies at the time of crisis should pre-book the logistics need. This must be complimented with capacity building, analysing the time sensitivity of the product delivery and minimising potential exposure to risks. The strategy should be nimble to adapt to the changing environment, which may also be situational in nature.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.