The novel coronavirus (COVID-19) has created profound uncertainty, and catapulted the vulnerabilities of interconnected supply chains front and center. Supply chain managers who are experiencing supply risks, demand uncertainty, and “wait and see” leadership directives are asking: What should I do now?
The answer to this question is quite extensive. Contingency plans need to be formulated and implemented across every supply chain function. To be sure, there are a number of strategic actions which should be contemplated, such as diversifying your supply base, designing and implementing a risk-adjusted network, and choosing when and where to invest in automation and other cost-saving initiatives. However, there are number of more tactical, immediate actions which should be near the top of your priority list.
Assess supply risks, reserve future capacity
Given the rolling progression of the virus, many companies with a concentrated supply base in China have already experienced some level of supply constraints. For the rest of you, it’s about to hit closer to home as domestic suppliers are beginning to shut down or they soon will due to increasing local and statewide lockdowns. Except supply chains similar to those in the automotive and aviation industries, many businesses aren’t used to managing Tier 2, Tier 3, and Tier 4 suppliers. Now more than ever, it is essential to be familiar with the tiers of supply in your supply chain.
Engage with your suppliers to understand their supply base, and be prepared to go at least three levels deep. To generate usable data, try to complete this analysis within a few days. Start with your biggest suppliers and cover as many as possible. Overlay your findings with maps showing the spread of the virus, along with the number of days since your suppliers’ geographic region(s) were first impacted. The goal of this exercise is to approximate when suppliers could restart production.
Based on the results, perform a risk/benefit analysis of purchasing future supplies from your multi-tier supply base. Don’t limit this to raw materials, but also cargo capacity (across all modes), temporary warehousing, and all other aspects of the supply chain you can accurately model. Then review your relationship with each supplier. How much can you offer to lock-in future supply? Don’t just focus on price here. The analysis must be done from a total cost perspective that takes into account supply quality, reliability of delivery, and other criteria.
Determine demand impacts and future demand shaping
For those manufacturers considered “non-essential,” the impact on future demand is still wholly unknown. And it will likely be different across industries and geographic regions. For example, some pharmaceutical supply chains are facing unprecedented demand. Many others are facing extended levels of depressed demand.
Based on how the virus spread curve is developing, can you predict when your demand will start to grow again? This determination will be crucial for all other supply chain planning decisions. Bear in mind that the economics of “post-coronavirus” markets will likely be different in the wake of the pandemic.
Be sure to also explore alternative sources of demand for your products. One of our clients that had long-focused on supplying the foodservice and restaurant markets saw their business evaporating in light of COVID-19. Shifting gears, they connected with multiple grocers and confirmed that they could fill a critical supply gap, and began executing on this strategy.
Manage cash flow, strategically leverage inventory on-hand
Cash flow is a top priority for all companies now. Firms are asking for longer payment terms when buying and immediate payment when selling. Supply chains need to account for this. Building-in lower and upper limits for payment terms into models – for each of your suppliers and other partners – can help you understand their variable effect. You can’t win every battle, but you can certainly be prepared to minimize the impact on your cash reserves.
Also consider what actions can you take today to create productive inventory in the near term. For many manufacturers, shortages of components have wrecked production schedules. How much can you produce with the on-hand inventory? Rather than lowering asset utilization, manufacturing some products might prove better. It may also act as a competitive advantage when demand ramps up and may help shape future demand. Though these are unusual methods, supply chain managers need to adapt to these less-than-ideal conditions.
On a related note, have you determined the “minimum to operate” operational design for both people and assets? Supply chains are generally cost centers. CFOs are quickly shifting into “cost-cutting” mode, and this will be top of mind for them.
Segment customers based on cost-to-serve
As a supplier yourself, you can choose which customers to supply. And when a level of normalcy returns, you’ll have another opportunity to select your customers. Do you pick your most profitable customers? The longest customer relationships? How about new customers? Do you take on as many customers as you can, despite risks to your level of service? Evaluating your options through an analytical approach will help you stay competitive.
Determine the best use of your workforce
Ensuring the security of your workforce is a necessity. Due to local and statewide shutdowns, many employees are now working from home. Other than in the technology and some service sectors, this isn’t a typical supply chain practice.
Do you have a category of projects that you can assign to your employees working from home? Master data cleansing is one of the most common “often ignored” tasks in supply chains. Your work-from-home employees can complete this and other similar projects. You can also encourage employees to take online courses, read books, and take on academic projects to build their capabilities. Be sure to track these activities like you would any other regular project.
In conjunction, you may want to explore bringing in a small workforce while adhering to local and state guidelines on social distancing. If possible, this would be an opportune time to complete tasks like a physical inventory, factory and warehouse maintenance or housekeeping, and work center reorganization – many of the projects that often go undone when there are competing priorities.
In each of these areas, we strongly suggest building analytical models which are quick and easy to refresh. In the current environment, speed over perfection is essential. “In the ballpark” results that you can quickly act on are more valuable than “ideal” forecasts which are likely to become irrelevant as events continue to unfold. (Besides, the accuracy of your models will improve over time as you continue to refresh and add new data points.) The more analytical your approach in these assessments, the more actionable the resulting information will be.
Disruption is a chance to re-examine your priorities and practices. Chainalytics’ combination of top supply chain talent, proven methodologies, and proprietary market intelligence consistently puts our clients ahead of the curve. Reach out if you want help taking stock of your supply chain and preparing for the challenges and opportunities that lie ahead.
Vikas Argod is a Sr. Manager in the Supply Chain Operations practice at Chainalytics. Kirk Waldrop is Vice President of the Supply Chain Operations practice at Chainalytics.
