COVID-19 is testing the resiliency of supply chains worldwide and particularly in Europe. The coronavirus pandemic is unprecedented, and its long-term impact on supply and demand are still wholly unknown. Despite growing uncertainty, there’s a number of supply chain network strategies which can be leveraged to mitigate risk and increase flexibility.
At this point, most manufacturers and retailers have experienced some level of disruption on the supply side of the equation. Because this pandemic is spreading across the world in distinct chronological clusters, supply risks are also shifting geographically. China-based factories and suppliers were the initial source of supply risks; however, the effects are now being felt by “regional” supply chains in Europe.
On the demand side, the airline and hospitality industries were the proverbial canaries in the coal mine. Since then, consumer durables, automotive, service industries – almost every supply chain outside of Food & Beverage and CPG – have been hard-hit. The Italian Treasury expects a 3% drop in GDP in 2020, whereas The Netherlands’ Rabobank predicts a 0.2% contraction in overall GDP – the lower number is probably a result of food and food-related sectors comprising a large percentage of the Dutch economy. Another factor contributing to demand uncertainty is the so-called “bullwhip effect” and how it will propagate across the value chain.
Learn more about the bullwhip effect and the risks that COVID-19 poses to global supply chains in our podcast with MIT professor Yossi Sheffi: Listen to it here or read the recap here.
How can supply chain network modeling help?
Pandemics like COVID-19 happen in a series of time-related and geographic clusters. How long the disease affects a cluster, and when the peak occurs depends on a variety of factors. These include the movement of people within the affected region and the level of government preparedness and mitigation measures. These patterns present a risk to supply chains but are also an opportunity for a region like Europe. The design of local supply chains can mitigate the risk of a particular distribution center or factory going down by shifting traffic or production to other facilities in adjacent locations, even across national borders.
Some of the supply chain network strategies that companies can leverage to mitigate these risks include:
- Supplier collaboration and flexibility: Supplier visibility extending to not only Tier 1 suppliers but critical Tier 2 and Tier 3 suppliers is essential to assessing supply risks to your supply chain at an early stage, reducing the bullwhip effect described previously. Bringing suppliers into your network design process provides visibility to procurement teams assessing the impact of sourcing decisions and strategies on the entire supply chain. In turn, this enables better tactical sourcing risk management (e.g., allocation of orders across suppliers for a component category and/or the use of financial incentives or aid), but also longer-term strategic supplier qualification efforts for sourcing more technical or complex components.
- Manufacturing capability and capacity flexibility: Establishing a new manufacturing facility involves enormous capital investment and the risk of over-building production capacity. However, adding flexibility to existing manufacturing plants to build multiple product lines isn’t as capital-intensive. Look at reducing single points of failure in your manufacturing network and balancing the capacity across your manufacturing network by enhancing plant flexibility and product line capability and capacity.
- Distribution infrastructure and flow path flexibility: Most design studies for supply chain networks focus on cost savings and, therefore, lean towards finding the absolute minimum number of facilities required, reducing fixed costs, and driving economies of scale. My Chainalytics colleagues and I have found that it is best to balance cost and a quantified “risk index.” The cost curve is often flat around the optimal balance – adding a few facilities into the network doesn’t significantly add to the cost while substantially reducing the risk index.
A supply chain network model that looks at cost but also metrics like “time to recovery,” “financial impact of disruption,” and “risk exposure index” allows the design of a supply chain that can significantly reduce exposure to supply and demand risks.
It’s crucial right now, as the implications of this pandemic are still playing out, for European supply chain leaders to factor in different demand and supply events in their decision-making process. To focus on making holistic supply chain decisions instead of functionally siloed ones and, most importantly, be able to evaluate a variety of scenarios and trade-offs. In these times, having a comprehensive supply chain network modeling process – combined with the capability to evaluate multiple situations across supply and demand – and taking ideal, risk-weighted decisions about the supply chain is a critical competitive advantage.
Disruptions like COVID-19 are useful for challenging the status quo and re-examining your supply chain strategies. Chainalytics’ combination of top supply chain talent, and proven methodologies consistently put our clients ahead of the curve. Reach out if you want help formulating a risk-adjusted supply chain network model or a quick diagnostic review of your supply chain.
Soumya Basu is a Europe-based Principal at Chainalytics. His areas of expertise include demand and supply planning, inventory optimization, and supply chain network design—across a variety of industries and geographies.
