In early February there was a discussion about the humanitarian and business impacts of the coronavirus. Back then, the world was still divided between downplaying the crisis and creating excessive panic.
As of this writing, the World Health Organization and CDC have recorded more than 100,000 confirmed cases and more than 3,000 deaths related to the COVID-19. By now it’s undisputed that an outbreak focused on China has turned into a global pandemic.
From a supply chain perspective, all of this adds up to a host of new challenges.
COVID-19: Supply chain challenges
Supply Disruptions
The first comes from upstream in the supply chain. It is estimated that 70% of the global supply of raw materials is controlled by China. As China has shut down production to contain the spread of the virus, the effects are being felt everywhere and across all industries.
For globally acting brand owners and manufacturers, it’s well known that a deep understanding of all raw materials and ingredients in their supply chains is required to analyze the effect on business continuity. But supply disruptions are being felt well beyond China. Italy’s spike in COVID-19 cases has created supply shortages not only in fashion, wine, and cheese but also in defense manufacturing – for example the F-35.
Demand Volatility
Already, China’s bold moves to contain the virus have adversely impacted sales within China. Take, for example, an 80%+ decline in cars sales. People that stay in their houses, after all, tend not to buy cars.
With the crisis now spreading beyond China, similar drop-offs in sales numbers are hitting industries worldwide. Many companies have imposed travel restrictions, leading to sharp declines for airlines, hotels, and restaurants. But on the other hand, healthcare and hygiene products such as hand sanitizers have seen sudden spikes in demand – leading to panic buying and stock-out situations. Expect demand to remain volatile throughout the crisis.
Delayed effects
Supply chain cause-and-effect dynamics can take weeks if not months to play out. As it happens, many consumer products and high-tech companies that rely on Chinese suppliers had already ramped up inventories in advance of the Chinese new year (Jan 25-Feb8).
This is a good thing as the effects of supply disruptions will continue to be somewhat mitigated by existing inventories in global channels and pipelines. With a slow-down in demand due the virus, these pipelines will last longer than usual. Likely, it will take until April/May until out of stock situations are felt by end consumers.
Oversteering
Classic supply chain literature says that uncertainty creates a so-called bullwhip effect that can be particularly acute in a global supply chain crisis. It starts with consumers buying more than they need (e.g. hand sanitizer) or not buying other things altogether.
In response, retail companies and wholesalers either start over-ordering or cutting orders – which ultimately amplifies the effect upstream. When such oversteering takes place, it is the small suppliers at the end of the supply chain that are heaviest hit. Typically, they run well over capacity or their businesses come to a grinding halt.
What’s the cure? COVID-19 and the rise of digital, resilient supply chains
If we look at global supply chains in such a crisis as a sick patient, certain principles for achieving a cure seem to apply:
- Diagnosis
You can’t manage what you can’t see. Thus, an integrated and digital business planning environment with full visibility into a digitally connected business network is required for managing all work-in-process, in-transit inventories – even beyond the four walls of the enterprise.
By putting all parties on the same page at all times, such visibility helps prevent the feared bullwhip effect. Without it, the alternative is war rooms and countless research and investigation projects that take time few organizations can now afford.
- Agile healing
Companies that continue to require long planning cycle times will increasingly find themselves in fire-fighting mode. Continuous alignment through a real-time planning and execution environment means the ability to quickly react to emerging news and redirect demand or supplies in an optimal fashion as and when the change occurs. The ability to seamlessly switch supply chain planning strategies from profit to cash flow optimization provides for much-needed funds in times of crisis, not only for small companies.
Running ad-hoc what-if scenarios with predictive real-time analytics can help organizations react to demand or supply changes in rapid fashion – preventing oversteering and making it easier to react smartly to changes with more confidence.
- Preventive care
As the COVID-19 crisis demonstrates the importance of preventative care, a parallel can be drawn to supply chain resiliency. Companies that have already implemented rules-based prioritization with a strategic allocation program, for example, now benefit from better crisis management.
Supply chain risk and inventory strategies to better buffer stock, meanwhile, will lead to better business continuity outcomes. And companies that have already looked at risk mitigation strategies – such as multi-sourced supplier contracts, alternative transportation and sourcing lanes, and balanced manufacturing – are now in a better position to ride out the crisis. When it comes to managing global supply chains, an ounce of prevention is worth a pound of cure.
COVID-19 and supply chains: Visibility and agility are more important than ever
Few can predict the ultimate impact of the COVID-19 on global health or global supply chains. What the crisis reminds us of, though, is that uncertainty is likely to remain a long-term, if not permanent, feature of our globalized economy.
Companies that develop the planning and visibility capabilities required to drive greater supply chain agility are those that will keep their business afloat and remain competitive.
