Insights > Strengthening the Global Supply Chain in Uncertain Times

Strengthening the Global Supply Chain in Uncertain Times

Global supply chains are being disrupted as the novel coronavirus continues to spread, a reality intensified by the extensive reliance of many companies on low-cost suppliers from East Asia. While some companies have diversified their supply bases in the wake of other global crises (e.g. the SARS epidemic, the Japanese tsunami, and the Icelandic volcano eruption), most have not invested in building the right supply chain infrastructure to withstand major global events. As a result, a majority of middle market corporations with global supply chains are beginning to see disruptions in how they do business.

In order to mitigate the risk of COVID-19, companies must look at the impact of the pandemic on all aspects of their supply chain infrastructure. From there, they can develop the right contingency plans to address immediate challenges, while preparing for a resilient and competitive future.

Companies should manage these large fluctuations in demand by working with their Chinese suppliers, who are incentivized to produce as much as they can, regardless of changes in demand.

Supply Base

The impact

China is a major player in the global value chain. If suppliers from China’s Hubei province ramp up production after several weeks of shut down, there will be large variations in supply.

In the short term

While panic regarding the pandemic has led to short-term increases in demand, the economic slowdown is projected to lower demand in the long term. Companies should manage these large fluctuations in demand by working with their Chinese suppliers, who are incentivized to produce as much as they can, regardless of changes in demand. If these suppliers are critical, companies should work with them in the short term to share the increased manufacturing costs in order to keep them afloat. This requires working with the suppliers to manage the uncertainty of demand and their response to it.

In the long term

As companies begin to make their supply chains resilient for the future, they should start developing a geographically diverse supply base, co-invest with suppliers to make their upstream supply more robust, develop systematic joint business planning processes, and explore emerging manufacturing technologies such as 3D printing and smart robotics to reduce their dependence on an extended supply base.

Inbound and Outbound Transportation

The impact

If suppliers from China’s Hubei province ramp-up production after several weeks of shut down, they will face transportation challenges when attempting to get their goods to the ports as a result of the exponential increase in demand for shipments.  Similar impacts will be felt with regards to outbound transportation.

In the short term

Companies should work with their suppliers to help them procure the carrier capacity needed to keep goods moving from factories to the port of departure. This will also require coordinating with freight forwarders to secure capacity on their vessels and with suppliers and shipping companies to relax container utilization requirements, which may lead to preferential treatment for a company’s freight. It is also important to find alternative routes from both the port of entry and departure. Companies should consider a packaging redesign in order to reduce dunnage where possible. During this time, companies should work with larger customers—such as Walmart, Costco, and Amazon—to utilize their logistics channels and clout with shippers and freight companies, which may help with arranging transportation.

In the long term

Companies should focus on creating sustainable alternative routes by working with freight forwarders and shipping companies that may have contracted rates for alternative routes. They should also develop partnerships with peers and, and where possible, with customers to utilize combined volume guarantees and drive win-win long-term contracts with freight forwarders and shippers. As emerging technologies, such as automated guided vehicles (AGVs), begin to play an increased role in our economy, companies should accelerate their deployment in partnership with third party logistics (3PL) providers.

Demand– Supply Planning Processes

The impact

Prices for consumables are rising as a result of their increased demand and the supply shortage following the shutdown in China and now other countries. Some smaller suppliers and manufacturers may not be able to survive these cash-flow challenges, which will result in further disparities between supply and demand.

In the short term

Sales and operations (S&OP) planning teams should work with finance to develop various demand and supply scenarios and model probable and extreme situations that could occur within the next six to nine months. From there, they can implement predictive KPIs that can quantify the impact of decreased demand after an initial increase (panic driven) and increased supply after the initial decrease (Chinese shutdown). This exercise should also include a modeling of the 60 to 120-day lag between supply and demand as the pandemic evolves. S&OP teams should work with finance to set up a pandemic relief expense budget with clear controls and guidelines to help key stakeholders make quick decisions about short term rises in materials cost, inventory buildup, and inbound and outbound logistics.

In the long term

Companies should develop joint business planning processes with their key suppliers, utilizing IoT-based supply and demand warning signals among suppliers and customers. It is also important to develop an integrated business planning process, which seamlessly integrates FP&A and S&OP processes with finance, sales, and operations teams, incorporating specific inputs from customers and suppliers through an IoT-enabled platform. Companies should consider investing in end-to-end supply chain visibility and planning tools, which utilize machine learning for demand planning, supply planning, and cashflow modeling.

Manufacturing

The impact

As COVID-19 continues to spread and impact a large local labor force, factories staffing may decrease, which will result in lower productivity.

In the short term

Companies should assemble a cross-functional taskforce comprised of leaders from manufacturing, procurement, supply chain planning, and finance. This taskforce should work to expedite raw material deliveries and update and refine production plans based on the availability of raw materials and reduced productivity levels. The taskforce should plan for reduced number of workers per shift while increasing the total number of shifts per week to meet demand. Companies should consider utilizing contract manufacturing where possible to outsource non-specialized sections of manufacturing, such as packaging, if reduced production targets will not allow the operation to meet demand.

In the long term

Automating the factory floor as much as possible can reduce the dependence of a company’s manufacturing operations on its labor force. Investing in IoT-based operating technology can also assist in these efforts. Companies should develop a strategic network of geographically diverse manufacturing locations to manage natural disruptions. Future product and manufacturing process design and a company’s make vs. buy strategy should factor in disruption risk management.

Distribution

The impact

As with manufacturing, material and labor shortage will disrupt warehousing operations. The availability of transportation for outbound shipments will result in unplanned spikes in demand as panic drives demand for medical products and other essentials.

In the short term

It will be important for warehouse and distribution managers to work with planning organizations to account for large variations in inventory as the supply continues to shrink. As Chinese suppliers restart production and work to catch up, distribution managers will need to plan for a surge in supply by arranging temporary leases for warehouse space with third-party logistics (3PLs) to manage the surge.

In the long term

Distributers must work with their 3PL partners to develop flexible warehousing space contracts that can be ramped up or down to manage supply and demand.   They should also consider automating warehouses by using emerging and existing technology—such as smarter warehouse management systems, automated guided vehicles, and robotics—which can reduce dependency on humans for pick, pack, and ship operations.


COVID–19 has disrupted supply chains for most global corporations. These impacts will only increase as the natural inventory buildup, which occurred prior to the Chinese New Year in January, continues to deplete. As companies begin to take short-term measures to stave off supply chain disruption, it is crucial to begin developing long-term strategic plans in order to stay competitive and resilient when the next crisis hits. This includes implementing early warning systems, accelerating automation, and engaging Industry 4.0 principles across the end-to-end supply chain.

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