How to Adapt the Supply Chain in Response to the Coronavirus Outbreak
It is hard to grasp what the total impact of the coronavirus outbreak will be. But already now we can state that the status quo is turned upside down. Things we took for granted seem to be not so trivial anymore. We are being challenged on our main life support systems such as healthcare, education, food and supplies. Those support systems are confronted with intense changes and high uncertainty of supply and demand.
In fact, you read about it every day in newspapers and on the internet. Think of the lack of penicillin, the empty toilet paper and pasta shelves in grocery stores, increased demand for home deliveries, disruptions or delays in supply of raw materials or components for manufacturing, physical stores closing down, reduced and uncertain availability of workforce, and so on. One of the biggest challenges today is to respond and anticipate accordingly.
In this blog, we’re sharing some of our thoughts on the main challenges the supply chains are facing due to the coronavirus outbreak, what actions to take in order to keep supply chains operational, and how to anticipate for whatever is to come.
The impact on supply chains
The management and operation of global and local supply chains are disrupted. Variability and uncertainty, which pose already big challenges for supply chain management in normal times, are rapidly increasing. On top of that, historic data may not be very useful to predict the future as input for planning processes. So, how should you deal best with this high variability and uncertainty to keep managing and operating your supply chain effectively?
The complexity of stochastics
Before moving on to actions to take, let’s first dive deeper in variability and uncertainty. These are considered symptoms of a world that is stochastic. It means that outcomes of most processes are uncertain to some extent. These days, many people are working on models to analyze the past and predict the future, for example analyses on the number of people infected by the coronavirus or the number of people that will need intensive care. These models are useful, but, as daily updates show, forecasts are always wrong. This is a fact that is important to realize. Moreover, a lot of these models are typically based on means and ignore variability. To make it even more complex, dynamics can be very confusing. Often, you are fooled by randomness.
Is mathematics than useless for analysis and decision support in these extremely uncertain times? The answer is no. Mathematics can help us to understand the dynamics. Combining this understanding with scenario analysis can help to figure out what the impact of more likely and extreme scenarios will be. This is hard, since there are a lot of stochastics, but the underlying distribution is not known. When taking measures, one must expect and be prepared for the unexpected, not the mean. Mitigation measures are therefore very important. A well-known saying is ‘variability is the root of all evil’. Therefore, measures to reduce variability are of significant value. Aggregation helps to reduce variability. Think for example of collaboration to aggregate demand or capacity, or agreement on longer delivery time windows to aggregate demand for a longer time horizon.
How to act
One may wonder in these times: were we well prepared for this virus outbreak? Have we assessed and managed our risks sufficiently? Those questions often directly point to the supply chain network design. Organizations may realize that their strategy and supply chain design are only limitedly aligned and balanced. But one could also argue: can organizations better align and balance their supply chain design to prepare for and reduce the impact of such a crisis at all? The answer is yes, but to a limited extent only since a virus outbreak like the one we’re facing now is unprecedented in modern times. This may be an important lesson for the future, but it does not solve the current challenges. Those are much more operational.
The main challenge now is how to operate the current supply chain in response to the coronavirus outbreak. As mentioned, variability and uncertainty are increasing significantly. This holds true for both supply and demand. In these uncertain times, the major job is therefore to keep matching demand with supply.
Asking the right business questions
To know what objectives you would like to achieve, and which changes to make to respond to and anticipate best on the new situation, it is important to identify the ‘new’ business questions to address. E.g., what are the services that are most important for us to live up to, what service targets are realistic to meet, what is our expected performance if we operate as usual, and what alternatives can we come up with to keep matching supply and demand as best as possible? Identifying the right business questions helps to set priorities in handling the new situation. Many organizations already acted this way. Take for example transport providers such as KLM and NS. From the demand side, they experience huge pressure on demand due to governmental measures. As a response, they have overhauled their schedules, and drastically reduced their flights and train rides. So, at the moment, they are compromising on service to keep operations more efficient. From the supply side, availability of goods as well as availability of resources are under high pressure. Grocery stores are struggling with the availability of goods and drug stores run out of medicines. Since compromising on service levels is hardly an option for these organizations, they are reconsidering their replenishment frequencies to keep up with the required service levels. To get to the right business questions, continuous communication and alignment is a must.
Balancing cost with service
It is now more important than ever to manage the supply chain efficiently. By stretching service offerings, for example by extending your delivery times or by compromising on the flexibility towards your customers, you create more room for efficient plans. An example of this is spreading work better throughout the day, reducing peaks. This will lead to less capacity demand and higher utilization rates. It is also very important to attain a higher utilization of your transportation fleet. This can be realized by longer lead times, but as well– and foremost – by collaborating with other transportation organizations
These examples stress that the balancing act between service (effectiveness) and cost (efficiency) should be top of mind, and all stakeholders should be as creative and flexible as possible to achieve that as such. From a marketing and sales perspective, it is important to manage expectations and to be aware of changed supply chain capabilities. From a supply chain perspective, it is important to realize that maximum efficiency is required, sometimes or even often by compromising on service.
Prioritize and differentiate
Increasing efficiency can partly cover the reduction of gross capacity, such that the net capacity impact is minimized. However, recalling supply chain’s mission of meeting the value propositions efficiently, we should not forget the impact of the service proposition on efficiency. Higher service usually comes at a cost. Higher efficiency can be realized by service offers that reflect real needs rather than desire. Established service expectations should be reconsidered. For example, although ecommerce and home delivery are exploding, we should all rethink the importance of next day delivery for non-critical goods. Short lead times for delivery of healthcare supplies and food deliveries are more important than for consumer electronics or furniture. Prioritization allows for more efficient shipping of crucial goods and services. Prioritizing service offers applies to preventive screening activities in healthcare as well. Though very important, those activities are currently less urgent and therefore postponed. Also, differentiation in service helps to balance capacity. You already see this in healthcare. Healthcare dedicated to corona is split from other healthcare. There are also initiatives to offer different services to elderly people, like dedicated opening hours of grocery stores.
Be creative and responsive
Besides these measures, damage control is not the only thing that can be done. Times like these are an invitation to help each other out and finding new ways to collaborate and operate. Think about alternative ways for meeting your customers and for creating platforms to connect supply and demand. Consider it as an opportunity for innovation and creativity.
What this means for the future
The future is for sure uncertain. But in times of crisis, mankind is more inventive than ever. So, once the world bounces back to a steadier state, let’s reflect. What could we have done better to be prepared? What lessons have we learned during the crisis? What methods have we developed that are useful in normal times too? And, what capabilities do we want to develop to better anticipate a potential equivalent situation?
To conclude
This exceptional situation will make it worthwhile to reflect on alignment and supply chain strategy in the future. But for now, there is a pressing call for operational action. Thinking about alignment and the balancing act of cost and service is a very good way to get to the right business questions. The current circumstances require customers to realize that they have to adapt their expectations. Everyone will have to contribute to manage this new faced reality. Supply chains must constantly anticipate and adapt to supply efficiently and must manage demand to enable that. Each day we gain new insights, so when making plans and preparing mitigation measures it’s important to accept an uncertain future. Intensive communication is a must. There needs to be a form of continuous and operational Sales and Operations Planning to keep supply chains going. It doesn’t need to take long but plan a daily standup to align. Plan, act, sense and respond!
This is an article written by Noud Gademann, Principal Consultant Supply Chain Analytics and Lianne van Sweeden, Analytics Consultant
Our employees are encouraged to proactively think along with you to cope with the new challenges arising from the virus outbreak. If you have any questions, please reach out to your regular contact person at ORTEC.