By: Professor Robert B. Handfield and Dr. Ian George via beroeinc.com
Supply chains have faced significant disruption since the COVID-19 outbreak, and organizations are trying to understand what this means for them and how they should respond to this complex new reality.
One of the most pressing needs highlighted in the media is the significant lack of healthcare supplies, notably N95 masks, face shields, and other Personal Protective Equipment (PPE); ventilators; and pharmaceutical supplies to deal with the exponential growth in the number of patients arriving at hospitals. In addition, there is an emerging lack of hospital physicians and nursing staff to treat these patients, with many healthcare staff also contracting the virus and consequently, unable to perform their duties.
An important missing component is a means for mapping supply capacity and capabilities to the areas with the greatest need, as COVID-19 spreads to different regions of the country as well as the world.
Moreover, with the prolonged lockdown across the globe, normal business operations have taken an unprecedented hit. The 2020 outlook for global growth looks negative; economists continue to debate whether it will be a “V”- or “U”-shaped recovery. Irrespective of the alphabet used, a recession would mean weak sales for most industries. Along with some supply chain disruptions caused by the pandemic, CPOs should also worry about keeping costs under control when major economies enter recession.
Procurement leaders must understand how all of this will impact them, and plan a glide path for returning to normalcy once recovery begins.
For CPOs, an important planning vehicle that is currently missing is a means for mapping the capacity and capabilities of suppliers to produce and distribute products to areas with the greatest need in the global supply chain and to keep pace with the rapid spread of COVID-19 to different regions of world.
Ideally, CPOs must establish a model to provide a vehicle for strategic “what-if” scenario planning and war-gaming plans based on future needs. The vehicle should also help establish key distribution planning ahead of the COVID-19 curve by establishing demand stocking points that can serve as last-mile delivery points to customers. This model will require segmenting the supply chain differently and structuring the information to make it accessible and useful for decision-makers.
Stage 1: Map the Physical Demand Distribution Chain
This is often performed using flowcharting techniques. Deciding how distribution channels are mapped at a high level and then defining them at the appropriate level of detail are essential.
Initial high-level maps can be progressively broken down into more detailed child diagrams and will be identified through product categories consistent with current distribution models. The demand points for delivery of products to hospitals with the greatest need must be identified
Stage 2: Map the Capable Sources of Supply
The second part of the approach entails mapping the current supplier network of providers who can manufacture the products. Here, it will be crucial to include the capacity availability of suppliers, many of who are running at full capacity and have dedicated customers that they are already struggling to serve.
Additionally, the model must create visibility around available inventory in the channel and, most importantly, forecast lead times for production. Once this has been established, modelling the viability of alternative supply solutions can help identify suppliers who have the capability to deliver and who may also be on contract with parties and can be better linked to demand that they can reasonably serve in a limited time.
As the coronavirus epidemic shuts down the global economy, supply chain executives should be planning now to ensure that their supply base remains intact in the face of massive disruption. This was certainly the case in the Great Recession of 2008.
We published a paper called “enactment theory” with a fellow academic, which demonstrates empirically that, during a major financial crisis, supply managers who regularly assess and develop an understanding of their key suppliers’ working capital conditions are more likely to renegotiate contracts that revise payment terms, leading to improved supplier working capital and fewer supply chain disruptions. The data was collected precisely in the middle of the crisis, allowing us to realistically capture supply managers’ thought processes during this period. Currently, shipments and payments have stopped, and people are being laid off. Taking steps now to avoid future disasters when the supply chain initiates, is critical to ensure that suppliers survive this massive disruption and are able to reinitiate.
Stage 3: Connect Supply and Demand
The notion of effective communication ﬂow for reducing future supplier disruption risk is aligned with the “enactment theory.” Our research suggests that while such communication does not have a direct effect on supply disruption risk, it is mediated through proactive buyer actions to improve supplier ﬁnancial health and implement renegotiation mechanisms that may preempt ﬁnancial distress.
This stage can effectively provide recommendations on how materials should be distributed in the supply chain, serving as a vehicle for rapid information communication for key parties through the supply chain. This is currently not being conducted effectively in most supply chains.
A “what-if” simulation model can be used to help identify errors in the assumptions being used in current decisions and also to determine bottlenecks and delays that may prevent untimely miscommunication.
This is a two-way process: suppliers need to update their customers just as much as customers need to let suppliers know their priorities. Key information must be input on a daily or hourly basis to update the model, which will include capacity levels, demand levels by product category, and specific constraints.
The model can later be expanded to distribution bottlenecks and can help create understanding around import/export restrictions, transportation and freight availability, inbound and outbound workforce shortages, and other details that may deter execution.
Stage 4: Connect People and Establish Financial Working Capital Flows
The distribution model can help connect people in the network. Even in the digital age, people are still one of the main factors of success when it comes to managing, anticipating, and mitigating supply chain issues. When situations are fast moving and unpredictable, it is people who get things done. However, people need to be guided with data, and this data must be communicated in a form that is relevant to their geography, place, and time, and that provides access to communication channels to execute based on the information.
Procurement managers who establish regular risk-based performance reviews with suppliers are more likely to adjust their payment terms to improve the cash ﬂow of suppliers facing problems.
Examples of communication involve, meetings to identify the impact of economic conditions on supplier cash ﬂow, regularly scheduled information sessions to exchange data on a supplier’s ﬁnancial conditions, discussions on contingency planning, and business continuity plans in advance of downward forecasts.
Research shows that although over half of the companies in our sample had regular communication with suppliers (60 percent) and were discussing business continuity contingency planning (53 percent), less than half were renegotiating contracts (43 percent). Additionally, over a third of ﬁrms had suppliers requesting improved payment terms; yet, most buyers failed to act on these signals.
Recall that financially healthy ﬁrms can leverage their resources effectively to aid the improvement in their suppliers’ ﬁnancial heath during an economic recession.
Overlaying the four components of supply and demand can also highlight errors in assumptions and create greater transparency in the network and help visualize the touchpoints where key parties can meet and interact. This provides the deeper insight that leads to step changes in performance and the ability to anticipate emerging problems.
Not acting on warning signals will have dire consequences in the future when we emerge from this crisis. These are important lessons learned that provide guidelines for supply chain executives in the current crisis. We are in an economic downturn that has no parallels, and it will be much worse than the 2008 financial crisis. If you do not talk to your suppliers now, do not be surprised when you call them this fall and receive no reply. Supply chains are in this together, and now is not the time to act in an “every man for himself” mode.
Organizations that attempt to deal with everything in isolation simply find themselves moving problems from one place to another without showing overall gains. Taking a systemic approach improves the entire supply chain and offers a manageable strategy for continuously improving performance with limited resources as staff self-isolate or fall sick.
(Note: Dr. Rob Handfield is a Co-Founder and Director Emeritus of Beroe Inc)