Wednesday, April 22, 2020

Pandemic Supply Chain Lesson 1: POST-CORONAVIRUS PANDEMIC SUPPLY CHAIN MANAGEMENT


Pandemic Supply Chain Lesson 1: POST-CORONAVIRUS PANDEMIC SUPPLY CHAIN MANAGEMENT

--Restart/Rebuild and More--


Content.

·       Reality and More Than Bullwhip

·       Forced Change and a Plan

·       Restart/Reset/Rebuild

·       Reshoring/Nearshoring/Onshoring

·       Industries/Market Sectors

·       E-commerce

·       Lessons Learned/Takeaways

·       Upstream Supply Chain

·       Inventory

·       Risk

·       Cost Pressure

·       Segmentation

·       Conclusion

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To start, supply chain management is leading retailers and manufacturers through this crisis.  Businesses and supply chains are changing and may be permanently changed.  Many of these changes will remain after the pandemic ends.  There will be no discussion of specific companies.  This is about bigger issues.


Use your domain expertise and experience to lead.  This is not a time for 40,000-feet terms and comments.  It is about practical supply chain management issues.  It is about adapting to the adjustments that CoViD19 makes on companies.  And, for supply chain management executives, it is about leading.  The dual challenge is dealing with the daily crush of what is happening and developing a supply chain strategy for after coronavirus with attention to end-to-end design and operations.
  
The pandemic has placed incredible stress on supply chains—end-to-end-- and their underlying, transportation/logistics service providers. It has established the importance of supply chain management (SCM) as it carries the operational responsibilities of company after company.  And more, stepping up above and beyond the call. 

Reality and More Than Bullwhip.
  
Much of the pressure is on the upstream supply chain. There was supply shock as Asia suppliers and manufacturers shut down.  Then there was demand shock as companies in North America, Europe, and around the world closed to deal with and limit CoViD19 spread.  And caught in the middle were all these supply chains and transport/logistics providers. Warehouses. Truckers. Ocean carriers. And more.  All this goes beyond the bullwhip effect both at the global magnitude of supply shocks and demand shocks and at the company level.

Transportation/logistics firms are struggling. Ocean carriers are dealing with reduced volumes, export shipments from Asia and importers not knowing what to do with containers with their businesses at a reduced activity or closed. Ships have been laid up.  Sailings have been blanked.  Ports and warehouses are congested.  There is even a suspension of transit in ocean transportation because of port congestion.

Along the end-to-end supply chain and its end-to-end logistics/transport are companies dealing with coronavirus in their own companies and with significantly reduced volumes and revenues to maintain operations.  This situation goes beyond challenging, as it does for much of global business.

Post-coronavirus discussions will include who had deep pockets to weather this and Darwinism—survival of the fittest.  And this will include Supply Chain Darwinism.  

As the battle continues, supply chain management executives must also be thinking of what their supply chains will look at when it is all over.  The strategy, design, and changes—post coronavirus.  And the lessons learned.  A question is how much of the lessons will be retained and implemented? And how much ignored and forgotten?  This is also a chance for businesses that have been laggards in revising their supply chain management to upgrade.

The supply chain management that emerges should be developed by SCM people.  This is their domain, their expertise, and their efforts that are carrying retailers and manufacturers through CoViD-19.  

There is the idea of supply chain resilience (and supply chain resilience may become the new buzz term). The question is at what scale considering another global crisis. This concept/buzzword can also distract from the work required with restarting, even rebuilding, manufacturing and retailing.  Again, this is about the end-to-end/total supply chain and not parts, such as fulfillment. The bigger issues. Bigger picture.

Forced Change and a Plan.


What companies are looking at is change—more exactly, forced change.  Make your plan for coming back post-coronavirus.  Do not wait to be asked for one.  Be out front. 


Change is difficult for most companies.  It must be done well with thought, planning, and solid execution.  And the change includes people adapting to new ways—a new reality.  And the adjustment challenge is compounded because it is mandatory for many.


Build from the elevated position that supply chain management achieved during the pandemic.  There are two factors to the plan for the post-coronavirus supply chain—events outside the company and supply chain management and those within SCM.  Not surprisingly, there is an overlap between the two and the points to consider within each.



First, topics outside of supply chain management that can influence the post-coronavirus strategy, operation and the company:


Restart/Reset/Rebuild.


Few manufacturers and retailers that operated during CoViD will come through relatively unscathed for their end-to-end supply chains and their transportation/logistics firms. That means how do we get things going?  Post-coronavirus business and supply chains may likely deal with a three-prong economic hit of recession and altered and contracted spending by consumers and businesses. The question is how long these will last?



One thing seems to be certain. Reset/restart supply chains for most firms will not be like flicking on a light switch.  It will be more than turning on machines and opening store doors.  For many, there will be changes. It will not be just picking up where everything was before the worldwide pandemic.


For starters, who will still be in business and how strong will they be? The pandemic is causing financial risk.  This includes manufacturers, retailers, suppliers, and transportation carriers/logistics providers. Plus, there is also the matter of when and how consumers and businesses will revise their isolation practices.



Importers who were closed will have to find where their containers are located while they were shut done—and if the carriers or forwarders who handled them are still operating.  Ports must be cleared of container congestion.  Warehouses at ports and elsewhere are filled with products that are sitting.  These must be removed as inventories are restocked.  And, hopefully, there is the needed paperwork to clear customs.


Staying with transportation/logistics, these firms must be reactivated to get goods moving.   Ocean containers must be repositioned.  There is suspension of transit/storage in transit with containers sitting at transshipment ports.  Ships are laid up and how they are recrewed and the rotation for which vessel starts where and when. Plus there are possible demurrage and other costs and insurance liabilities. How it may affect all this is the litigious mess ahead among carriers, forwarders, and importers.  Restart/reset gets more complex.



There is also discussion that social distancing, either formally or informally, will continue in 2021 and maybe 2022. What will that do to retail, grocery, CPG/FMCG manufacturers and their supply chains as to restart/reset/rebuild?



Once the various total supply chain statuses are validated or revised/updated, then restock/replenishment can start.  Depending upon what is still operating and how well, this may be more of a rebuild than a restart.  Retailers and others in countries hard hit by the coronavirus may face more of a rebuild.



Manufacturers and retailers may need to develop new suppliers and existing suppliers may need to find new suppliers too.  Add in transport and logistics providers, all modes and methods, new providers may need to be established.



That will add delays for products to be made and shipped, including the suppliers of your suppliers and their suppliers.  The production and transit times will add to the delay.  Not every company will be able to expedite the movements by flying in inventories.



Against these are companies that are still working.  Their supply chains, while limited, are still functioning.  They could have an advantage when business resumes.



Reshoring/Nearshoring/Onshoring.


This topic sets a foundation for other issues presented below.  Reshoring/nearshoring/onshoring, pulling back from globalization, is getting attention at this time.  Offshoring took decades and was based on the demand and push for lower product costs. 


There are two points here.  First, the role of the upstream supply chain and top importers and products imported provide context.  The information below is for the United States.  Research can be done for other countries to provide a basis for discussion. 


Data is presented for importers and for products imported into the US to set the scope of the endeavor.  These numbers provide an order of magnitude--an idea of the size of moving productions back to the US.  Research for other countries would set the basis for them.


The US imports over 20 million containers (measured at TEUs—20-foot size container or equivalent) a year.  Here are the top 10 importers in 2018 and the number of containers they brought in.  The number is TEUs.  The data is from PIERS, a sister company of JOC.com: 


IMPORTERS of Containerized Goods

1)     Walmart.  940,410

2)     Target.  631,621

3)     Home Depot.  417,100

4)     Lowe's. 307,625

5)     Dole Food.  235.571

6)     Ashley Furniture.  200,000

7)     Samsung America.  190,144

8)     Family Dollar Stores/Dollar Tree.  180,985

9)     LG Group.  173,720

10)  Philips Electronics NA.  152,903


Drawing on a February 8, 2020, article by Daniel Workman, "United States Top 10 Imports", the US imported $2.568 trillion worth of goods in 2019.  The top 10 products imported for 2019 are:


PRODUCTS IMPORTED

1)     Machinery including computers. 14.8% of the total.

2)     Electrical machinery, equipment.  13.7%

3)     Vehicles.  12.1%

4)     Mineral fuels including oil: 8,2%

5)     Pharmaceuticals.  5%

6)     Optical, technical, medical apparatus.  3.8%

7)     Furniture, bedding, lighting, signs, prefab buildings.  2.6%

8)     Plastics, plastic articles.  2.4%

9)     Gems, precious metals: 2.3%

10) Organic chemicals.  2.1%


Note, some of the products above do not move in containers and are not in the TEU data.  Also, there is the issue of supply chains within supply chains upstream.  This is often not a simple one-step manufacturing activity.


The different data show the diversity of industries, products, and supply chains. These also mean many versions of post-coronavirus supply chain management.

Note, a recent article said Bank of America estimates the price of $1 trillion to move export manufacturing for reshoring.  And that price does not recognize and include the upstream supply chain complexity of suppliers' suppliers.


Industries/Market Sectors.


Not every market sector and industry has been affected in the same way by the pandemic.  Some have been highly effected, others moderately, and some little.  So, post-coronavirus supply chain management will differ. 


Retail is a very affected industry.   Their operations are their supply chain management—end to end.   Stores closed or are limiting how many customers can go in. E-commerce, whether delivery or customer pickup, are sales lifelines. 



Merchants who are closed have inbound supply chains that have stopped. Others with essential items, such as grocery and pharmaceuticals, are doing "well".  These two sectors are doing more online sales because of social distancing.  And both depend on supply chain management as their operations.


Recognition of other sectors include:  


·       Complex products and their bills of material with the sourcing of parts, components, and assemblies from multiple countries bring a special footprint. Multiple countries mean multiple supply chains and coordinating the movements across products.


·       Low-price retailers and other businesses may find an advantage after CoViD as countries deal with their recessions.


·       Apparel may be challenged for a Zara type model with production closer to the sales market. This means different SCM, including different materials and styles.


·       Sectors such as luggage, swimwear, formal wear, and bridal clothing have been hard hit. Their needs may range from potential rebuilds to unsold inventories—and how all these ripple up their supply chains.


·       Retailers, e-tailers, and CPG/FMCG may have sales drops with products that consumers stocked up on during the coronavirus and as they draw down on their home inventories.


E-commerce.


E-commerce is a bright spot during this time.  It is a market that is experiencing growth as a result of the coronavirus. Social distancing, stay at home, store closings, and personal safety concerns are factors in its surge.


The sales surge has tested the design and operations of supply chains.  For e-commerce, like retail, supply chain management is the operation.  Depending on the length of self-quarantine, online activities and their supply chains may be put to more pressure.  Also, as with retail, self-quarantine has impacted some products more as to missing out on online sales.

E-commerce during this time has escalated discussions as to retail's future as to bricks vs clicks  These tie to speculation on how much of e-commerce's growth will be retained after coronavirus eases.  Branding and rebranding around digital retailing—which demands a strong end-to-end

supply chain is something only a few had before COVID.  Also, laggards in e-commerce have had problems during a pandemic to upgrade their supply chains as needed for robust online sales.


There was the retail apocalypse and now what may be a retail Armageddon.  Will this cause CPG/FMCG/non-durable consumer goods manufacturers to rethink of being less dependent on retailers and selling their products online/direct to customer?  This will require them to revise their supply chains to do online order delivery and its last mile.


Pre-crisis order delivery velocity has been tempered during this time with the crush of orders and the supplies of products.  If post-coronavirus, the volumes for online hold, then a question is whether order-delivery expectations will return.  If so, what will this mean among the firms selling online?  What product assortments sold well?  Will they still?  How and what products may also start selling strongly?  These questions range from what are called essentials items during this and nonessentials.  The growth may be two-fold—holding on to what products sold well and having the "nonessentials" sell again.


Having products to sell during a crisis versus selling with renewed customer expectation is unknown. If there is a return to the prior ways, then what supply chain management will drive business, as before?  While it stands as "to be determined", the supply chain implications are significant.  Will it mean more warehouse capacity, added technology and robotics, and more delivery capability?



Second, now topics within supply chain management to draw on for the post-coronavirus supply chain management.  They reflect lessons learned about supply chain management and what to do about them:


Lessons Learned/Takeaways.


Supply chain management is more than strategic.  SCM is the hidden strength of many manufacturers and retailers that kept them in business.  Those that still view it in terms of back-office and cost center are either in unique businesses or face futures filled with struggles.


The end-to-end complexity of supply chain management has been validated.  Map and understand your supply chain, its complexity, non-linearity, and supply chains within supply chains. Do upstream and downstream.  Assess and understand it, including risks.  Identify these from what is happening and if and how to mitigate them.


Companies that ignored e-commerce and struggled to pivot and change their supply chains for direct to consumer (DTC) during the crisis.   Many of these had essentials and were used to selling to businesses.  A question is whether they add online to their capabilities and upgrade their supply chains for e-commerce.


Where the greatest pressures were should be important in developing a new structure of process, technology, and organization.  For example, instead of organizing as to logistics activities, do it by upstream and downstream.  Then for things like corporate transportation, supplier, logistics negotiations, put them into a type of matrix management.


The use of track and trace technology for visibility depends on the operating viability of the carrier or forwarder. This is a lesson about survival.  Blockchain is another option—a digital ledger track and trace—with a similar limitation as to supplier, transportation, logistics survival. A supply chain execution technology that takes the higher visibility view, should be substituted.  Such platforms focus on purchase orders the fundamental document of supply chain management, logistics, and business.  That also implies greater control of the upstream and downstream supply chains with increased visibility.


Upstream Supply Chain. 


Much of what has happened is with the upstream supply chain. Its importance has been recognized, which is interesting since the supply of supply chains begins upstream.  This contrasts with the downstream supply chain that traditionally has gotten more attention.  It is larger and more complex that downstream. 


The inbound supply chain performance has often been defined by costs.  The upstream is bifurcated as to finished goods/parts/etc. and transportation/logistics. This can contribute to a gap in managing the total activity and a degree of confusion with the cost pressure.


At the minimum, post-CoViD, the upstream should be elevated.  Its complexity and supply chains within supply should be mapped and assessed.  The bifurcation should stop.


These, and other steps, are lessons learned that should be corrected.  This is not just for supply chain resilience, it is about operational viability and risk mitigation going forward.


Inventory.


Restocking inventory will be one of the first actions after COVID-19 is resolved.  There will be questions about existing suppliers, new suppliers and where to supply from?


But there are other questions too.  A look in distribution centers and warehouses shows products that do not sell/move. These range from parts/assemblies/components to finished goods.  These non-moving/very slow-moving represent wasted working capital that could have been invested in the company and could have generated a better return. 


Slow/non-movers can be seen by the dust on the cartons in the warehouse, by sales reports, and by inventory turns, and by the needed space they take up in distribution centers.  And that use of space then ripples into needs for additional warehousing.  Removing these items and SKU rationalization are starters. 


The speed of inventory movement through the supply chain should be analyzed.  That is a step to improving inventory turns—a very important metric—and having more money.  Stop thinking of inventory, especially excess inventory, as an asset and whether to use LIFO or FIFO. Treat too much inventory as a waste—a waste of working capital and investment opportunities lost.


Sometimes inventory is referred to as A, B, C to designate as to its importance—such as sales or profit margins.  And with seasonality, perhaps use sales by quarter.  Maybe a weighted sales-profit margin index may be good.  The point here is to differentiate and manage inventory by such a designation.  That permits a better focus on inventories.


Managing inventory reflects the total time to plan, receive, and sell.  So time is a factor.  The point is to manage the movement as to A, B, C.  Compress time. Do it for As.  Then Bs.  And then Cs.  That will get faster turns which frees up capital for investment and changes a firm from being inventory rich and cash poor.


Align transportation/logistics with inventory designations.  Prioritize.  Review levels of inventory where there is multi-level warehousing.  Inventor is meant to move through the end-to-end supply chain.  Stopping products does not add value from a customer perspective.


Risk.  


With the pandemic, supply chain risk is getting attention.  For this paper, the risk is not about assets.  That application is left to insurance companies. 


This is about risk identification, assessment, and mitigation along the total supply chain.  It is about the continuity of operations.  Coronavirus, with its global scope, has made this effort both broader and more difficult.  Weaknesses/areas of risk can mean every player and participant in the total supply chain. Every supplier. Every transportation carrier.  Every logistics provider.  And every operation—including every one of yours.  Every link.  Every node.


Start with the understanding and mapping mentioned in Lessons Learned/Takeaways.  That will take you into your supply chains nonlinearity and your supply chains within supply chains.  Much of that is in the upstream supply chain.
  

The effort includes both analytics and expertise, real-world validation, and assessment. Draw on what happened during COVID.  That experience adds a degree of certainty—not just as to the particular companies it applies to but as to the locations on the supply chain. Did the risk stop the supply chain and require rebooting or did it cause a bottleneck that restricted product flows?


A key is knowing there are no absolutes as to risk avoidance in a worldwide crisis. Avoid those who say or infer there is.


Cost Pressure.  

There will likely be pressure to control and reduce costs as businesses start back up.  And even more so, with the anticipated recession.


Lastly, this is a work in progress.  How and how long the coronavirus plays out around the world may affect what is presented here.  This paper will be updated as time and events unfold.  This is my sharing ideas about coronavirus and its impact on post-coronavirus supply chain management.  Good luck.

Tom Craig Consulting    tomc@ltdmgmt.com

Supply Chain Management/Logistics Consultant and Advisor