The year 2020 has been quite a year for global businesses and especially for supply chains.
Just in the first six months of the year, the world has already witnessed some defining moments, including looming trade wars between the U.S. and China, preparations for the post-Brexit economy in the Eurozone, and an increasing focus on sustainability and environmental consciousness. Though one can argue that none of these moments took the world by surprise, they did push global supply chains to review and reengineer their operating models.
However, none of these events have had as big an impact as has the global pandemic we know as COVID-19. Where the other events affected certain geographies more than others, COVID swept across the world knowing no boundaries and borders. This meant that every node in global supply chains was simultaneously being challenged, exposing any vulnerabilities for flexibility and resilience.
As a result of the ongoing crisis, global GDP for 2020 is expected to average close to 0%, which would be a faster contraction vs the 2008 crisis. However, some of the hardest hit sectors like manufacturing are expected to have a sharp rebound in 2021, as the demand and supply recovers.
Though most of the research available is based on economic models, a lot can also be inferred by assessing the complexity of supply chains. It can be argued that the length of supply chains has a considerable effect on the ability of a sector to be resilient to any such shocks to the system. It is also easier for shorter supply chains to recover faster, as there are fewer moving parts and environmental complexities.
This may well prove to be the first truly global catastrophe for a few hundred years now, but research suggests that this certainly may not be the last. However, one can definitely use this “shock” as an opportunity to review assumptions and operating models which run our global supply chains. This global event has also highlighted the importance of risk management and continuity planning once again.
What Should Companies Start Doing?
Though most of COVID’s effects can be seen as inevitable, the overall impact could definitely have been softened by being proactive and better prepared. In our experience, the following five steps can prepare companies to better deal with similar situations:
1. Know your supply chain. CIPS reported in 2016 that only 4% of companies actually know their Tier 2 and Tier 3 suppliers. This situation hasn’t improved over the last four years and poses a key risk to supply chains. It is important to map process, information and cash flows to gain an end-to-end view of your supply chain.
2. Go digital to be more proactive. Though knowing your supply chain gives you the right level of visibility, it is also important to have internal systems to speed up information flows. This would help implement any fall-back plans as quickly as possible and allow firms invaluable days to take any corrective actions.
3. Look beyond cost competitiveness. Commercial costs will always form an important part of the supply chain equation; however, it is important to consider other elements like continuity, operational complexities, resilience and sustainability to fully appreciate the real cost of your supply chain.
4. Rejuvenate business continuity planning. Companies generally revisit their business continuity plans every 4-5 years. Though this may have been good a few decades ago, when the demand and supply were not very volatile, in today’s scenario it can be considered suicidal. It is important to continuously monitor and plan for business continuity in today’s working environment.
5. Bring down functional walls. Last but definitely not least, it is important to bring down those functional silos and let the organization operate as a single value system. Some of the more successful firms during the times of crisis, like Amazon and Dutch retail giant Spar, are known for their operations based on their multiple supply chains, rather than the other way around.
How to Survive Another Lockdown
Over the last three months, lockdowns have been seen as an effective way to deal with the COVID-19 crisis. Despite a varied degree of success, this delay strategy has had its positives and negatives for different sectors. But with a second (and third in some countries) lockdown being talked about, how can companies prepare better and decrease disruption to their operations?
Our research suggests a three-step approach to deal with this situation:
● Instill confidence in employees, customers, suppliers and stakeholders. With safety taking a paramount position in everyone’s minds, companies need to assure their employees and customers that it is safe to operate and shop in the company premises or avail services remotely. They also need to review their business plans and relay realistic messages to their suppliers and stakeholders, in order to instill confidence across their operations. Given the volatility of the situation, this messaging cannot be one-off and will need to be reviewed on a timely basis to keep people abreast of any changes.
● Review operations for nimbleness. It is important for companies to draw out a detailed relaunch map, updating all parties involved of their responsibilities and why it is safe to relaunch. This should also include plans for any short-term speed breakers, with the right people involved who can quickly review plans if needed. Further work will be required to revive demand and reboot operations, with a close look out for any signals and red flags.
● Reshape strategy to maintain business continuity and build resilience. While the cautious approach discussed in the first two steps is a great start, it is important to start investing in building resilience and continuity in the system. However, this is not possible until and unless firms are able to know their supply chains like the back of their hands.
Once firms achieve a good understanding of all the flows, relationships and data in the system, it is important to carry out a full risk review from an end to end supply chain view. It is also important to regularly stress test the operations not only from a commercial cost perspective, but from an operational stability and demand fulfilment view. It may be a good idea to involve a dynamic group of your customers and suppliers in this exercise, so as to gather an unbiased view to your resilience.
Last but not least, it is important to invest in a scenario modeling tool that will allow you to assess your supply chain dynamically and to plan better.
The New Normal
The new normal is probably the most overused term in reference to COVID-19, and rightly so. Not only is the pandemic leading to changes in the working environment, but it’s also influencing planning mechanisms, with supply chains not left untouched.
While the COVID-19 crisis is likely to accelerate fundamental and structural changes that were inevitable, we can expect to see some additional changes evolving from changes in consumer behavior and a need to create more resilient supply chains. But it is important for companies to fully assess the impact of any such changes on their end-to-end supply chains. from both cost and benefit lenses.
If the first six months of this year were a rollercoaster of a ride, one cannot expect the next six months to mellow down much. Having said that, the next few months are going to see some very interesting changes and may well pave the way for the next phase in supply chain development.
Gopal Iyer is supply chain delivery lead at procurement consultancy 4C Associates.