Three ways to stabilize your supply chain as we begin to recover from COVID-19
By Melissa Cope and Ben Godfrey
This is part of a series of insights on the global supply chain impacts due to COVID-19. Our colleague, Andrew Camilleri, recently wrote about how to protect your supply chain during this time of uncertainty, and here, we focus on how to stabilize your supply chain.
It’s been just over a month since COVID-19 was declared a pandemic. While there are some early signs of recovery as countries and states successfully “flatten the curve”, there will likely be lasting impacts on global supply chains as organizations face the new business landscape. Currently, we know that organizations are still largely in firefighting mode.
As we start to shift towards recovery, it’s essential for your organization to stabilize its supply chain by cutting out the noise, focusing on your prioritized products and identifying how these might change (if you haven’t already). Once done, you need to build a realistic demand picture; leverage analytics to build scenario plans and respond to daily changes to the global supply chain; and ensure a consistent and reliable supplier network of goods and services. Here’s how:
1. Create a stable demand picture by building a realistic forecast from downstream data
The COVID-19 pandemic has been a crash course in supply chain management affecting millions of people. One highlight of the course, so far, is the powerful disruption that the bullwhip effect can cause. The bullwhip effect is a phenomenon that describes how fluctuations in demand become larger as they move up the supply chain (see diagram below). The impacts of these fluctuations, particularly on wholesalers and manufacturers, due to COVID-19 will play an integral role in an organization’s recovery strategy.
One way to reduce the negative impacts of the bullwhip effect is to shift the focus of the forecast process away from what happened in the past to modeling downstream demand:
- Gather shipment and order data on downstream sales (your customer selling to their customers)
- Understand your customer’s inventory positions and policies. For example: How much of your products do your customers have on hand? How much safety stock do they keep? How often do they order?
- Build a customer inventory netting model using the statistical forecast on customer orders or shipment data. Then net off their on-hand inventory to create a “recommended order forecast”.
One thing that hasn’t changed is that demand will always remain a key input into the rest of the supply chain. It is essential that organizations build a realistic demand picture of customer needs and use it as a starting point of reconciling demand with supply.
2. Use predictive analytics to build scenario plans and drive decision-making
A second lesson COVID-19 has taught us is that what happened in the past isn’t always the best predictor of what will happen in the future. Traditional demand planning models put too much emphasis on historical data. Demand planners spend too much time “cleansing” minor disruptions in demand, let alone the effort required for a large disruptive event.
To reduce this overhead and better plan for disruptions, teams should:
- Utilize external, predictive, data sources as additional inputs to demand models (Google trends, weather patterns, news, social media, etc.)
- Communicate a range of certainty with the statistical forecast
- When collaborating with sales and marketing teams during Sales & Operations Planning (S&OP) or Integrated Business Planning (IBP) processes, concentrate the team’s efforts on your prioritized list of products and where the models have the widest range of potential outcomes
We understand that best practice dictates sales, inventory management, production, and financial plans all be based off a “one number forecast” from the S&OP or IBP process. However, the time spent on getting the team to agree on one number can be detrimental to long term planning. Instead, teams should spend time building targeted risk management plans for the downside and upside that are likely to come from uncertain times.
3. Assess alternate sources of supply; diversify the geography and mix of suppliers
A third highlight in the supply chain management crash course is centered on the importance of supply chain risk and supplier diversification. Once you have determined your list of prioritized products and have built a realistic demand picture, it is critical to assess your supply risk and take actions to reduce this risk. Understanding the risk over the next months will be a key input into your scenario planning as you prioritize, or “fair-share”, supply across your customer base.
Organizations can stay ahead of supply risk in the coming months by establishing clear and consistent channels of communication with primary suppliers, particularly for your prioritized products. In this complex time of reconciling demand and supply, your key supplier relationships will prove invaluable.
Consider the following actions in order to assess your risk of supply and need for supplier diversification:
- Assess supplier shortages and at-risk products now and in the next few weeks or months, depending on lead times
- Ensure you understand the risk for suppliers further upstream (e.g. tier 2 suppliers)
- Prioritize finding alternate sources of supply based on highest risk and longest lead time products
- Identify suppliers that could be more strategic partners in the future
Once we start moving more towards recovery and rebuilding, it will likely be a time for longer term conversations on end to end supply chain risk, strategic supplier diversification and development, or even insourcing. In the meantime, a lot of organizations are still striving for stabilization and maintaining just enough inventory to satisfy demand.
Summary
Global supply chains are complex, and the impacts from COVID-19 are going to continue throughout the recovery period. Taking a medium-term view, these three strategies should help stabilize your supply chain as well as start to build or enhance overall supply chain best practices. What does your organization need to do to stabilize your supply chain?
If you’d like help thinking through supply chain impacts and considerations during and post the COVID-19 pandemic, we encourage you to reach out to us at Melissa.Cope@slalom.com or Benjamin.Godfrey@slalom.com.
