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The world is in the midst of what economists call a “black swan event” — an unexpected occurrence that causes severe damage to the economy. Under regular market conditions, businesses operate within a familiar and relatively predictable framework of supply and demand.
Yet when faced with a black swan, like COVID-19, supply and demand are thrown into disarray. Quarantines, factory shutdowns, and panic buying are massively disrupting the supply and demand chain, with almost 75% of U.S. companies affected. When a crisis hits, businesses must do their best to manage their supply and demand forecasts as effectively as possible, despite the uncertainty.
In the new reality of COVID-19, the full effects on the supply chain are yet to be seen. Here are several tactics that companies can use to proactively manage supply and demand and ward off some of the potential consequences,
In this article:
Monitor the Situation Closely
Manage Inventory Smartly
Create “What-If” Scenarios and Contingency Plans
Build Flexibility Into the Supply Chain Wherever Possible
Take Precautions for Employee Safety and Wellbeing
In the current #CoronaCrisis, the area of business hardest hit is the supply chain, and no company is left unaffected. Even global giant Apple is forecasting a 10% reduction in iPhone shipments in Q1. Given the heavy reliance on Chinese manufacturers, the majority of consumer goods companies have been or will be severely affected by factory closures and slowed production. Furthermore, the crisis situation is highly volatile, changing from hour to hour depending on the country and even the city in which the supplier is located.
For supply chain managers, this increases the need to monitor the situation and the supply chain closely and in real-time. Analyze both short-term and long-term demand predictions and how much inventory is required to cover them. This will build a foundation for a supply and demand forecast, which can then be adapted as necessary as the situation changes. Digital inventory management systems and supply chain management technologies are vital tools that aggregate data from across the supply network, helping managers create accurate predictions based on the situation on the ground. A survey from October 2019 shows that the majority of companies worldwide have already implemented or are piloting the use of emerging technologies for supply chain management, which is encouraging.
One way to build resilience in a crisis is to create redundancy in the supply chain. For example, companies can increase their inventory, contract with multiple suppliers, or hire backup staff to cover themselves in unpredictable circumstances. While it is wise to create an inventory cushion to get through temporary bumps and delays, it is important not to go overboard, as redundancy is costly and isn’t always the guarantee it seems to be. This is especially true during an ongoing crisis whose end is unclear or not yet in sight.
For example, people who stocked up on hand sanitizer at the start of the pandemic, hoping to profit from it later, ran into strict price gouging regulations on major e-commerce platforms like eBay and Amazon. Not only were they not able to sell their inventory at inflated prices, they weren’t even able to turn a profit on the products they had purchased and ended up losing money on the goods they had stockpiled.
With the situation changing at a rapid pace, the future is far from clear. The way to navigate supply chain management within this uncertainty is to develop a range of theoretical “what-if” scenarios and map out the actions necessary for each. Imagine the best-case and worst-case scenarios that could occur. For example, if the crisis were to pass within two months, the contingency plan would look very different than a forecast of six months.
Creating effective contingency plans requires analysis of the information garnered from the current status of the supply chain. How much inventory is stored in reserve and how long will it last? Are the suppliers located in affected areas in China? How much inventory is sourced from factories that have shut down or slowed output? It is important to communicate openly with current suppliers to build a workable plan to suit both parties. Decide which suppliers are most critical to maintaining inventory, and find out whether they can ensure supply and for how long. If necessary, start looking for backup suppliers who can fill the gaps that may arise.
During episodes of panic buying, there may be a need to reduce demand or spread it out over a longer period. Explore ways to do this, such as suspending promotions, limiting the number of items, and pacing the availability of products in-store.
A flexible supply chain is capable of responding quickly to changes in the market and fluctuations in demand. However, a black swan event is outside the realm of the normal shifts expected in supply and demand. It calls for a level of flexibility in all aspects of the supply chain, which means having several options and backup plans for manufacturing, transportation, warehousing, and distribution.
Besides disruptions to the supply chain from the manufacturing side, there have also been huge changes in consumer behavior as well. This is due to the large numbers of people worldwide who are in isolation at home, closures of cafes, restaurants, and malls, as well as millions of businesses worldwide that have implemented work-from-home policies. This has led to a massive increase in demand for home deliveries, particularly “contactless” deliveries, designed to reduce the risk of spreading the virus. Companies that are flexible enough to expand or adapt their delivery capabilities will maximize their ability to meet demand.
“It takes 2,500 parts to build a car, but only one not to.” This comment by a former supply chain management strategist at Tesla highlights just how vulnerable the supply chain can be. Maintaining maximum productivity of the supply chain is critical to a company’s ability to meet demand, particularly in a time of volatile crisis. Two critical elements to the supply chain are parts and people, and both need extra attention in a crisis.
According to a Dun and Bradstreet analysis, 92% of U.S. companies have tier 1 suppliers located in the regions of China affected by COVID-19. Moreover, many company executives are not aware of the source of components below tier 1, which can cause unknown disturbances that are difficult to trace or plan for in advance. When a crisis hits, there may be little time to spare in backtracking missing details and parts. It is critical that managers and decision-makers have a thorough grasp of every loop in the supply chain in order to ensure the highest possible level of productivity at all times.
Effective supply and demand management is reliant on a productive workforce. Many companies are facing shortages of staff due to quarantine rules or school closures that leave parents without childcare and prevent them from being able to attend work. Other companies, such as supermarkets and e-commerce brands, are facing skyrocketing demand, with not enough manpower to handle it. This has led to an increase in temporary workers who need to learn quickly on the job. In fact, Amazon is reported to be hiring 100,000 temporary staff to cover massive demand increases. It is vital to have a solid onboarding program in place to help acclimate new workers and maintain smooth productivity even during the most challenging crisis and unusually high demand.
The COVID-19 pandemic has heavily impacted the ways that people interact with one another — in public places and in the workplace. The public health order to maintain social distancing and limit the numbers at gatherings means that people are no longer congregating in malls, attending celebrations or parties, and are encouraged to stay home. In workplaces, this has led to remote working, shift working to reduce contact between employees, and maintaining distances of six feet between staff members. There is also the issue of “stranded employees”, those who were visiting regions of the world where the virus broke out and now are not permitted to return to work until after a period of isolation. This can take a toll on the employee workforce, both physically and emotionally, which can have detrimental effects on the management of supply and demand.
Managers should put staff safety and wellbeing at the top of their priority list. This means acquiring necessary protective equipment, such as protective suits, masks, and gloves, and it also means providing moral support. Staff who are unable to meet in person can connect via video conferencing, work schedules can be accommodated for employees with families at home, and managers can regularly check in with staff to ensure they have everything they need to keep working efficiently and comfortably. When considering supply and demand, it is easy to imagine the products. However, the people are just as critical, especially during a period of vulnerability and uncertainty.
The coronavirus outbreak of 2020 is unprecedented in the modern world. Despite the nonstop media coverage, expert commentary, forecasts, and predictions, no one knows for sure exactly how the situation will pan out, nor what the ramifications will be for local and global economies. Companies must face each day with a commitment to closely monitor changes in supply and demand as they occur, adapt contingency plans with agility, maximize flexibility and productivity in the supply chain, and focus on employee wellbeing during uncertain times. By following these key principles, businesses can optimize their approach to supply and demand and greatly increase their chances of overcoming the black swan.
Originally published on March 19th, 2020, last updated on August 16th, 2022.