Repairing broken supply chains after COVID-19
This article first appeared in SupplyChainBrain
So you thought your supply chain was prepared for disruption? Then COVID-19 happened.
Years of building supply chains with efficiency and cost as primary drivers resulted in significant gains in growth and profitability. However, the resulting lack of operational flexibility and resiliency led to an inability to handle catastrophic disruption, posing an existential threat to many companies. Organizations now have the imperative to restore broken operations in the near term, while rethinking and redesigning what the supply chain can handle in future.
Among the lessons learned from the COVID-19 disruption is the reminder that organizations plan as if catastrophic disruptions occur once in a generation. Looking back at the past 20-plus years, we can see that these types of disruptions really occur approximately every two to three years, and the scale of disruption isn’t fully anticipated in contingency planning. As a result, companies lack the flexibility and resiliency needed to manage the impact of this type of disruptive event.
The disruption caused by COVID-19 is unique, in that it has simultaneously impacted all elements of the global supply chain:
- Demand. Public policy and consumer behavior have created unpredictable demand streams. Some products experienced hoarding behavior, while others saw demand drop to a fraction of pre-COVID levels.
- Supply. Shutdowns created uncertainty about flow and stability. The scope of impact includes financial viability of suppliers, limited visibility to flow of materials, and unknown supplier uptime and scheduling.
- Core operations. Production facilities experienced intermittent operations, low capacity, absenteeism, and impending shortages of capital, labor and materials.
In the near term, companies face the dilemma of needing to restore operations to get cash flowing, but also needing cash to restore operations.
COVID-19 didn’t just create new challenges for organizations; it magnified existing challenges within supply chains which require attention. These include:
- Supply chains need to evolve. Up to now, most have been based on incremental trade-offs between cost and service.
- Supply chains are reactive, inflexible, and at best responsive. As service demands have increased, companies looked to drive efficiency. This was partially accomplished by reducing the flexibility and resiliency of the supply chain.
- Supply chains provide services the same way they did 10 years ago. A cost-center mindset hindered the adoption of much-needed innovations.
We’re now three months into varied states of public policy shutdowns and openings. Companies expected greater operating-environment clarity at this point. Instead, they’re discovering that there are more questions than answers. At the same time, they’re feeling the necessity to re-open business activities, even if they lack critical information needed to guide those actions.
This challenging environment will continue for the foreseeable future. To address this uncertainty, management can utilize a combination of short-term responsiveness and long-term strategic thinking to build comprehensive survival plans. Companies should align on three horizons:
- Restore. Focus on immediately re-establishing operations, setting parameters to ensure workforce safety and minimizing operational risk, stabilize the balance between demand and supply, collaborate with customers and suppliers, and work to improve cash flow. This creates immediate breathing space for the organization.
- Rethink. In the intermediate term, evaluate supply-chain capabilities required to support future operations within the optimal balance between cost efficiency, customer service and operational flexibility.
- Redesign. For the long term, develop commercial and operating models that draw on next-generation capabilities and partnerships.
Core to these three horizons is the successful transition from near-term tactical actions to longer-term strategic initiatives. Companies may also need to consider adding temporary proficiencies to address immediate needs related to COVID-19 monitoring, including virus-testing partnerships and predictive modelling.
All companies are doing what it takes to restore operations, but not all are in the same place on that journey. As such, a “one-size-fits-all” approach won’t work. In all cases, however, organizations must be able to assess the state of operations, including security of supply, cash position, cost-cutting opportunities, employee health and safety guidelines, and customer requirements. The success of this effort rests on three key factors:
Ability to get required information where deficits or knowledge gaps exist. Assessing operations and setting direction requires information that companies don’t readily possess. In many situations, they rely on public health officials, and the information is inconsistent or out of date. To provide the best environment for operational restoration, companies should engage in COVID-19 monitoring, using testing protocols and partnerships to build a data-driven approach that will enable them to understand the health of their workforce, ensure employee safety, and manage operational risk due to shutdowns or absenteeism. Companies should also adopt epidemiological models to understand COVID-19 disruption and its risk to supply-chain operations.
Ability to set direction, coordinate action and move forward. Companies must establish a core group to manage and govern activity. They should set up cross-functional rapid-response or “SWAT” teams, buttressed by existing sales and operations planning teams, to guide operational activities. This team should be supported by operational control towers, S&OP process activities, and supply-chain and manufacturing analytics.
Ability to work with greater uncertainty. COVID-19 disruption created an increased environment of uncertainty. In response, organizations must establish scenario-planning capability to model near-term and future operations. This will enable them to model likely scenarios and better understand the impact of today’s decisions.
In addressing these areas, organizations can initiate the restoration of operations and manage activities through uncertainty.
As organizations rethink capabilities to support future operations, a critical element will be balancing supply-chain flexibility with cost and service. Flexible supply chains allow for the mitigation of risk by anticipating and addressing issues proactively, and by quickly adapting to disruptions like COVID-19 without significantly increasing operating costs.
Key components of this effort include planning and governance to provide control; manufacturing, supplier and distribution flexibility to enhance collaboration, and visibility to predict and resolve disruptions through action. Finally, companies should embrace supply-chain finance and supply-chain analytics, to optimize the balance between cost, service and flexibility.
A portfolio strategy approach is vital as companies redesign and revolutionize the supply chain. Toward that effort, many have initiated smart supply-chain or digital supply-chain initiatives with varying degrees of success. They need to re-evaluate those efforts to understand which capabilities are truly transformative, and worth continuing to invest in.
With these actions, organizations will have the tools to address immediate issues and restore operations, while also positioning themselves best for long-term success. They can build future capabilities such as:
- Diversification of the manufacturing footprint and supplier and distribution base.
- Scenario analysis of supply-chain events, to provide additional options for responding to potential disruptions.
- Real-time information and visibility, to improve response time to interruptions.
- Full visibility of the supply chain.
- Overall governance, command and use of a control tower to coordinate responses and everyday operations.
Applying this approach will produce immediate results, and position the supply-chain organization where it needs to be: a critical component in this time of uncertainty, and a flexible and proactive operation for the future.
Andy Prinz is a manufacturing expert at PA Consulting. Shanton Wilcox is the US Manufacturing Lead at PA Consulting.
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