Post Date : June 20, 2020
Over the past decades, the various black swan events that the world encountered were mostly in terms of the financial crisis, war, terror strikes, nuclear accidents, or environmental disasters. Whether, it was the 1997 Asian Financial Crisis, the “Dotcom” Crash, the 9/11 Attacks, the 2008 Global Financial Crisis, the Fukushima Accident, or the Tsunami of 2004, none of the black swan events emanated from Supply Chains nor did these affect the Supply Chains so disproportionately.
When we specifically look at the Covid19 pandemic, in terms of collateral damage, the Supply Chains have been devastated the most. Throughout human history, there have been several pandemics of diseases. The last known severe pandemic Spanish flu, also known as the 1918 flu pandemic infected 500 million people – only about a third of the world’s population at that time, whereas the Covid19 has engulfed almost the entire world population now.
Any future black swan event, if it has vast geographical coverage and a large density of population under its grip, then Supply Chains would be the first recipient of any collateral damage.
No Supply Chain is designed to withstand disruptions to the extent, that the physical realm to operate it does not exist. Supply Chain is not a static function. It can only exist dynamically. The existence of any Supply Chain depends on the oxygen of motion, the movement of goods. Due to strict lockdown, the Supply Chains got incapacitated and came to a grinding halt. Supply Chains never came under existential crises before. The quintessence of any Supply Chain is the uninterrupted movement of goods.
An existential crisis, is different than a usual crisis, in the sense that, once you overcome the existential crisis, you catapult into an advanced version or state, you no longer remain the same. This is the most difficult phase for Supply Chains in known history. In the post-COVID-19 world, supply chains can transform and become resilient even to bigger shocks.
Let us examine a few ways to make future supply chains pandemic and lockdown resilient by developing immunity of our supply chains towards shocks:
Rubberize your Supply Chain
Covid-19 has changed the complete Supply Chain paradigm. The Covid19 is the first such crisis that has really tested the rubber of Supply Chains. Although, the crisis is temporary, by the time pandemic is overcome, the loss of sales due to stock-outs or unplanned costs incurred would have already drilled holes in balance sheets of companies. As companies evolve through the Covid19 pandemic, do your supply chains have enough rubber to absorb the shocks of future lockdowns? Will your Supply Chain strategy remain a two by a two-dimensional matrix of Cost and Quality?
Companies need to create organization level as well as industry level Inventory structures that can offer resilience during the crisis. Companies can create ‘Covid19 specific inventory stocks’, at the highest level in their Inventory structure. Raw material buffer stocks can also be held at the Industry level, thereby marginalizing the costs. Similarly, these pandemic specific resilience efforts can be made in distribution infrastructure as well. Companies can share the usage of fleet, and warehouses and lower down budgets & cost structures for such black swan events. Ultimately the threat is common to all the companies in the industry.
During the crisis, standalone models become a liability as they are rigid by design. Companies need to adopt a hybrid modeling approach as they are flexible. For example, single long and large volume haulage networks can be converted into a hybrid network of variable warehousing & short Haulages. This gives more degrees of freedom. Under lockdown restrictions, you have variable buffers to absorb shocks. These variable buffers both in terms of warehouses and fleet can double up and replace any bottleneck resource.
“Mom & Pop Store” format a key element to Supply Chain Strategy
In the current Covid19 crisis, it is clearly emerging that the local ‘mom and pop’ (Kirana) stores in our neighbourhood are leading the charge to replenish our household essentials. None of the shopping malls or big shops was able to serve us. Their inability was not due to their incapability or incompetence. But due to their incapacitated state, driven by their business format of serving large pubic, footfalls and associated risks with the crowd gatherings.
Interestingly, most of the supply chain elements, whether at the factory level, port, CFS, fleet, or at the warehouse level, got incapacitated to a large extent, due to inter-country and inter-state movement restrictions. Their sheer size and long handle linkages within the overall global economy added constraints to their operations. Local suppliers and logistics partners, due to their agility, deep understanding of topography, and short linkages are able to serve better.
A typical mom & pop store offers some of the advantages that suit a situation like a pandemic crisis. The store processes are easy to run, flexible to change, the financial burdens or the working capital requirements are little, the understanding of local and hyper-local needs are very clear and the delivery and serviceability is fast.
If your Supply Chain is crossing the whole globe, from west to east, it is imperative to revisit your Supply Chain strategy and figure out, how much of your Supply base can be hyper-localized and broken down to self-contained and fast delivery mom & pop store type of suppliers & logistic partners.
Exponential Cost Webs
Supply Chains often get weaved through unintended exponential cost webs. Manufacturing disruptions can be addressed by anticipating and inventorying the products. However, inbound and outbound logistic elements of Supply Chains, cannot be addressed so simply. Because logistics is always live and running.
Companies use external Logistics Assets to run their Supply Chains. These assets range from trucks, trailers, rail wagons, import container boxes, material handling equipment, on one side to seaports, container freight stations on the other. Whenever a Supply Chain disruption happens, the throughput through these assets gets delayed. These results into your logistics partners invoking penalty clauses of your legal contracts. These costs are exponential by design. Costs increase as days of default pass. Since these are conditional costs, they never remain visible, until the disruption hits and start eroding the margins of the companies.
The Covid-19 pandemic has triggered disruptions in logistics supply chains, leading to delays in clearing of goods from ports, prompting some cargo owners to suspend their operations and detaining of containers. Following the 21-day lockdown, the Directorate General of Shipping (DGS) had imposed a14-day quarantine on shipping vessels arriving from any port in China and any nation affected by COVID-19.
Companies, especially MSMEs looking to restart operations were confronted with multiple issues including additional costs due to stringent norms, working capital needs, and above all extra cash needed to pay penalties in the form of detention and demurrage.
The resurgent supply chains, post Covid19, will need to create a workaround to minimize these unavoidable costs. Some of the opportunities are to find 3PL service providers, who have tie-ups and back to back agreements with large space operators like CFS & ICD’s. These can act as shields against monstrous detention & demurrage penalties.
Contact Less Supply Chain
The term ‘Supply Chain’, was crafted to signify a tight connection between individual elements. However, Covid-19 created many threats and most of them got realized before one could act. This reflects that we discounted the need to make these Chain elements “Contactless’ in the physical frame. Supply chain elements remain connected in terms of the flow of information, capital and materials, but from the health and hygiene angle, these elements ought to remain contactless, especially in distribution and last-mile delivery.
Companies need to develop unique cost-effective, plug & play modules of contactless manufacturing and distribution. While RFID is a 25-year old technology, but the cost of RFID tags has come down drastically. Use of this proven and evolved, technology can contribute cost-effectively to contactless Supply Chains.
Create Bankruptcy Proof Supply Chains
During a crisis, an oversupply of produce due to demand destruction will compel suppliers to dump raw material in the market. One short-sighted approach that might lure manufacturers is to immediately force suppliers to cut prices steeply and accumulate discounted, cheap produce from them. However, this can throw your suppliers into bankruptcy & hurt your company in the long run.
A visionary approach is needed in such a situation. Sometimes, value engineering done in a Supply Chain can catapult a company into a new league of product lines and markets. Not only are you able to protect your suppliers from getting bankrupt, but also able to create a new product line and cater to new markets.
A recent case in India is an example of such a visionary approach, where milk cooperatives like Mother Dairy, Amul, Nandini, Parag, and several others walked the extra mile to procure surplus milk from farmers. Despite a dip in sales, milk cooperatives did not discourage supply. They continued to procure milk from the farmers, which resulted in surplus milk. This surplus milk was used to produce skimmed milk, a different product category altogether, which serves customer demand in the crisis like Covid19. Skimmed milk powder can also be used for export. A classic case of value engineering.