Bend, Don’t Break: How Some Supply Chains Are Beating the Pandemic
The COVID-19 pandemic has pushed many supply chains to their breaking point. But those that stayed intact offer clues for preparing for the next crisis.
May 6, 2020
During a crisis, system failures stand out. But to move forward, say supply chain industry experts, it’s a good idea to identify what’s going right and to strengthen those processes.
It’s easy to see the recent strain on supply chains, from empty store shelves to shipping delays. But it’s acceptable for a system to creak; bending doesn’t mean the process is broken. Rather, a platform that works under stress should reassure businesses of better footing on the path forward.
Supply chain diversification wins over single source
When goods come from multiple sources, the supply chain can survive consumer demand spikes and plummets.
For example, the healthcare industry has been flexible in finding and developing new sources on the fly. That has included “heroic efforts from firms to ramp up production of key products, including ventilators and PPE,” says Andy Borchers, professor and Associate Dean for Research and Accreditation at Lipscomb University. “Companies like GM, Ventec, Ford, and others have rapidly redeployed facilities to meet needs.”
Similarly, healthcare organizations added hospital beds in out-of-the-norm locations. Testing capabilities expanded into unusual sites. Medical research efforts shared data and tools to work around process bottlenecks and primary source shortages. In each case, the organizers excelled at finding new suppliers when existing ones were overloaded or unavailable.
“Supply chains that relied on only one supplier encountered the most difficulty,” says Tom Reynolds, consultant and lead of the Supply Chain Practice at Egon Zehnder, a global management consulting firm. “Once that primary source was disrupted, it had a ripple effect.”
Some companies are already changing direction, says Stanley Chao, author of Selling to China and managing director for All In Consulting, a consultancy specializing in assisting SMBs with Chinese and Asian business strategies. “Companies are diversifying from China – not decoupling, as many claim – to spread the risk.”
At-the-Ready Storage won, while Just-in-Time inventory crashed and burned
Just-in-Time (JIT) solutions work only when you have plenty of time. The just-in-time inventory strategy is to receive goods only as they are needed in the production process, which means inventories (and their costs) stay low. However, businesses that urgently need to adapt during a crisis don’t have that luxury.
One example: CFR Rinkens, a global commercial cargo shipper that specializes in the containerized shipping of motor vehicles. While daily adjustments are necessary, says Joseph Giranda, its director of commercial relations, “Fortunately, we operate a vertically integrated auto supply chain.” The company is optimizing the assets it has on hand, which include managing its own warehouses, workers, container yards, and trucks. With their assets on hand, they can react faster than waiting on just-in-time vendor deliveries that were timed to normal usage patterns, not to a crisis with different user patterns that presented new obstacles.
Keeping a warehouse fully stocked is a marked departure from manufacturing’s long embrace of high-efficiency tactics such as lean manufacturing, Six Sigma, and just-in-time inventory.
But it turns out that in a crisis, lean and mean is just mean. Attempting to rapidly adapt lean concepts to adjust to the demands of a crisis also snowballed problems downstream. “Companies are second-guessing Just-in-Time inventory. These JIT companies got really burned,” says Chao. Chao recommends companies “at least find ways to hold finished goods at the tier 1 supplier or in a bonded warehouse ready to ship anytime.”
Can’t change the supply? Adjust the product
For some companies, challenges on the supply side were easily matched or exceeded by challenges on the demand side. Rather than rectify supply chain problems, they repurposed existing supplies into products in more demand, such as distilleries making hand sanitizer instead of spirits or perfume companies making disinfectants. (There’s prior history for this, too, such as one beer brewer switching to making cheese after Prohibition.)
“Many manufacturers will struggle as the goods they produce are no longer in demand, but more agile operators will shift to making different products,” says Abe Eshkenazi, CEO for the Association for Supply Chain Management.
Overlap or integrate
Companies that could integrate retail and commercial supply chains could also adjust the product to fit demand. Those that couldn’t saw their waste costs escalate.
For example, food distributors have shifted their efforts from supplying restaurants to stocking grocery retailers – with varying success. The supply streams for restaurants and grocers differ significantly, even though each consists of warehouses, inventories, work forces, and delivery fleets.
The food service distribution business dropped like a stone during the pandemic. The International Foodservice Distributors Association (IFDA) projects the industry will lose $24 billion over the next three months from COVID-19 pandemic closures of restaurants, schools, and hotels. Some stored food has gone bad, and some was donated to feed the poor and unemployed.
The positive supply chain response: “Some has been sold to grocery chains in formats customers would not normally see,” according to a report in The Globe and Mail.
Grocers, as we all know from empty store shelves, were stumbling in the race to keep ahead of consumer demands. “They [grocers] need more product, more storage, more trucks and, most importantly, more workers. To their mutual benefit, the two distribution networks are collaborating like never before,” according to the Globe and Mail article.
To speed such major shifts through newly formed partnerships of heretofore separate supply chains, industry associations stepped in to build a bridge. The IFDA and FMI-Food Industry Association launched a match-making partnership that connects foodservice distributors with excess capacity to assist food retailers and wholesalers that require additional resources to fulfill needs at grocery stores, according to an IFDA official statement.
Despite best efforts, that strategy won’t work for every supply chain. Wherever there are significant product differences between commercial and retail product versions, or a lack of will to reconcile such differences, a relatively simple fix isn’t possible.
“The single biggest challenge has been barriers between commercial and retail supply chains. Many products with stable demand patterns and low margins have become specialized to the point that switchover isn’t easy,” explains Andy Borchers, professor and Associate Dean for Research and Accreditation at Lipscomb University.
“Supply chains need greater flexibility to switch between commercial and retail channels. Historically, demand for products like toilet paper has been very stable and changeover hasn’t been needed. When future crises arise, flexible automation will allow easier changes,” says Borchers.
This is one area in which technology advances may play a part. “Further work in digitizing the supply chain will allow for better allocation of resources,” Borchers adds. That is, they’re not visible in the supply chain in real-time; a business can only see overages and shortages as they manifest at points of delivery.
Future-proofing vetted by the virus
Despite some success stories and useful lessons, there are some market segments where the supply chain just plain failed. Some businesses need parts that come from an area that is shut down. Some manufacturing and processing plants have been unable to change the workflow to ensure worker safety. It’s hard to find a light at the end of that tunnel, particularly with expectations of a second wave of the virus.
“The factory closures and slow-downs will affect Q3/Q4 seasons due to the average lead times to procure, produce, and then ship product,” warns Carlos Castelán, managing director of The Navio Group, a retail consulting firm. Retailers should brace for the subsequent impact now, such as working with suppliers to identify which products will be affected and finding alternative or additional manufacturers.
One element that benefited the supply chain was reliable connectivity – and has taught people what they can rely on in the future. “Almost everyone has remote access to their business e-mails and of course their phones. So, communications are solid,” says Stephan Logan, who owns ecommerce site Indigo Instruments, a supplier of science education products and science instruments. And while shipments were slowed, it was possible to run the operation on reduced staff to maintain social distancing. “That was vital to keeping employee morale high,” Logan adds.
“If the next emergency is a second COVID-19 wave, then we’re ready. If it’s something else entirely, we have to hope we are nimble enough to adapt,” says Logan.
For some companies, visibility, flexibility, and innovation paid off. Now’s the time to review supply chains with a careful eye towards sustainability and continuity so that the next crisis doesn’t pinch so hard in the first place.