Perspective

COVID-19: Preparing Your Supply Chain in Times of Crisis

The spread of COVID-19 is an epidemic affecting hundreds of thousands of people worldwide, with significant economic implications to linger for months to come.

The Organisation for Economic Co-operation and Development (OECD) warned that the coronavirus could cut global economic growth in half, with industries across the board facing fallout. The global economy and international markets plunged as the coronavirus spread from China, the world’s second-largest economy, to other countries in Asia, Australia, Europe, the Americas and the Middle East. Policies intended to prevent further spread of the virus, which include travel restrictions and quarantines, have unintended consequences of disrupting international supply chains, suspending business operations and shrinking revenues.

According to recent data from Dun & Bradstreet, services, wholesale, manufacturing and retail account for more than 75 percent of businesses in the impacted region of China. On a global level, 51,000 companies have “one or more direct or Tier 1 supplier,” from the impacted region and an additional five million companies have Tier 2 suppliers there, with 938 of those being Fortune 1000 companies.

The impact on supply chain is twofold. For one, companies must closely monitor short-term and long-term demand and inventory to accommodate production loss in the wake of factory closures and economic slowdown. For another, retailers are faced with inventory depletion as consumers stock up in preparation for potential quarantine or extended stays at home. Delivery options have also become a more appealing alternative for consumers who want to avoid making trips to the store – leaving retailers to mitigate fulfillment, while also keeping employees safe.

“Retailers around the world are grappling with the appropriate response to the coronavirus for their employees, customers and their business,” Hilding Anderson, head of strategy, retail, North America, said. “For many, it's shaping into a once-in-a-generation test of business continuity, planning and supply chain flexibility.”

Events that have a very high impact on the market but have a very low probability of materialization – otherwise known as “black swan events” – make short-term and long-term consequences like “panic buying,” work shortages or limited supply hard to measure definitively. However, there are measures organizations can take that can help navigate risk when black swan events occur, and as they unfold.

Create contingency plans

According to Nitin Dsouza, director of strategy and transformation, Publicis Sapient, London, organizations should start with scenario-planning strategies, where different demand environments are considered across the entire supply chain. While different organizations face unique risks, companies should develop plans for both optimistic and conservative situations. In the case of COVID-19, this is defined as:

• Optimistic scenario: COVID-19 is contained by April or May, with normalcy returning to global operations through the end of Q2.
• Conservative scenario: COVID-19 remains prevalent, with continued impacts lasting into Q4.

Mitigate supply shock

In the short-term, companies should work with their existing suppliers to create a business continuity plan. In the meanwhile, suppliers in different regions allow organizations to diversify supply chain and safeguard against shortages, especially for organizations that deal with longer supply cycles.

According to Anshul Acharya, vice president, management consulting, Publicis Sapient, New York, organizations that have exposure in China typically see longer spans between demand signals and delivery, often with 30, 60, or 90-day delays.

“In these situations, it's always important that your business model allows a buffer with additional inventory,” Acharya said.

In one example, an organization may rely primarily on one or two active suppliers from one region, like China, but place a contract with another partner in a different region, like Europe or South America, that will be able to guarantee a certain amount of inventory that can be leveraged in case of emergency.

“Balancing sourcing resilience and flexibility with cost was already on the list for many retailers,” Anderson said. “With the desire for more unique, customizable products and more speed, opportunities exist in sourcing near-shore as well as offshore. The spread of coronavirus might just be another reason for retailers to consider introducing more supplier flexibility.”

Aggregating data from third-party partners allows visibility into stock movement across the supply chain network and can pinpoint potential roadblocks. For example, if inventory is delayed when crossing the border, organizations can put contingency plans in place to address the issues and accelerate outcomes.

“Can you link your data sets from your supply and your demand across your internal network and across the supplier network?” Dsouza said. “From there, you can then start measuring various scenarios and identifying where rapid intervention could be done.

In the longer term, companies would benefit from using Enterprise Digital Twin solutions that can simulate demand and supply end-to-end within and across the enterprise.

“Technologies that provide inventory visibility across the distribution network (e.g. distribution centers, stores, vendors, third-party providers and wholesale inventory) offer major benefits for flexibility and transparency to serve customers in best way possible given supply limitation,” Anderson said. 

Manage demand volatility 

In the short term, halting promotions, prioritizing products, and creating inventory reserves are other strategies to help manage demand when supply is limited.

Recent Nielsen data shows that sales of oat milk, surgical masks, fist-aid kits and other non-perishables spiked throughout late February in response to coronavirus fears. These “panic buying” scenarios – where certain items spike in demand – can also lead to price gouging both in-store and online as supplies become more limited.

Amazon has been ineffective in restricting marketplace sellers from increasing prices as much as 2000 percent. If prices are increased too heavily, Dsouza says it risks damaging relationships with the consumer in the long-run.

“If people are bulk buying limited supply items, make sure that you have communication in place telling consumers that there’s only a limited amount that people can buy, so you can control stockpiling,” Dsouza said.

Some companies are taking on the role of the "responsible retailer." Tesco, for example, is one of a handful of supermarkets participating in a “Feed the Nation” contingency plan, working with suppliers to control demand, while creating a positive image in the minds of people.

In the medium term, companies should plan for a bull-whip effect to impact their business and their suppliers due to high volatility. Link supply to the consumer demand within the business and allow trusted suppliers to have full visibility of demand.

On a broader scale, AI/ML-based demand planning tools using big data and hot data sets should be leveraged to aggregate metrics like weather and seasonal shopping habits that allow for stronger predictive models in preparation for the ramp of demand during the path to normalcy.

Make work safe 

Equipping employees who handle food, logistics or delivery with personal protective equipment (PPE) can help keep workers and consumers safe in outbreak situations like COVID-19. Stocking up on PPE supplies early can help mitigate risk of shortage over extended periods of time, especially if global supplies strain due to surges in panic buying.

Technology like internal third-party logistics and employee applications can also be used to monitor staff availability and shipment options while streamlining onboarding procedures for new workers.

“Enable new staff to be on-boarded, trained and be work ready, with assistive intelligence technology along with the promise of a protective environment,” Dsouza said.

Looking ahead

Following the initial COVID-19 outbreak in early 2020, factories in the region are working towards getting back to business. NPR reported in early March that Chinese factories are reopening and resuming production, with eight provinces downgrading their emergency levels to allow for more mobility for citizens and workers. While black swan events like coronavirus can’t always be predicted, understanding supply chain risks and opportunities gives organizations more transparency to plan ahead while maintaining customer experiences in the face of crisis.

“New versions of established tools will play a critical role in helping supply chain managers have an ongoing view of potential risks and provide framework to help take corrective actions to better serve their customers,” Anderson said.