The Covid19 pandemic is the common challenge before the whole world and the purpose of this paper is to analyze its impact on the supply chain and discuss potential measures that different businesses can evaluate in dealing with the current uncertainty. The objective is to put a handful of quick assessment tools in hands of CXOs and managers that will help them in understanding the disruption and making better decisions. An idea of ‘NICE Business’ is being introduced in this paper for the Post-Covid19 world.
Covid19 effect on Human life :
Globally there are 422,582 confirmed Covid19 (2019-nCoV or Coronavirus) cases as reported till 24th March 2020 of which 108,388 have recovered while 18,891 have died. The number of cases has grown exponentially over the period as have the number of deaths as shown in the figure below.
Figure 1: Number of deaths worldwide due to Covid19 or Coronavirus(1)
On a statistical scale the number of people impacted by such a pandemic can be assumed to fall under a normal distribution curve as shown in the image below. The World Health Organization (WHO) and the governments worldwide are taking a number of measures at war-scale to control the pandemic e.g. limited or complete shut-downs and preparing excess medical supply. All this would help in flattening the curve (refer image below) and reduce the number of people impacted by this highly contagious virus which has close to ~4% fatality rate overall.
Figure 2: Estimated Normal and flattened curves of daily number of cases during a pandemic (2)
An important indicator to note is the growth rate of coronavirus across the world as WHO Director-General points out that “It took 67 days from the 1st reported case to reach the first 100,000 cases, 11 days to reach 200,000 from 100,000 and just 4 days to reach 300,000 from 200,000”. It took just 4 more days for number of cases to reach 400,000 from 300,000. A person attacked by Covid19 starts to show symptoms in a period ranging from 5 to 14 days as per available reports. To break the transmission chain, governments in many countries are taking measures ranging from partial shutdown to complete shutdown across the nation as in India. While airlines, rail, road movements of people are stopped, in such times it’s important for these countries to keep operating the logistics supply chain across the nation for millions of people who cannot come out of their homes. Air, sea & land cargo movement, healthcare services, daily food items, electricity & water, refuse cleaning, banking and some of the News channels have been classified as essential services. In many countries, gig economy workers and e-commerce firms are also supporting the last mile delivery of essential services. Companies are also thinking out of the box, e.g. switching the use of production lines for producing alternative products that are the need of the hour to ensure continuity of essential products.
Covid19 disruption category
For ease of understanding, we can categorize potential disruptions across two dimensions: likelihood of occurrence (Disruption probability) and magnitude of impact (Consequences) as shown with examples in the image below.
Figure 3: Disruption probability and consequence framework for risk assessment (3)
Companies focus more on high probability disruptions with severe consequences; but, Pandora’s box is opened by low probability disruptions with severe consequences. Covid19 is a low probability but high impact risk; which has disrupted Supply chains worldwide. There is a third dimension to disruption matrix image shown above: disruption detection lead-time, i.e. time between knowing that an event will take place and its first impact on business. The likelihood of disruption can be reduced by being compliant to regulations and responsive to social concerns including employee health. A company can reduce the impact of disruption by preparing to deploy the response strategy in time. Covid19 is an outlier in terms of likelihood; but, it scores very high in terms of impact and disruption lead-time. Most companies practicing risk management should have had something similar on their radar screens and been able to respond better.
Covid19 disruption on Supply Chains :
Different disasters have different impacts and hence comparisons to recent impacts may not be the right approach to handle disaster. Covid19 is different from other epidemics as it’s causing a double whammy affecting both Supply and Demand. Besides Supply disruption, the Demand disruption is happening due to shut downs and increased focus on public health.
- Demand Disruptions.
a) Demand disruptions would broadly fall under following types:
- Increased Demand e.g. healthcare, online streaming
- Demand shift e.g. Commercial vehicles, furniture
- Normal Demand e.g. Daily food items (panic buying would impact this demand)
- Reduced Demand e.g. consumer goods, electronic goods (non-essential items)
- Lost Demand e.g Hotel rooms or airlines tickets
b) Some industries may have to hire temporary staff for the short term to meet the demand e.g. e-commerce, healthcare. Demand can be managed in one or more of the following ways:
- Product re-allocation based on rationing or essential/ non-essential classification
- Auctioning of the limited products
- Produce a substitute for the product
- Demand shaping by controlling the price or re-scheduling delivery time
c) Demand disruption would also cause Bullwhip effect: Amidst shut-down consumer demand for some of the products would go down so retailer would reduce inventory and order lesser from OEM. OEM would add some buffer and order lesser from supplier 1 and so on resulting in increased volatility as we go upstream. At the same time for high demand products as positive buffers are added at each stage the volatility will again increase as we go upstream.
- Supply Disruptions
a) Supply disruption can be broadly classified into following types:
- Increase in supply e.g. blue-chip stocks at attractive price
- Supply shift e.g. courier delivery
- Normal Supply e.g. power & water utilities
- Reduced supply: e.g. fresh food, fresh entertainment content
- Lost Supply e.g. production capacity of manufacturing plants
b) Supply disruption would cause many industries to re-evaluate their strategy and employee strength. For some of the industries the key challenges to address are following:
- Ability to get skilled manpower when required
- Ability to run the plant and produce at optimal levels
- Acquiring new and local suppliers
- Ability to ship products
- Unavailability of credit
- Trust & Communication challenges
c) Supply disruption would cause Reverse Bullwhip effect: When companies realize that remaining suppliers do not have enough supply they start ordering more. The supplier typically increases the price on seeing so many orders. So buyers order more before prices increase further and since the increase in price volatility is more downstream than upstream it’s Reverse Bullwhip.
Supply Chain Fulfilment :
a) Lee’s (2002) uncertainty framework can help us in classifying the supply chain risks associated with demand-supply dynamics as shown in table below:
- Efficient Supply Chain is cost effective and optimized to utilize resources efficiently and works best when both demand and supply are certain.
- Responsive Supply Chain has flexibility to readily adapt & customize itself in order to meet rising demand
- Risk-hedging Supply Chain is focused on sharing inventory and resources to manage potential risks
- Agile Supply Chain is characterized as hybrid model of responsive and risk-hedging supply chains
b) During the current crisis when shut-down has been enforced some businesses might be having ‘high demand uncertainty’ as well as ‘high supply uncertainty’ but you must also asses what the scenario would be post shut-down, e.g. Demand for electronic goods might suddenly increase after shut-down but if crisis is prolonged then some of the fashion clothing inventory may become out-of-fashion.
Measures for Businesses to address Disruptions :
If your risk mitigation strategy is not working as expected in tackling the Coronavirus disruption then it’s time to do a quick re-assessment. We can think along the following short term and medium term measures: (Depending on your requirement & strategy, some medium term measures may have to be moved to short term and vice-versa)
1) Short term measures (Now to 3 weeks) :
a) Enable People:
- Time to reflect by corporate leadership in your communication and actions. Central command should get all information: analyze and take action.
- People are the real asset for any organization and companies must support them well in these times, e.g. paid medical leaves, allowing to work from home
- People providing essential services would primarily be running the different supply chains during the crisis. Hence, they are most prone to get impacted by this contagious disease. They need extra protection and hygiene measures to ensure supply chain continuity of such businesses.
b) Assess Suppliers(4) https://www.youtube.com/watch?v=Br0FqIuWAHA :
- Assess and prioritize supplier risks
- Get visibility of Suppliers and all information for decision making centrally
- Map the complete supplier foot-print with exact locations of your supplier plants
- Know the current and planned Capacity of suppliers
- Review supplier contracts for relevant clauses e.g. ‘force majeure’
- Quality checks must be strictly complied with
c) Agile Logistics :
- Supply Chain control tower: Real-time visibility, real time analysis, real-time decisions and real-time feedback can be taken at this centralized command center. This will help in getting visibility of inventory and resources across the supply chain and helping them reach right or changed destinations within time.
- Inventory management: Know the actual Inventory at all levels (FG, WIP and RM), at all your locations and with all your suppliers and all your dealers/ distributors. Inventory would have to be shared, re-assigned and/or re-routed. Try to keep inventory levels on higher side and direct inventory to high-margin or essential products and stop to low margin or less selling products.
d) Review Customers & Products:
- Identify which Customers or Products need to be served and in what priority. (e.g. e-commerce firms can prioritize delivery of essential items)
- Update Forecasts: Demand for some products would increase and for others may reduce so a revised forecast would be needed
2) Medium term measures (2 weeks to 6 weeks) :
a) Assess Suppliers :
- Segmentation of suppliers to develop different strategy for handling different segments e.g. strategic, critical etc.
- Support critical suppliers in running their business
- Diversify and develop new local suppliers but keep an eye on fake suppliers
- Explore opportunity for 3-D printing
b) Agile Logistics :
- Secure additional logistics capacity, warehouse space if needed and optimize routes considering the shut-downs across different cities and different countries.
- Network re-design: International Supply Chains are driven more by tax structure than actual lead times or transportation costs. Coronavirus has become a bottleneck at many such transit locations where inventory is stuck due to the shut-down. A quick network assessment would help in finding out ways to move this stuck inventory faster.
- Production Planning: Know revised demand for your products, available capacity for production, available inventory at all levels and the new constraints that may have come due to Government policies on Coronavirus containment coming into effect.
c) Review Customers & Products :
- Identify which Customers or Products need to be served and in what priority.
- Decide which products need to be manufactured on priority e.g. product with higher margin
- Demand Shaping – by varying price or postponing product launch. Innovate to serve your products and services to customers online.
- Manage Working Capital focusing on (a) Increasing DSO (b) Reducing DPO (c) Reducing DIO
- Prepare for 3-9 month long disruption and its after-effects
e) Plan for Recovery :
- Develop different possible future Scenarios e.g. Quick recovery, delayed recovery or reoccurrence of coronavirus in your different markets or a global slowdown
- Opportunity for tough decisions – cut down non performing products & customers
- Observe for second wave of disruption from after-effects of Coronavirus, atleast for next 6-15 months
- Government support & incentives: Many governments are planning to support the industry in some way or other, so keep an eye on future announcements.
- Stand-by your people and stakeholders and support them in all possible ways
Disruption as a Warning and Opportunity for NICE Business
Machine learning and cloud based applied analytics tools are quite helpful in analyzing different disruption scenarios and assessing the impact of potential decisions that you may take in the future. Companies must keep a realistic and balanced approach to avoid fear and greed from becoming the key drivers in such times. Businesses are eventually about people and since Covid19 is highly contagious there is an increased emphasis on maintaining personal hygiene and following practices which help in checking spread, e.g. ‘Namaste greeting’. I think that in the Post-Covid19 world there would be an emphasis on ‘NICE’ business practices wherein NICE is :
- ‘Nature’: There would be closer evaluation of positive or negative impact of your business on Mother Nature. Actions to check issues such a global warming, ecological footprint can’t be delayed now.
- ‘I’: The health and fitness of every individual is important to ensure fitness of community and businesses. Emphasis would be as much on personal fitness as on the fitness of the business.
- ‘Collaboration’: Work from home has given many companies an opportunity to explore different possibilities of collaborating virtually. When everyone on the globe is fighting against Covid19, there is a common factor binding them and such collaborations defying geography would continue in future.
- ‘End-to-end’: Visibility of suppliers and customers (ecosystem) to ensure provenance would become critical for many businesses. This not only helps in getting buyer trust but also helps the manufacturer in evaluating various scenarios and developing different strategies accordingly. Digital tools such as Blockchain would help in establishing this provenance.
On second thought, this pandemic has given the whole world an opportunity to come together and fight for a common cause. The earth seems to have been put on reset mode and there are many videos surfacing over internet showing how wild-life & marine-life has become active again in areas left unoccupied by human beings in the last few days. Nature is reclaiming back its territories and re-balancing herself. We need to continue efforts in maintaining this balance with nature while balancing our Supply Chains in the Post-Covid19 world by following NICE business practices.
- A Coronavirus briefing with MIT https://www.youtube.com/watch?v=Br0FqIuWAHA