COVID Correction, An Opportunity to Rethink Supply Chains
The world is changing due to COVID-19 and will never be the same. This may create an opportunity for many individuals and companies, but at the same time devastating to others. Deep and sweeping changes will take place for all industries and how society behaves. Some changes will be temporary, and others will be everlasting. Some of the changes that will be everlasting include online grocery shopping and education.
A key to all of this is the trend to reshape global and local supply chains.
To understand how supply chains have become so vulnerable, we need to take a brief closer look at how China became so important. China’s entry into the World Trade Organization in 2001 propelled its share of the world’s manufacturing exports from 6 percent in 2001 to 18 percent in 2012. During that same period, the US experienced a decrease from 18 percent to 9 percent. Also, in 2013, China surpassed the US as the most significant trading nation in the world. This astounding shift has created significant risk in the US supply chain on many levels.
The trade war between China and the US has made a significant dent in the growth in China but only to shift production to other Asian countries such as Vietnam, Thailand, Indonesia, and Malaysia, which offer better labor and production costs. As imports from these countries increased, so did scrutiny and tariffs.
Then the Covid-19 pandemic caused the shut-down of production facilities worldwide and put economies in a state of limbo. Economists and business owners began to wonder – what will post COVID-19 supply chains be like?
The impact of COVID-19 on supply chain management is not entirely clear, but what is clear is that companies small and large must take action to reduce their risk. This will be done by reducing reliance on others and a better and more integrated supply chain and inventory management.
Reduce Today to Protect the Future
No doubt that the spread of the virus puts into sharp focus short and long-term economic effects. Businesses are being forced to confront a protection of the safety of their workforce and their operational viability, both of which are impacted by a strained supply chain. Companies are not going to pop back to the levels of activity we are familiar with, but rather it will most likely be slow. Now is the time to properly plan, restart and create sustainable supply chains, and prepare for the future. Action across the end-to-end supply chain will be required. Here are six initiatives owners should consider:
Create Transparency with all suppliers, especially on a multipier supply chain. When a manufacturer relies on multiple suppliers for components, determine what those critical components are, their origin, and identify alternative sources. Communicate with your suppliers and consider how they have been impacted, what might be coming over the next week, months and start to see the ripple effect to you. It is essential to understand the financial wherewithal of your suppliers and the timeliness and quality of the materials they will be providing you.
With greater visibility, a manufacturer or distributor can address capabilities, industry dependencies, alternative suppliers, and market demands and adjust themselves accordingly. More information allows for greater collaboration and communication between groups to increase visibility for planning, forecasting, demand, inventory, and shipments. Reducing overall supply chain risk and increasing growth, and sustainability of the enterprise.
Estimate Available Inventory along the supply chain. Most businesses would be surprised how much inventory sits in their supply chain. While you are creating transparency determine inventory at various stages such as:
Finished goods – held in the warehouse, blocked or, held for delivery quality control and testing.
Spare parts inventory – that can be repurposed for new product production. Keep in mind that there might be a trade-off between existing customer support and maintaining new product sales.
Parts with lower-grade ratings or quality issues – that can be reworked to address supply issues. The cost to rework must be considered.
Parts in transit – determine what can be done to accelerate delivery considering customs or quarantine.
Supply currently with customers or dealers – determine if the stock can be repurchased or sent somewhere else.
Assessment of realistic final customer demand using a demand forecast and respond to the shortage-buying behavior of customers. Businesses need to question short and long-term demand signals from their immediate customers. This requires honest collaboration between the sales and operations team using industry experience, customer communication, market intelligence, and other available tools. Special attention should be paid to shortage buying as this could signal a demand that doesn’t exist. Limiting order sizes and adding flexibility to supply contracts could smooth the demand and lead to better margins, revenue, and ensure continuity of customer relationships.
Optimize production and distribution capacity to understand whether Sales and Operations can meet both financial and operational implications. Companies must move from a command and control system to one of centralized orchestration. Internal collaboration between sales, operations, and finance enables you to understand and identify bottlenecks and make necessary adjustments. As an example, sales will send a signal of demand to operations, so operations will know what is coming and can prepare. On the contrary, cash is still king and that not only physical goods moving through the supply chains matter, so does cash and information.
Operations need to understand whether they can meet the demand. Finance must be involved to determine the effect on cash flow to make sure inventory or accounts receivable will not be tying up cash unnecessarily. Several scenarios should be tested to assess different capacity levels, including a prolonged shutdown. Scenarios should also include current and future capacity implications, unavailability of key components and raw materials, those products that offer the highest strategic value and always the health and safety of employees.
Identify and secure logistics capacity, to understand current, and future capacity by mode and their respective trade-offs will enable an understanding of needs and time-sensitivity of product delivery. As companies ramp up production and make time in their value chains, they ought to consider pre-booking logistics capacity to avoid exposure to unavailability and price increases. This will enable a company to have real-time visibility to track the on-time status of freight in the process but also broader changes.
Managing cash and net working capital is now even more critical as the crises takes its course. With supply chains strained, sales slow, and margins reduced the pressure on earnings, and liquidity will become critical. Close monitoring of accounts receivable and payable and payment terms in conjunction with lowering inventory in other parts of the supply chain will free up cash. Purchases of supplies in all areas of the company should be carefully monitored, and where-ever possible should be negotiated to seek favorable terms.
Once risk factors described have been identified, a supply-chain-risk function should be established to design and implement company resiliency strategies. This strategy should become part of the culture and governance of the company. Collaboration and governance within the company and with outside suppliers will further the resilience of supply chains that can survive a future shock like Covid-19.
The ability to move materials into and through distribution paths will become extremely critical. Companies need product flow. The risk is that if people get sick and the product is stuck in those parts of the country and modes of transportation are grounded, the supply chain is impacted. Therefore, redundancy becomes an essential risk mitigation that must be managed.
The safety, health, and welfare of your people including employees and those that enter your business must be at the center. This will require that decisions be made differently, and that collaboration exists at each point in the process. Investments in a stay at home workforce are made, which has been shown to increase productivity in most cases. Investments in robotics, technology, improved more efficient and safer workflows to promote social distancing and protect the company from a potential shutdown will need to be made. Companies will also bring manufacturing closer to the source through nearshoring. Many other best practices will come up and must be based on facts of what is known at the time.
Digitization of the process will improve transparency, speed, accuracy, and flexibility of the supply management function. A single source of truth will strengthen the capability of anticipating risk, provide greater visibility across the supply chain, and manage issues that arise from growing product complexity Besides, digitization will enable the company to cluster potential suppliers and show what they have in common to manage a multi-supplier supply chain of the critical products.
This is the second installment of a series that will provide you with actionable information that you can implement immediately to create a sustainable business enterprise as a part of your culture of growth and value acceleration.
By Barry Goodman, CPA CEPA CMAA CVGA
Managing Director, Birkdale Transition Partners, LLC
Copyright: Cannot be Reused without the Author’s Permission.
Birkdale Transition Partners LLC is the objective source for those seeking business sustainability, growth, or considering a business transition. Our goal is to ensure business sustainability and to maximize the value of an enterprise before any transition or transaction. Business owners without a transition plan often are unable to sell or transfer their company at its highest value. We help them to balance a company’s transition with the owner’s personal goals. Then we work with them to avoid problems caused by the lack of planning or not to recognize what needs to be added, corrected, or modified before.
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