Back to Blog
Actions taken now to reduce impacts on supply chains from coronavirus can also build flexibility against future shocks.
Even as the immediate toll on human health from the spread of coronavirus (SARS-CoV-2), which causes the COVID-19 disease, mounts, the economic effects of the crisis are coming into sharp focus. Businesses must respond on multiple fronts at once: at the same time that they work to protect their workers’ safety, they must also safeguard their operational viability, now increasingly under strain from a historic supply chain shock. Many businesses are able to mobilize rapidly and set up crisis-management mechanisms. The typical focus is naturally short term. How can supply-chain leaders also prepare for the medium and long terms—and build the resilience that will see them through the other side?
What to look at now
In the current landscape, we see that a complete short-term response means tackling six sets of issues that require quick action across the end-toend supply chain.
1. Create transparency on multitier supply chains, establishing a list of critical components, determining the origin of supply, and identifying alternative sources.
2. Estimate available inventory along the value chain for use as a bridge to keep production running and enable delivery to customers.
3. Assess realistic final-customer demand and respond to shortage-buying behavior of customers.
4. Optimize production and distribution capacity to ensure employee safety, such as by supplying personal protective equipment (PPE) and engaging with communication teams to share infection-risk levels and work-from-home options.
5. Identify and secure logistics capacity, estimating capacity and accelerating, where possible, and being flexible on transportation mode, when required.
6. Manage cash and net working capital by running stress tests to understand where supply-chain issues will start to cause a financial impact.
Create transparency Creating a transparent view of a multitier supply chain begins with determining the critical components for your operations. Working with operations and production teams to review your bills of materials (BOMs) and catalog components will identify the ones that are sourced from high-risk areas and lack ready substitutes. Once the critical components have been identified, companies can then assess the risk of interruption from tier-two and onward suppliers. This stage of planning should include asking direct questions of tier-one organizations about who and where their suppliers are and creating information-sharing agreements to determine any disruption being faced in tier-two and beyond organizations. Manufacturers should engage with all of their suppliers, across all tiers, to form a series of joint agreements to monitör lead times and inventory levels as an early-warning system for interruption and establish a recovery plan for critical suppliers by commodity
For risks that could stop or significantly slow production lines—or significantly increase cost of operations—businesses can identify alternative suppliers, where possible, in terms of qualifications outside severely affected regions. If alternative suppliers are unavailable, businesses can work closely with affected tier-one organizations to address the risk collaboratively. Understanding the specific exposure across the multitier supply chain should allow for a faster restart after the crisis.
Estimate available inventory
Estimating all inventory along the value chain aids capacity planning during a ramp-up period. Specific categories to consider include the following:
— finished goods held in warehouses and blocked inventory held for sales, quality control, and testing
— spare-parts inventory that could be repurposed for new-product production, bearing in mind the trade-off of reducing existing customer support versus maintaining new-product sales
— parts with lower-grade ratings or quality issues, which should be assessed to determine whether the rework effort would be justified to solve quality issues or whether remanufacture with used stock could address supply issues
— parts in transit should be evaluated to see what steps can be taken to accelerate their arrival
— particularly those in customs or quarantine
— supply currently with customers or dealers should be considered to see if stock could be bought back or transparency could be created for cross-delivery
Assess realistic final-customer demand
A crisis may increase or decrease demand for particular products, making the estimation of realistic final-customer demand harder and more important. Businesses should question whether demand signals they are receiving from their immediate customers, both short and medium term, are realistic and reflect underlying uncertainties in the forecast. Additionally, direct-to-consumer communication channels, market insights, and internal and external databases can provide invaluable information in assessing the current state of demand among your customers’ customers. With these factors in mind, forecasting demand requires a strict process to navigate uncertain and ever-evolving conditions successfully. To prepare for such instances effectively, organizations should take the following actions:
— Develop a demand-forecast strategy, which includes defining the granularity and time horizon for the forecast to make risk-informed decisions in the S&OP process.
— Use advanced statistical forecasting tools to generate a realistic forecast for base demand.
— Integrate market intelligence into productspecific demand-forecasting models.
— Ensure dynamic monitoring of forecasts in order to react quickly to inaccuracies.
Making orders smaller and more frequent and adding flexibility to contract terms can improve outcomes both for suppliers and their customers by smoothing the peaks and valleys that raise cost and waste. A triaging process that prioritizes customers by strategic importance, margin, and revenue will also help in safeguarding the continuity of commercial relationships.
Optimize production and distribution capacity
Armed with a demand forecast, the S&OP process should next optimize production and distribution capacity. Scenario analysis can be used to test different capacity and production scenarios to understand their financial and operational implications.
Optimizing production begins with ensuring employee safety. This includes sourcing and engaging with crisis-communication teams to communicate clearly with employees about infection-risk concerns and options for remote and home working. The next step is to conduct scenario planning to project the financial and operational implications of a prolonged shutdown, assessing impact based on available capacity (including inventory already in the system).
Identify and secure logistics capacity
Companies look to ramp up production and make up time in their value chains, they should prebook logistics capacity to minimize exposure to potential cost increases. Collaborating with partners can be an effective strategy to gain priority and increase capacity on more favorable terms. To improve contingency planning under rapidly evolving circumstances, real-time visibility will depend not only on tracking the on-time status of freight in transit but also on monitoring broader changes, such as airport congestion and border closings.
Manage cash and net working capital
Companies will need all available internal forecasting capabilities to stress test their capital requirements on weekly and monthly bases.
Supply-chain leaders should analyze the root causes of suppliers’ nonessential purchases, mitigating them through adherence to consumption-based stock and manufacturing models and through negotiations of supplier contracts to seek more favorable terms.
Focus on resilence for the future
Once the immediate risks to a supply chain have been identified, leaders must then design a resilient supply chain for the future. This begins with establishing a supply-chain-risk function tasked with assessing risk, continually updating risk-impact estimates and remediation strategies, and overseeing risk governance. Processes and tools created during the crisis-management period should be codified into formal documentation, and the nerve center should become a permanent fixture to monitor supplychain vulnerabilities continuously and reliably. Over time, stronger supplier collaboration can likewise reinforce an entire supplier ecosystem for greater resilience. During this process, digitizing supply-chain management improves the speed, accuracy, and flexibility of supply-risk management. By building and reinforcing a single source of truth, a digitized supply chain strengthens capabilities in anticipating risk, achieving greater visibility and coordination across the supply chain, and managing issues that arise from growing product complexity.
Finally, when coming out of the crisis, companies and governments should take a complete look at their supply-chain vulnerabilities and the shocks that could expose them much as the coronavirus has.
As the coronavirus pandemic subsides, the tasks will center on improving and strengthening supply-chain capabilities to prepare for the inevitable next shock. By acting intentionally today and over the next several months, companies and governments can emerge from this crisis better prepared for the next one.
Source: McKinsey& Company
by Knut Alicke, Xavier Azcue, and Edward Barriball
