Supply Chains across the globe are facing severe challenges due to the COVID-19 epidemic and its effects. With the situation in China slowly stabilizing, it is time to start thinking not just about immediate countermeasures but also about how to recover from the disruptions. While I cannot tell when things will be back to normal, I can talk about steps that can be done already now to be ready when they are.
Before we start talking about recovery, so, let me point you to some important and relevant links regarding the Coronavirus:
And the daily situation reports with all the numbers:
If you are looking for the latest, global numbers go and check the links above. Same goes for any recommendations regarding the handling of symptoms or any measures you can take to protect employees, business partners and family.
And now, let’s talk about the necessary steps to make recovery as smooth as possible!
The Main Issues
First, we have a look at the current situation and the main problems for supply chains:
- Production in China came to a virtual halt
- Shipping capacities have already been constraint by Chinese New Year
- Empty sailings resulted in an even bigger backlog of outbound shipments from China
- These backlogs result in a container shortage elsewhere as empty and not yet shipped containers are stuck in Asia
The result of this are supply shortages for everything sourced from China. In very broad strokes, that’s about it. Which, given the scale of the problem is bad enough.
The Expected Development
All supply chains are affected by this at the moment, but those depending on Chinese sourcing and production are whit the hardest. One big problem is, that everybody is affected. And this means that everybody ill come back online at more or less the same moment. And then everybody will hit production capacity shortages, container and shipping capacity shortages, difficulties prioritizing customer demand and rising costs.
This situation, which in certain ways will be more stressful for supply chain management that the current shortages, cannot be avoided. But the recovery can be made smooth and less painful with good preparation.
So, what have we to expect once Chinese suppliers are ramping up production again? Suppliers will be facing a huge backlog of orders from all there customers. This backlog is most likely badly prioritized. Suppliers will also face raw material and intermediate material shortages as tier-2 supplier will have to ramp up themselves first. These effects will ripple through all supply chains, imagine an almost limitless number of compounding bullwhip effects hitting severe shortages at every level. Scary, right? But also an opportunity, if you are aware of that and prepare accordingly you can assure availability and reliable delivery dates. And that will set you apart compared to other companies who start to figure out recovery plans on the fly.
So, supply chains have to prepare for the following points:
- Unclear prioritization of products
- Raw material and intermediate material shortages
- Lack of containers
- Carrier capacity shortages
- Increased production and transportation costs
The Supply Situation
The supply situation will be characterized by high backlogs, unreliable availability dates and unreliable production dates. One main issue is the uncertainty suppliers in China are faced with. They will have to define production schedules based on input from their various customers and their suppliers alike. Plus the general uncertainty when they can restart production due to quarantine measures.
In order to sort this out, suppliers and customers have to work together very closely. Your suppliers should provide various potential scenarios regarding production schedules, availability and capacity. Customers have to provide clear prioritization between products and product groups. The latter requires close cooperation between Supply Chain Management and sales to get the best picture available. The goal the recovery strategy should be reliability, any attempts of rushing every product as soon as possible would only prolong the disruption.
So what are the main changes for the early recovery phase compared to routine operations? As the disruption affects more or less all different products, the variation between products has to be as high as possible to recover as many different products as possible. The solution are the smallest feasible lot sizes. In the case, I would prioritize the number of distinct products over production costs. Your supplier will most likely have to manage various customers, so start working with him as early as possible on production slots and lot sizes.
As reliability is the goal, plan with conservative dates wherever possible. To do so properly requires a clear prioritization. All products that are not high priority should be managed based on conservative availability dates. But also include a certain degree of flexibility in schedules for high priority products or last minute changes in the product mix.
For high priority products, the planning is different. While you should plan with conservative dates, aim for ambitious ones. The difference offers you production windows for high priority products at the earliest possible dates. As customers are waiting for them already, the earlier they are available the better.
And how do you implement these measures? By starting the planning, data collection and discussion with your suppliers as early as possible. Implement regular calls with suppliers, at least weekly, according to you S&OP meetings. And make sure both, you and your supplier, come prepared to these meetings.
The Demand Situation
Any buffers, either inventory or time, will not be enough to cover the time until things normalized again. This will affect availability and demand across supply chains. Expect demand patterns to be totally disrupted by this. And yet, demand is a crucial input or formulating feasible, reliable and effective recovery plans. So, how do you get the best possible picture?
From close cooperation with your customers. And there it gets tricky, usually Supply Chain Management is not in direct contact with customers. S&OP is the ideal party to drive this communication. The crucial information needed from customers is:
- Criticality of products
- Smallest feasible quantities
- Acceptable lead-times
Based on this, you can use the input from your suppliers to define production plans and, as a result, reliable availability dates for each product and customer. Obviously, these plans will change. That’s why the frequency of these meetings should be higher than normal, at least bi-weekly if not weekly. The benefit is, that once the basics are established, these meetings should go rather quickly the better the overall picture is.
This will become a main bottle neck. As everybody will need capacities, availability will be even lower than usual after Chinese New Year. Carriers and Forwarders are faced by a similar, if somewhat less complex, situation s suppliers, namely when they need how much capacity and for whom. This means, that you need to know exactly how much capacity you are going to need. Remember the recurring S&OP meetings? That is where you get this information from. Luckily, carriers don’t need the exact product mix, consolidated numbers are perfectly fine and make your life a lot easier.
The input your forwarders and carriers should be providing is:
- Expected rates
- Possibilities of reserving capacity up front
Especially the latter part can be powerful tool for you, the earlier, and more reliable, you plan and reserve capacities the earlier your supply chain will recover.
The main distinction to make is between high priority products and the rest. Consider air freight for the high priority shipments in order to increase availability and cut down transit times. Plan conservatively with sea freight for the rest.
A Word on Costs
It will be expensive. Everything, from production to transportation will be more expensive than before. Be prepared for this. Good thing is, so, if you nailed down the planning as outlined above, you can reduce the costs impact. Simply because you won’t need nearly as many last minute, urgent solutions as you would without it.
A Word on People
This recovery will be, in some cases, pure Supply Chain hell. And it will also be more stressful than the current situation. For sales, things tend to be the opposite. Formulating, implementing and executing a thorough recovery plan will increase the workload for supply chain teams already now, but it will also make life easier during the recovery. It is important to remember, so, that supply chain management is a people business. And people are already stressed out and will be stressed out even more once things start running again. Add to since the general anxiety caused by COVID-19, and you know what to expect.
As leaders, be aware of that. And be ready to cut people some slack. When you are in supply chain, consider the pressure your sales colleagues are getting from customers. When you are sales, be aware that for your supply chain people the critical period is yet to come. The recovery will far easier if everybody works together. And if you are in leadership position, make sure people do work together. Also don’t forget, that supplier is equally affected as you are. And more directly so if he is one of the Chinese hot zones.
The recovery will be stressful and chaotic. The better and earlier you prepare, the easier it will be. This preparation has to involve your suppliers, your customers as well as forwarders and carriers. Sales and Operations Planning is the perfect function to drive the planning. Different solutions are needed for high priority products and the rest, it is paramount to get prioritization right. The higher the frequency of S&OP is, the better. And don’t forget that it is people that are doing all the heavy lifting.