|School:||HENLEY BUSINESS SCHOOL|
|Date:||May 21 2020|
Within supply chain management, a distinction is drawn between efficient supply chains that emphasise cost and agile supply chains that emphasise speed. To determine the appropriate supply chain for an organisation’s product depends upon the nature of demand for it.
But why is this relevant now? You are almost certainly aware of stock outs in supermarkets for certain products such as toilet paper and flour and the shortage of personal protective equipment (PPE) due to COVID-19. If we map these types of products against Fisher’s supply chain matrix, we can start to gain an understanding as to why we are seeing this.
Fisher found that products with unpredictable demand, requirements for many changes to the product, price markdowns, short lead times and high margins would match the objectives of a responsive supply chain. On the other hand, products where demand is predictable, few changes are required, products are low in variety (standardised), have relatively stable costs through life and have low margins would match the objectives of an efficient supply chain.
Toilet paper, flour and (large parts of) PPE will have efficient supply chains. These are designed to keep inventory low, particularly as they move closer to the point of demand, to allow supply chains to maintain fast throughput and reduce the amount of working capital tied up in inventory. The inventory that is held is usually held by the manufacturer – described in this BBC piece – allowing costs to be kept low and utilisation high.
In order to replenish stocks, the manufacturer relies on information (demand signals) from downstream. However, during the pandemic, panic buying and irregular shopping patterns were so obscure, manufacturers found it difficult to respond to the information and replenish the shelves in a timely manner. As the pandemic continues, panic buying and hoarding has reduced, meaning stock outs for these items are less likely to occur.
In contrast, the demand for PPE has continued to be high and global shortages continue to affect the safety of frontline health staff. As we have seen, efficient supply chains operate at a high utilisation with low levels of inventory (inventory costs money and in healthcare services across the world, there has been a focus on driving down costs). Suddenly ramping up production to cope with a sustained increase in demand is difficult as productive capacity within these supply chains is not always available. Like many nations, the UK’s response to this supply crisis has been to encourage other manufacturers to repurpose their facilities to increase capacity for the production of PPE and other medical items, which a consortia of firms have done.
The theme of efficient supply chains being fragile to shocks would align with events of the past. For example, when the New York Times reported on the 2011 tsunami in Japan, its article implicitly highlighted how efficient supply chains, such as those operated by General Motors, are instantly hit by sudden shocks, compared with Apple who may not be affected for weeks or months due to the high levels of inventory they hold as part of their agile supply chain. Whilst this debate continues to go on in the humanitarian supply chain community, are there any immediate lessons we can learn for supply chain resilience? Based on what I have seen and read, I think the following three areas will be important for resilient supply chains of the future:
The importance of supply chain visibility for organisations has been highlighted numerous times during past humanitarian disasters. For instance, in the New York Times article, the Japanese tsunami highlighted the lack of visibility organisations have beyond their tier 1 suppliers, which had repercussions for the focal organisation as they were not able to quickly understand the ramifications of the tsunami on the entire supply chain upon which they relied. Decisions made upstream can also have cascading effects that are amplified during a crisis. For example, if an upstream supplier sources material from a single source or region that is affected by the pandemic, this single source strategy will have cascading effects on downstream organisations who ultimately receive, but do not directly source from, materials from these suppliers. Therefore, greater visibility of the entire supply chain, aided by advances in the Internet of Things (IoT), should help organisations manage supply chain risks better.
A number of manufacturers use single sourcing strategies either for strategic reasons or simply for ease. However, as we have witnessed during the pandemic, if a manufacturer single sources from one supplier or one region, they are at particular risk of stock outs if their supplier’s production halts. Given the risks of single sourcing COVID-19 exposed, we might see manufacturers move toward multiple sourcing from different suppliers and regions to mitigate any future risk.
Finally, will we see manufacturers invest in advanced technologies such as additive manufacturing (3D printing), blockchain and robotics, on top of the IoT mentioned earlier. During the pandemic, we have seen industry with access to these technologies use them to respond to unforeseen changes in their markets with greater agility. Some examples of this can be found here.
Whilst fragilities exist in existing supply chains, advances in technology provide routes through which manufacturers can build resilience into them. Whether we see any of the three approaches described here implemented in the future, only time will tell, but certainly the movements and signals from companies that we are seeing taking place, coupled with existing political tensions, suggest there may well be a shift in how supply chains of the future are managed and what the key objectives of those are.
Slack, N., & Brandon-Jones, A. (2018). Essentials of Operations Management. Pearson.