Supply Chain Disruptions
I was prompted to write this blog post because of emails on LinkedIn like this one below:
"Hello sir - Good morning I am a Planner in xxx industry. I need to do some discussion on Import purchase order which we gave to Japan & Thailand.
So should we maintain that order or cancel them. In this situation what needs to be done. Please suggest."
I don't need to tell you why, at the moment, supply chain managers with more than a decade of experience in their respective industries are four sheets to the wind with respect to supply chain planning.
Clearly, they are receiving no guidance from their COOs or other top managers and are lost as to how to manage a severely disrupted supply chain through one of the worst crisis in their lifetime, so far.
These are not easy questions to answer. And, you cannot blame the COOs and top managers either because they do not have a magic crystal ball.
However, the situation is so common, across the board that it is more useful to write a blog with a broader answer to the overlying question - how to cope with the supply chain disruptions resulting from the COVID19 crisis.
Obviously, I do not have a crystal ball for any industry either, and in any case, supply chain planning is not about being able to predict demand, and place orders.
It is about being able to manage demand and supply in time and space to be able to somehow achieve some sort of mating of the two.
With this in mind, and with my ability to see around the corners and look deep within the key drivers of demand chains and supply chains, here are a few guidelines that are applicable in a wide range of industries.
The Crises Are Not Yet Over Supply Chain Disruptions
Covid-19 is only the latest crisis, and it is far from over. Even when it gets over, in the aftermath, there will be multiple crises in the offing, some economic, and others social-cultural in nature.
I say this as a precursor to the rest of the discussion only because the supply chain disruptions are likely to last a long time and perhaps accentuate due to the Bull-Whip effect.
The term Bull-Whip effect, easily demonstrated by the beer game formulated at the MIT, postulates that any disturbance in the supply chain is likely to increase in amplitude as it travels up or down the supply chain in time and space.
The likely practical effect of this will be that if you have noticed demand shortfall in the short term, you need to be even warier of the long term demand behaviour.
In other words, the least important part of the supply chain - demand management - will get the most attention going forward. I will talk more about that later but let us first briefly get a handle on the supply chain disruptions we are all facing.
Supply Chain Disruptions Are All Around Us
Even though international shipping kept running all through the crisis, the number of shipments and the volume of shipments dropped dramatically.
Also, in the early days, the land-based transportation elements of the multi-modal shipments were severely disrupted by the lock-down.
Queues of trucks at international borders and outside ports were symptomatic of this. Cargoes piling up in ports, and in warehouses was also symptomatic.
In many places, even the ships were put in quarantine as long as two weeks before they were allowed to dock.
Ship crew changes are still experienced severe disruptions in almost every traditional crew change port in the world.
The result of all this disruption is that goods are strewn in unusual places all around the world. Shipments are delayed beyond reasonable times, sometimes even unreasonable times.
Shipments from China, the pre-COVID19 supply chain hub of the world, are even more severely affected, and likely to remain so for a variety of reasons that are obvious but worth exploring in a separate article.
Temperature, humidity, stowage, and many other conditions of carriage are being breached on a daily basis. In many cases the consignee, or shipper will not even come to know what transpired with their cargo till it is too late.
Actual or consequential losses are enormous. Many shippers and consignees are not fully aware of the remedies available to them.
Fine print in the contracts of carriage is suddenly starting to get attention it deserves, albeit only in progressive corporations.
People are starting to treat the contract of carriage as an important document, and have considered the implications of blindly signing it, like they click ok on software end-user licence agreements.
Today, the situation is such that if you place an order with your supplier in Germany or China, you don't know when the product will actually turn up, irrespective of the promises of the salesmen from the freight forwarders.
Freight forwarders are at the mercy of the shipping lines, who are at the mercy of the declining shipping volumes for managing the sailing schedules.
Airlines are faring no better, and a great majority of airlines teeter on the verge of bankruptcy. Shipping lines may feel insulated because of market concentration, but that is likely to give way if the declining global trade does not pick up again.
How can you plan supply if your transportation is such shambles. The situation with cargo pileups is improving gradually as the backlog clears, but just the fact that shipping industry workers are not even classified as essential workers so far shows us that most governments today are still totally clueless about how global supply chains operate, even though, to appear sophisticated, politicians keep repeating the mantra supply chain, supply chain, supply chain at the drop of the hat.
Internationally trading ships have become global pariahs despite crews being in lock-down on their ships for months, and, despite absence of any cases of COVID19 on board the ship. If that is how you treat the people who bring essential supplies to you, how likely are they to sign up for another contract?
Why Demand Management Will Become Critical?
Reverting to the big question asked above, let us first have an agreed understanding of what is demand management and how it is currently carried out.
In most companies demand management, if it is carried out at all, consists of using statistical analysis of historical demand patterns to forecast future demand, with occasional application of market intelligence (from sales staff). This information is then used to plan supply (either from production, or purchasing) to generate sales.
Attempts to modulate (or actually 'manage') demand were largely shunned in the past 2 decades for the simple reason that most companies were, in practice, demand takers due to excess supply market competition, as well as, the presence of the substitutes.
In other words, we have become used to a 'demand constrained' supply chain management model in the past three decades.
In many commodities we are moving towards a 'supply-constrained' supply chain management model - think about all the recent shortages of toilet papers, staple goods and other panic buying.
Is The 'Supply Constraint' Temporary, Sporadic, Or Permanent?
Temporary supply constraints can throw an inexperienced management team into panic mode. It is akin to the first time a sailor encounters a tropical revolving storm (TRS).
Sporadic supply constraints are even more debilitating. It is akin to the permanent hangover you get from weeks of sailing through stormy seas of roaring forties.
On the other hand, permanent supply constraints are easier to manage. Once you realise this is the way of the future, you know that the solution lies on the demand management side of the supply chain equation. It is like sailing through the placid waters of Bering Straits - not warm and comfortable, but something you can get used to.
If I am giving you an impression that a global winter is setting in for commercial trading, you are not far from my impression of truth.
What About The Industries Where The Demand Has Collapsed?
There are also companies out there where demand has totally collapsed. Some of these companies have laid off up to 40% or more of the their entire workforce. The remaining workforce is anxious and stressed. The temporary fillip in profitability to make up for lost sales by workforce reduction is starting to take a bite.
The bigger question is whether the demand is going to pick up and go back to the pre-COVID19 level again. In other words, is the 'demand constraint' temporary, sporadic or permanent.
Every industry is different. Closing of gyms has suddenly pushed up the demand for the golf courses. Some of those new golfers will end up taking up golf for good, and may cancel their gym memberships in future.
Closing of sailing clubs has led to growth in a number of solo sports such as kayaking and canoeing. Again, will all these new kayakers and canoeists come back to sailing?
What I want to convey here is that as the work patterns, life patterns and leisure patterns shift to a new normal, a new demand pattern will emerge for every industry.
What Are The Likely Emerging Scenarios In Your Industry?
Even your sales force will be hard-pressed to answer this question. That is the reason most management teams are four sheets to the wind. Fresh thinking and flexible supply chains will assist in finding your solutions. Following points can help.
What Is The Underlying Demand Pattern, And Supply Pattern?
Some demand is clearly discretionary. Other is mandatory. Everyone has to eat, sleep and work. Some demand is sticky (habit-forming). Some demand is easily substitute-able. This is not the time for hallucinating your demand patterns, it is the time for keen observations of the emerging 'new normal'.
On the supply side, the situation is even more complex.
Because, demand is easily observable while supply patterns are confidential commercial information subject to information gaming. Individuals hide their demand pattern only for privacy reasons, and have limited capability to hide it from the sellers in the market place.
Producers may choose to hide information about market glut from each other, or from the buyers, to the extent that they can. They may also exaggerate information about supply shortages to push up the prices.
That is why it is critical to keep track of changes in the supply patterns in your core supplier markets so that you can take action in time. I repeat below a story from my book The 5-STAR business network which is illustrative:
Mobile Phone Market Story
Two stalwarts in the mobile phone industry in March 2000 were equally impacted by the same event - a lightning fire in the chip manufacturing plant of their common supplier, Philips, in New Mexico.
Both Nokia and Ericsson experienced business disruption to an equal extent as a result. Fire damage to the stocks was extensive.
More importantly, the manufacturing capacity was damaged, and it wasn't easy to estimate the time for repairs.
Nokia had invested months, if not years, in creating and perfecting a robust and responsive supply chain, while Ericsson's supply chain was relatively a middle-of-the-line affair that worked well when things were good.
After the fire, Nokia was able to see the full impact of the chip shortage on its own business, as well as the entire industry with a lot more clarity than Ericsson, and even Philips.
Moving quickly, it activated other parts of its supply chain to shore up supplies, to redesign some of the chips to manufacture them in other plants, and to take pre-emptive steps in the business network.
Ericsson let the situation evolve at its own pace and made decisions more re-actively.
The resulting gain in profitability and market share for Nokia and the loss of these for Ericsson tipped the balance of the industry to an extent where within a few years Nokia pulled far ahead of the Ericsson which never caught up with its erstwhile equal rival.
Of course, the very same supply chain let Nokia down in its rivalry with Blackberry and iPhone, who managed their supply chains much more adroitly for leading innovation that any other company ever did. But that is a different story, also told in the same book.
How Can You 'Manage' Both - Demand And Supply - Simultaneously?
Above story will have already given you a lot of things to think about in terms of managing the demand and supply simultaneously.
The most dangerous thing is rigid, dogmatic thinking that assumes that somehow demand and supply are fixed in time and space.
Nothing could be far from the truth. In reality both of these are flexible and manageable. They respond to the right stimulus. Creative thinking can modulate both of these so you can meld them together in real-time.
What Are The Risks? Which Risks Your Management Is Willing To Bear?
If dogmatic, rigid thinking is the most dangerous thing in these circumstances, then the most useful thing is the lateral, creative thinking about a variety of scenarios that can emerge and how to prepare for these. Lateral thinkers like my friend Tony Fedorowicz will be invaluable asset to any company in these circumstances.
A brilliant economist and game theorist once said - You cannot make a list of everything you cannot not imagine.
That is why war gaming and scenario planning workshops are so powerful for most corporations.
And yet, most boards charged with corporate governance, and supply chain governance, do not make time for supply chain wargaming, even in these extremely challenging times.
Let me give a tiny example to make it more real. Consider the email at the start of this blog. The supply chain planner is concerned about the import orders he has placed to suppliers in Japan and other countries. He is likely facing a collapsing demand. He is also likely facing a supply disruption due to shipments being held over in ports. Wargaming, even in this simple scenario, can get quite involved.
What are the various demand scenarios he could face -
1. Excess demand due to people staying at home and using more of his product for home renovations.
2. Collapsing demand due to fall in disposable income and resulting fall in discretionary spending
3. No change due to a combination of two above
4. Extremes of 1 or 2.
If he believes 1 is the likely scenario and orders excess import supplies he could be stuck with excess stock. How would he manage that risk?
If he believes 2 and orders less import suppliers, he would have supply shortfall. What are the risks - and how would he manage that risk?
In this short article, I am only giving you a small flavour for wargaming, which in reality can get very intense and involved exercise lasting several days.
A supply chain misstep can easily wipe out the profits for a quarter, a year, or even kill the company. That is the reason the person is sending an email for more guidance.
His management team, and board probably lack supply chain savvy to think forward and reason backwards (the hallmark of wargaming, as per Dixit and Nalebuff) and left him to make the decisions. And, he is probably well aware of the risks, but lacks authority and influence at top to get them to hear him out so that they can understand and accept the risks involved.
This is potentially an explosive scenario for him, as well as, for the company, akin to what happens with the so-called rogue traders that show up in investment banks from time to time.
In The Short Term Do This
Take stock of the situation, and take control of the situation.
Get all the details of where exactly did your cargo sit for how long? Where were any conditions of carriage breached? Who is liable? How to claim liability? From whom?
Do not be swayed by the false assurances or interpretations of the potentially liable parties. In other words, assert your rights and claim your dues where you have already paid the price.
Further still, make sure future contracts of carriage and other supply chain contracts are not just standard forms put in your face by the carriers. You have rights to negotiate your rights in the contract itself. Pay particular attention to exclusions, and liabilities for actual and consequential loses.
You may need specialist advise from your corporate counsel, and/or a legal advisor in many cases. Do not hesitate to get it, because it is money well spent, especially when you spend it well in time.
What Will Your New Supply Chain Model Look Like?
No computer can model all the complexity and scenarios that emerge from the wargaming exercise. Yet, such modelling and simulation are necessary for the decision-makers to be able to weigh the options in their minds.
A general consensus should emerge about the options and the preferred options as a result of the wargaming and scenario weighing - especially if it is accompanied by heavy mathematical modelling.
We have seen every time that this is the case where all the experience and pragmatism on the board becomes incredibly valuable. A new supply chain model should emerge - even if entails eternal vigilance.
Intel CEO Andy Grove is reputed to have once said that "only the paranoid survive." Incorporate world, that time has now come.
How Do You Communicate The New Supply Chain Model To The Top Management And The Board?
If your top management and board are not involved in the exercise above, it will be very hard sell. That is the reason to involve them from the beginning. Even if they are involved you will need to keep them in the loop given the volatility of the situation.
Work out a regular reporting and decision-making schedule. In many places, these are being called supply chain boards - which directly report to the actual boards of directors.
What Supply Chain Governance Protocol Does Your Board Have In Place? How Does Your New Supply Chain Model Fit In With That Supply Chain Governance Protocol?
This brings us to the final question we will address in this article. Most companies are severely deficient in supply chain governance for the simple reason that most boards are still unclear about what is supply chain governance, and why it matters. You can read this article to clarify these all-important questions.
Without appropriate supply chain governance protocol, effects of a one-off exercise are likely to fizzle out in face of continued crises, volatility and complexity. You are likely to be back to square one in a few months time.
I have written extensively about supply chain governance and a lot of that material is relevant here. You can search this website for more information in case you have not read that material.
Carried out properly, the above steps should stand you in good stead. I emphasise the continuous nature of these crises and the required responses.