Supply chain resilience – lessons from COVID-19

It is often said that there are two ways of looking at a troubled period: lamenting and blaming events for the misfortunes brought or learning from the challenges. Among the many lessons that these times will bring us, we can highlight the importance of resilience for supply chains. The theme is not exactly new, but it is more important than ever in this adverse moment.

Figure 1 – Resilience in the supply chain is essential in times of crisis.
Image wokandapix by Pixabay

As you, who are reading this, probably know, the term resilience is borrowed from materials science and originally describes the ability of a material to absorb mechanical energy in an elastic regime, that is, the ability to deform and return to shape. original after the mechanical effort ceases, without prejudice to the structural integrity. Analogously, resilience, in our context, defines the capacity that supply chains have to “deform” according to external forces without ruptures. With COVID-19, we have an immense external force acting on global supply chains, yet it is not uncommon that many companies do not know how to make their chains really resilient, which makes this term become just a vaguely repeated word.

A resilient supply chain necessarily, but not exclusively, involves:

1) Flexibility;
2) Visibility;
3) Communication;

The flexibility of a chain depends on how malleable it is, or how easily it can be modified in a short period of time. In the supply field, this translates into the need for backup strategies. For example, if an input supplier's factory is affected by a COVID-19 outbreak, it is practically certain that its ability to meet the agreed deadlines will be compromised, the existence of a backup supplier allows for a continuous supply of inputs, preventing sales from being lost due to lack of raw materials. Another example refers to product transport and storage services: it is important to have backup suppliers or mitigation strategies with the same supplier, in which logistics service providers become very important partners in guaranteeing the service. It is essential at this moment that the supply teams do not become attached to cost reduction dogmas, for this reason their managers, who have a global vision of the company, must value the last line of the Income Statement. Having the lowest unit cost is of no use if, in a time of crisis, the supplier is unable to withstand the challenges faced by the company, causing it to lose sales and harming its bottom-line.

Visibility refers to the information available for decision-making and goes through a large interface with information systems. Most medium and large companies already have ERP, TMS and WMS systems, however the existence of systems in the company is not enough to guarantee visibility, the systems need to be well integrated and implemented. More often than not, we see systems that provide conflicting information: the ERP indicates the existence of stock available for sale, but the WMS does not allow the sale, as the stock is reserved for another customer. Does the stock exist or not? Just going to the factory to count the boxes and know for sure. Another example, very frequent in Inbound: the inability to track the transit of factory inputs. Many companies simply don't know where their supplies are and rely only on safety stocks to keep sales going. However, in the arduous scenario in which we find ourselves, this is not enough, the safety stock is designed to cover a variation of some standard deviations from the supply lead-time, leaving the company completely at the mercy of its own luck, as an easy target for competitors better prepared.

Finally, communication, and here I restrict myself to communication between the links in the chain. This topic is already present in discussions in the world of supply chain management since the papers published by Hau Lee in the 1990s describing and quantifying the bullwhip effect in supply chains, topic of other posts on this blog.

Figure 2 – Illustration of the Bullwhip Effect. Source: Slack at al (1999)

It is not uncommon to find relationships between suppliers and customers with a level of distrust between them, almost as if they were competitors. In times of “disruption”, this is not the most appropriate “approach”. It is essential for the industry to have information on the retail sell-out that sells its products, precisely to mitigate the bullwhip effect caused by the perception of demand variability. Retailers should not hide this information in order to leverage their suppliers, as they run the risk of not having the products that are actually being sold and generating revenue at a later date.

In the arid environment in which we find ourselves, as supply chain professionals, we must seize the opportunity and learn from each of the sufferings we have to come out of this stronger and prepared for a future that is certainly challenging.