This is an edited excerpt from the first ISCM Virtual Town hall Series for the MENA region. As the world grapples with the uncertainty of a virulent, pandemic that has forced businesses to suspend operations and consumers to alter their consumption, ISCM brought together experts from the region to understand the issues and challenges faced by supply chain professionals in the region. You can watch the entire interaction on our you tube page
The short term and long term impact of covid-19 on supply chain planning
In most parts of the world, the current pandemic began by end of March. At this point, most businesses focused on protecting their business over the next two to three months, and ensuring supplies either through local Sourcing of global Sourcing. One of the biggest challenge has been – how to deal with the sharp downturn in demand. Companies had to share these figures across the supply chain and ensure availability of raw material as per the new plan. Companies had two objectives – survive today and plan for future. Survive today is more about managing cash. Most businesses today are concerned with managing cash flow. If sales fall by 20 to 50percent, especially in a long in lead time supply chain, it will cause a severe strain to cash flows. Another question that firms will need to address coming out of the crisis is – what would be the future of supply chain.
Unfortunately, as we look ahead, there is no one size fits all model and firms will have to work closely with their marketing and sales to define the future supply chain
Unfortunately, as we look ahead, there is no one size fits all model and firms will have to work closely with their marketing and sales to define the future supply chain. In a country like UAE, where most firms do not have production facilities, and the lead time of procurement is around three months, firms typically have a stock in hand of at least three months. This of course depends on the sales cycle of the product. When the demand drops by 50%, the stock that would cover three months will now cover six months of sales. Firms which had purchased raw materials as per the original plan would need to be alert about the changes on the ground. At a time when there is no historical precedents to fall back on, firms need to create cross functional teams to understand the implications and chart the way forward. The indicators used prior to the crisis may not work as we come out of the crisis.
When the pandemic struck, there was a huge rush on malls and retail outlets, where people picked up whatever they could. The first shock was – the customer was not looking into any brand but on whatever was available. Firms were trying to deliver their products to the point of sale as fast as they could from their inventory. For the forward supply chain, it was a big challenge as the pandemic started. The scenario for the back end supply chain was quite different. Companies had to cover up their inventory for a longer lead time. Companies that had a production facility in Dubai had the challenge of procuring the raw materials at the time when supply chains were shutting down. The strategy that firms adopted was lean inventory for the shorter Lead time products. These items were procured on a need to basis, to conserve cash. For long Lead time items, companies built inventory. And to deal with cash flow challenges, companies had to extend their credit period. The close ties between companies and their suppliers helped them during this period.
The first long term impact of the pandemic is the change in consumer buying behavior. The earlier practice of dropping in on a shop has now moved online. E-Commerce is definitely looking up, and that is where the next supply chain challenge lies.
Fortunately, for Sourcing teams, the pandemic began around Chinese New Year. Since most Chinese firms close for the Chinese New Year, companies had built up their inventory. However, instead of resuming operations, Chinese firms went into a lockdown, putting pressure on supplies. Companies immediately started looking for alternate suppliers in other parts of the world. This did put a pressure on the alternate suppliers – they had their constraints in expanding production to meet the new demand from UAE. In addition, raw material prices started increasing putting pressure on gross margin. As the pandemic progressed, and lockdown imposed, companies found it difficult to process orders, and suddenly short lead time products required long lead Time. At this point in time companies which had close relationship with their suppliers managed to get their requirements fulfilled.
Under the current circumstances, external variables play a very important role in demand forecasting. Demand planners need to be able to pull apart their existing models and put in new variables
Due to lack of visibility across the supply chain, most companies were not aware of the challenges faced by nodes down the supply chain, increasing Sourcing risk. Especially in the Pharma sector, 70% of the active Pharmaceutical ingredients come from China. Therefore,even if you shift your any other country you need to realize that the source or active ingredient still comes from China.
On the other hand, distribution companies faced increase in demand for one set of products and a decline in demand for others. They had to balance this. Those who could identify this early on, spoke to their suppliers, and understood the risks in their supplies. To mitigate this risk companies could not rely on an algorithm, this was the first time the world was seeing such a large scale disruption. Supply chain managers understood the risk by talking, understanding, and estimating what needs to be done. The saving grace was that due to the fall in demand, inventory in hand is sufficient cover a longer period than during normal times. The other side of the spectrum is the short shelf life products like food and beverages. Given the short shelf life of food, where today there seems to be adequate stock available, companies may suddenly find themselves facing supply shortage, as the expiry date of inventory approaches. Companies would be faced with both supply shortages and dead stock. Supply chain professionals need to develop long term vision of the situation 6-12 months down the line. Will the products in demand today, like the sanitizer, be in demand 6-12 months down the line? Supply chain managers should be worried about what is going to hit them October onwards. Clearly supply chain challenges are set to increase.
Resilience of Supply Chains
We need to break up the robustness of supply chain into two parts. The first is – are you capable of responding to customer’s changing needs – either from the B2B or B2C perspective – at this moment. The second is – what should companies do to prepare for an uncertain future. These decisions are not just supply chain decisions, but business decisions. The head of supply chain should be able to tell the management about the impact of a decision on cash flow. They also need to discuss with the sales teams their perspective on the ground. At the same time, supply chain managers should engage with entities down the supply chain probably moving to tier 3 or 4, to understand their challenges. There is no established statistical model that can be relied on, and supply chain professionals have to get down to the task of really understanding their supply chain. Companies like Nestle source from across the globe. Sourcing is also affected by what happened in Europe North America and South East Asia. Asia came back very fast, while Europe took longer to come back and suppliers in North America are actually yet to come back. Nestle supply chain managers need to prioritize the products they absolutely need to have in stock. They work closely with the sales team to identify these products to ensure their availability.
The impact on demand planning and the planning process
Jack Maa once famously said,“I feel like a man sitting on a blind tiger.”The current situation is pretty much the same. The demand from consumer is unpredictable. Products which were not thought of as a Priority – like exercise equipment – sold out very quickly during the early days of the pandemic. Many companies put in a subpar performance due to the lack of forecasting tools. The tools were configured for a normal market condition, and was not suitable for the current situation.
What is clear today is companies cannot control demand. They need to build individuality and flexibility in the supply chain and production to quickly adjust to changing demand patterns
For example,a mall in Dubai has announced that parking will be restricted to 30% of the available space. This will have a huge impact on sales. These are the kinds of external impact supply chain managers now need to factor, but is not available in the existing models. Under the current circumstances, external variables play a very important role in demand forecasting. Demand planners need to be able to pull apart their existing models and put in new variables. Demand planners have a huge challenge on their hands if the systems are not capable of handling this.
Another example – Bateel has backward integrated right up to the farmer – they own farming land, the processing units, and therefore are in control of the entire supply chain. They could easily change the production based on the emerging demand patterns.
The demand moved from luxury products to essential commodities. Demand planning became a communication channel moving information between the market, production, and logistics functions.
For example, Dabur moved from styling products to essential products. To match the demand and supply, Dabur move to a daily S&OP process, closely interacting with the distribution chain to understand the uptake of each individual product, prioritize manufacturing, and supply it.
The pandemic has led to the evolution of two types of consumers – one is the price sensitive consumer who is not particular about brands. If he is getting the product at a lower price, he will go for it. The second type of consumer is cash rich, but is delivery sensitive – more worried about how quickly can he get the product.
Over the past few months online has become a much bigger portion of the business moving up significantly over what it was even three months ago. We are now in a phase of supply chain transformation with no history to look at in terms of consumer behavior. It is now important to learn as you go. And no one is sure if this trend will sustain into the future. For example, managements need to find answers to questions like – if E-Commerce will be 50% of sales, should companies focus on opening more retail joints? Should they invest in brick and mortar shops? Companies need to identify the behavior changes that will stick and those that will revert to old normal once the pandemic is over. And there is no crystal ball.
Planning demand and aligning the distribution for a better supply chain
What is clear today is companies cannot control demand. They need to build individuality and flexibility in the supply chain and production to quickly adjust to changing demand patterns. The supply chains have to work on a number which is uncertain. For example, in Bateel, the S&OP meeting which was held once every 2 weeks is now done twice a week. Another challenge is in new product innovation. For example, in Bateel, loose dates is a fast selling item. However because of covid-19, people do not like products that may have been touched by others. Bateel came up with the product – 1 kilo bulk pack for Dates, and launched it within 2 months.
There should be higher level of senior management intervention at this point of time. This is also a time for companies to re-evaluate the distribution network. There are two aspects to it – one is production-distribution and the other planning. Scalable solution combined with automation will be a key enabler to create agility. But agility comes with cost. Nobody wants their operational expenses to go up. A key element here will be the capability of the people in the organization. The second aspect is the use of big data in machine learning for demand forecasting. Going forward, the established matrices will be inadequate – especially for planning. Probably it’s time to move to the new metric – net promoter score – to measure the effectiveness of the supply chain to meet customer expectations.
Technology has enabled the demand planner to move to a data driven decision making. Today there is a lot of information available on consumer buying behavior right from the point of sale. Artificial Intelligence and machine learning will help demand planner make sense out of this huge amount of data. Going forward, Supply chain transformation will be very closely linked to business performance. ♦♦♦♦♦