Coronavirus and supply chain

The on-going outbreak of coronavirus has highlighted how dependent many supply chains are from China. We have been evaluating China-dependency for real-life supply chains in one of our cases before, and the findings were …discomforting. If China shuts down, a large part of the world economy shuts down. 

While it’s easy to state obvious non-brainer recommendations like “Ensure priority” or “Guarantee supply” or “Seek alternative sources”, it is very different to translate those into precise and tangible actions that one can begin to work on actively right away. 

I asked our experts what kind of actions companies could take immediately, daily and weekly to protect supply chain availability. In the following, they have complied with some hands-on best practices that they have utilized to proactively secure availability under exceptional risks.

Verify your supplier operations “issues” use your supplier audit rights   

When all of the supplier’s customers are suddenly and simultaneously active to “ensure priority”, it becomes very tempting for some of the suppliers to pursue opportunistic deals by allocating products or capacity to the best-margin customer.  

After all, suppliers now have a perfectly believable excuse to tell some low-margin customers that their share of production has been limited by the virus, even if there’s no real-life limitation, and sell that share to the highest bidder. So, what tangible steps can a company take to ensure they are not opportunistically played for a fool? 

Get boots on the ground 

Most customers have contracts in place that give them the right to audit supplier operations when needed and claim hard sanctions if supplier de-commits from delivery promises. While some companies exercise these auditing or sanction rights rarely, now is a time to step it up: If supplier informs of a capacity or delivery reduction, immediately send experts of your own to supplier site to verify whether the reduction is real or opportunistic de-commitment (if it's "corona safe area"). And if it’s real, your own expert can help in coordinating and prioritizing the recovery plan with your own operations. 

Don’t be a soft target 

When suppliers seek opportunistic de-commitment potential, the ideal customers from which allocation can be cut are the ones who are: 

  1. Too polite and hesitate in exercising their rights stated in the contracts 
  2. Too slow and don’t show active and frequent interest in checking their allocation plans 

Don’t be that company. 

In case your supplier truly ends up in severe allocation challenge, you must be brave in utilizing the senior management to manage even the smaller suppliers, as the components they are delivering are must-have in your production. Be active in inviting your top management to visit the suppliers and show how much you appreciate them to persuade them to allocate needed production time to the needs you have. 

Checklist for immediate actions 
  • Check your contract if you have the right for supplier operations audit and send an expert to verify the situation 
  • Coordinate and prioritize the recovery plan with your supplier  
Checklist for daily actions 
  • Set-up extra frequent checkpoints with your key account management teams at supplier side: go through the delivery schedule for each and every production batch and shipment they have committed to you 
Checklist for weekly actions 
  • Give clear signals to the supplier(s) that you are interested and active, and if they try anything shady there will be consequences 
  • Prepare senior management to use their time for smaller suppliers if they are critical especially in this exceptional situation 

Create or update your customer 
categorization prioritize who you primarily serve  

To prepare for challenges with the availability of goods for your customers, you need to have the processes ready for making (hard) decisions with how to allocate the limited availability you have. In other words, not all of your customers should be competing for the items, but you should have a clear picking order in place. 

At simplest, this can be done based on sales volume; the higher the net sales for a customer, the higher a prioritization rank it receives. Moreover, you can base your customer prioritization on, e.g. gross margin, customer type, sales channel, other contractual commitments, or any combination of these. And just to be crystal clear - we do not recommend any kind of opportunistic approach towards your customers here.  

Additionally, when possible, negotiate more room for you to make decisions on how to utilize the limited availability. For example, you should try to negotiate longer lead times with the customers for the duration of availability issues. This way you have a better understanding of the demand earlier, and you can use the additional time to optimize your production batches to those products where demand exists. 

Checklist for immediate actions 
  • Make sure your current customer categorization for prioritization of availability is up to date or if such list is missing create one  
  • Create the process for decision making when a need for prioritization occurs  
  • Make sure there are no loopholes in the process that could be utilized for sub-optimizing, e.g., a sales unit might overestimate the sales forecast to ensure buffer availability to their customers while another sales unit might run out of stock and have actual demand that can’t be filled. 
  • Evaluate the possibility to negotiate special terms for the duration of availability issues. This should be done at least the largest customers. 
  • Make sure everyone involved in the process knows their role and responsibility within the process. 
Checklist for daily actions 
  • Ensure that the prioritization is done according to the process 
  • Work with product management and supply chain to evaluate more possibilities from your products to replace items with stock-out risk 
Checklist for weekly actions 
  • Update your estimates of the items that are most probable for having a stock-out and see what kind of actions you need to take both internal and towards customers 
  • Communicate with the customers if items they are typically ordering are facing availability issues 

Look to your stock replace items for similar ones if possible   

After the customer categorization, you should look at the availability of items you already have created. Your sales team should check if any of those items with limited availability could be replaced with another similar kind of product. Whether or not you are able to do this naturally depends on the business your organization is in, it might be impossible to replace a spear part with another, while you might be able to replace fast-moving consumer goods item with another design. 

Being proactive on this side might provide you, e.g., chance to improve inventory turn of your items from lower inventory turn categories. 

Checklist for immediate actions 
  • Scan your finished goods and especially high-runner items: do you expect to face challenges of maintaining their availability due to, e.g., delivery block of a certain component from the quarantine zone 
  • Start to earmark possible alternative options for items that are facing availability issues. Maybe you find some slow-movers that could be utilized instead of originally requested item 
Checklist for daily actions 
  • Collaborate with your customer to start fixing orders for a longer period to prevent volatility and shortages and to improve your output 
  • Work with product management and sales team to evaluate more possibilities from your products to replace items with stock-out risk 
Checklist for weekly actions 
  • Update your availability info towards customer if the item is once again available for orders 
  • Update your finished good lead times and review the changes with the customer to ensure up-to-date info through the supply chain 

Find your bottleneck(s) in production prioritize selected items  

In your production, find the bottleneck and plan your output based on that limitation. Prioritize the selected items, e.g., based on availability, demand, profitability, and access to components. These actions do not differ radically from how you should steer your operations and production in a “normal” situation. However, current special conditions require even more active planning and management of your bottleneck resources as the output limitation might be even tighter than a typical situation.  

If you are losing capacity from the bottleneck, e.g., the factory is forced to shut down for a couple of weeks, search for alternatives to expand the resources, e.g., is there another factory able to produce the same product or external source for it. 

Checklist for immediate actions 
  • Ensure you have necessary personal protective equipment available for you (production) employees 
  • Evaluate your value chain to find the actual bottleneck in current circumstances and optimize production based on the new limitations 
  • Search for possible extra capacity for bottleneck (internal resources, external sources) 
Checklist for daily actions 
  • Review actual output from the bottleneck process
  • Try pre-book freight for your deliveries to ensure logistic capacity as different channels might face dramatic limitations depending on quarantine regulations. Check other possibilities vs. your typical freight providers 
  • Update and follow-up availability of your employees, situation with quarantines might change daily while new infections appear. Maintain and adjust capacity accordingly 
Checklist for weekly actions 
  • Confirm production/purchasing plan with updated bottleneck limitations.  
  • Review your process if bottleneck exists at some new phase (e.g., some part of the supply chain is located at critical geographical areas) 

N.B. It is important not to make any changes to the demand plan for the short execution period, even when the customers and sales teams are yelling more than ever. You must give the factory and production team a chance to maximize the output for, e.g., 14 day execution period – all external changes to this will cause total output to drop due the hassle of changing all the plans, and due the complexity of managing material shortages in case of hundreds of products with complex bills-of-materials. 

What to expect in the upcoming months  

Our colleagues from Sweden forecasted the following:  

“Currently we are approaching the second phase of Supply Chain disruption caused by Coronavirus – where we will see the direct effect in the upcoming weeks when the expected influx from China has been reduced and companies will be running out of stock locally.  

In the next step it’s probable to see severe limitation in transport capacity that will affect not only Chinese flows but also within and between countries in Europe. In addition, repercussions due to limited export flow will be visible and escalate further. Therefore, not only Q2 will be challenging but most probably the major focus throughout 2020 will be to recover from these disruptions.” 

If you need any help with your supply chain, don't hesitate to contact us. You can, e.g., book a meeting with me:

   
 
      redline (1) Author
Mikko Myllys is Capacent's sales and marketing director in Finland. Mikko holds over 15 years of experience in working capital management, management consulting and change consulting from various industries.