Post-pandemic Supply Chains

Stephen DeAngelis

May 4, 2020

“As countries shut down, stock markets crumble and economic activity slows to a crawl,” writes Yossi Sheffi (@YossiSheffi), the Elisha Gray II Professor of Engineering Systems at the Massachusetts Institute of Technology, “it is hard to believe that in a few months the coronavirus crisis may be over.”[1] The pandemic may be over; however, consequences of the pandemic will remain. Sam Baker (@sam_baker), healthcare editor at Axios, notes, “Even as the number of illnesses and deaths in the U.S. start to fall, and we start to think about leaving the house again, the way forward will likely be slow and uneven. This may feel like it all happened suddenly, but it won’t end that way.”[2] Even though the economy is likely to sputter rather than spring back to life, planning for the recovery is essential. Sheffi notes, “It is not too early for companies to think about how to position themselves for a successful, speedy recovery. To do that companies must look deep into how they manage the most basic mechanisms of their supply chains and operations.”

 

Post-pandemic supply chains

 

Like Sheffi, Sean Doherty and Kimberley Botwright (@KBotwright), international trade analysts at the World Economic Forum, believe post-pandemic supply chains need to be scrutinized. They write, “Beyond the immediate need for supplies, questions are being raised about the risk inherent in current supply chain structures. Over recent decades, supply chains have globalized, specialized and become leaner or just-in-time. They are more efficient, less risky in certain areas, but potentially more exposed to a breakdown of cooperation.”[3] Randy Rankin, Global Client Development Director at Eurofins, makes a similar point. He writes, “The impacts of the COVID-19 pandemic will dramatically change many aspects of life and the way we do business. … The initial China experience with the virus provided some important lessons in supply-chain management — challenging truths and highlighting issues with the just-in-time systems that have come to be the norm. From the outset, key lessons related to knowing the supply chain were at the forefront — not just the final link but key sources of supply related to materials, having contingency plans for interruption of supply, and understanding the capabilities and vulnerabilities of critical elements within the value chain.”[4]

 

Huileng Tan (@huileng_tan) predicts, “Global supply chains are set for a major reshuffle as the coronavirus pandemic exposes the vulnerability of countries and companies that rely heavily on a limited number of trading partners.”[5] Extended global supply chains are being questioned as is a heavy reliance on Chinese manufacturing. Tan points out, when the SARS, or severe acute respiratory syndrome, epidemic broke out in 2002 and 2003, “China contributed 4% to the world’s GDP. Now, the country contributes almost 20% to world GDP.” Reliance of Chinese manufacturing has many pundits insisting manufacturing needs to be re-shored or near-shored. Willy Shih (@willyshih_athbs), the Robert and Jane Cizik Professor of Management Practice in Business Administration at Harvard Business School, writes, “The transformation of supply chains to global multistage production networks took place in a benign environment of falling trade barriers and an implicit willingness to accept increasing interdependence and the associated risks. But over the past decade, we have had a number of black swan events. … The disruption unleashed by the new coronavirus is different in that it has highlighted country risk at an unprecedented scale. Nobody could have foreseen what would happen when the world’s second-largest economy went offline and completely shut down external logistics connections. And because of supply chain tiering and the delays inherent in ocean container shipping, many companies are only now coming to grips with the depth of their dependencies.”[6]

 

Doherty and Botwright believe abandoning global supply chains would be a mistake. They explain, “It is not too soon to think hard about restarting economies and building back a resilient and responsive trade system able to cope with the next disruption whatever it may be. Decoupling and reshoring, though superficially tempting, are overly simplistic proposals. Rather, demonstrating that as nations we care about those outside our borders will strengthen our response today and secure resilient supply chains for tomorrow.”

 

David Simchi-Levi (@davidsimchilevi), Professor of Engineering Systems at MIT, suggests companies should plan for three post-pandemic scenarios. He explains, “Given the level of uncertainty, many scenarios are possible, yet it is instructive to focus on three key ones in order to develop some practical insights into the range of outcomes. These scenarios represent three different realizations of the recovery length and magnitude: the pessimistic, worst-case scenario; the more optimistic, best-case scenario; and the most likely scenario. … Given that a shock of exceptional magnitude is already happening to the worldwide supply chains, both on the supply and on the demand side, it is crucial for companies to prepare for each recovery scenario.”[7]

 

Fostering post-pandemic success

 

For each scenario, Simchi-Levi suggests five steps supply chain executives should take to develop an effective recovery plan for their business. Those steps are:

 

Step 1: Identify suppliers in affected regions and estimate TTR by scenario.


Step 2: For each scenario, estimate demand and assess which products and assembly facilities will be affected by these suppliers and for how long.


Step 3: Use the insight from the previous step to determine when and for how long you should shut down, or significantly reduce, manufacturing activities.


Step 4: Determine how to ramp up capacity by focusing on sales and operational planning. Allocate the available capacity and inventory only to products that allow you to achieve your specific objectives during the recovery period.
Step 5: Book logistics capacity as soon as possible.

 

Advisors from Marsh, a leading insurance broker and risk adviser, suggest there are 5 key areas businesses should consider in order to better quantify and manage risks.[8] Those areas are:

 

  • Quantification of the Impact: Marsh analysts assert, “Businesses should map out the potential severity and spread of the pandemic and link that to their current operations and recovery strategies. At this stage, no one knows for sure when a potential vaccine or treatment will emerge or how long global country ‘lockdowns’ could continue.” Shih agrees. He writes, “Mapping the upstream supply chain — where the suppliers are and what they provide — can give a company a timely warning if one of them goes down and which products and customers will be affected.”
  • Safeguarding Staff and Core Operations: “Management should assess how people will be impacted and provide a safe place of work,” Marsh analysts write, “especially for those asked to work in difficult circumstances. Factors such as frequent work place disinfection and the implementation of sanitization and remote access infrastructure should also be considered. Similarly, they must identify the people that are critical to operations and provide them with the necessary infrastructure and safety. Alternates for critical staff should be identified and training provided to ensure they are ready to take on additional responsibilities.”
  • Cost Calculations and Systems Resilience: According to the analysts, “It is crucial to remodel cash flows in light of reduced revenue, increased costs, and incident response spends — to ensure funds are available to continue managing the pandemic. Leaders should also take this time to stress test systems and processes to ensure they work; and then make upgrades as necessary. Any cost assumptions made should then be regularly evaluated to ensure they remain accurate.” Along those same lines, Sheffi recommends doing four basic things: 1) Increase days payable outstanding (this is the average time that a company takes to pay its bills); 2) Reduce days sales outstanding (this is the average time that receivables remain outstanding before they are collected); 3) Reduce days of inventory on hand; and 4) Defer capital expenditures and even use force majeure clauses to get out of contracts with long-term paybacks.
  • Crisis Response and Communication: “Another important area,” March analysts write, “is the implementation of response protocols and the monitoring of their effectiveness. Businesses should actively engage with all stakeholders (including suppliers and customers) to determine where support can be provided. Similarly, it is important to connect with local communities and identify how to better collaborate and support one other.”

 

Shih believes companies should also consider regionalization, develop second sources or additional safety stocks, and rethink scale and product mix. He concludes, “The disruption to supply chains is likely to continue for many months, and it will be exacerbated by fear, shortage gaming, and the difficulty of restarting logistics and raw-materials suppliers. Managers should consider the extraordinary costs they are facing and identify actions now that will improve their resilience to future shocks.” Sheffi adds, “For supply-chain managers, the task is to keep critical suppliers viable and to treat customers in ways that do not create resentment. Companies that achieve this balance should come out strong on the other side.”

 

Footnotes
[1] Yossi Sheffi, “Commentary: It’s Not Premature to Set Supply Chains for a Coronavirus Recovery,” The Wall Street Journal, 19 March 2020.
[2] Sam Baker, “We can’t just flip the switch on the coronavirus,” Axios, 10 April 2020.
[3] Sean Doherty and Kimberley Botwright, “What past disruptions can teach us about reviving supply chains after COVID-19,” World Economic Forum, 27 March 2020.
[4] Randy Rankin, “What Will the Post-Coronavirus Supply Chain Look Like?Sourcing Journal, 1 April 2020.
[5] Huileng Tan, “There will be a ‘massive’ shuffling of supply chains globally after coronavirus shutdowns,” CNBC, 20 March 2020.
[6] Willy Shih, “Is It Time to Rethink Globalized Supply Chains?MIT Sloan Management Review, 19 March 2020.
[7] David Simchi-Levi, “Three Scenarios to Guide Your Global Supply Chain Recovery,” MIT Sloan Management Review, 13 April 2020.
[8] Marsh, “How to ensure your business survives a pandemic,” Zawya, 30 March 2020.