My Take on Coronavirus and the Supply Chain - Supply Chain Council of European Union

In case you haven’t noticed, something like 9 out of 10 articles on supply chain in recent days have something to do with the impact of the dreaded coronavirus crisis.

OK, I may be exaggerating a bit, but it sure seems that’s about the ratio. I’ve read quite a few. Most were bland and boring.

Gilmore Says….

Among the eye openers from this crisis is the news that the Western pharmaceutical industry is hugely dependent on finished products and ingredients from Chinese factories.

What do you say?

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So the supply chain industry needs yet another coronavirus article like the proverbial hole in the head, but I couldn’t resist the opportunity to see if I could find anything interesting to add to the discussion.

Let’s start with this.

Supply chain risk management rose in prominence let’s say about 20 years ago. Then, we started to see some basic models for deciding what risks to mitigate, as shown in the graphic below. Those basic models – still in widespread use – have two dimensions, the likelihood of a given event, and the corresponding financial impact.

Naturally enough, those models drive companies to focus on risks that are high probability and likely to have a big impact. Low likelihood, low impact events can mostly be ignored. What to do with those risks in the middle create the tough questions.

So where would a global virus breakout fall on the basic model framework? Probably nowhere. It is what Dr. David Simchi-Levi of MIT calls one of the “unknown unknowns” – and it is not clear what to do with those risks in the existing frameworks (though Simchi-Levi came up with a very smart approach we covered several years ago that I don’t have room to cover in this column).

Another observation is that while risk management has become a core supply chain discipline, the emphasis tends to wane and wax depending on events. Until this current crisis – if it really is a full blown crisis – the last major supply chain risk management inflection point came with nuclear reactor disaster in Fukushima, Japan in March of 2011.

That event – another unknown unknown – caused hundreds of Japanese factories to close for weeks, putting a big hit on output from companies across the globe, many of which had no idea their supply chains were dependent on tier 2 or tier 3 suppliers they didn’t even know existed.

It also generated one of my all-time favorite supply chain quotes from mighty Toyota’s head procurement, who said, paraphrasing from memory just a bit, “We thought we had complete control of our supply chain. It was an illusion.”

I am going to come back to the key point here at the end of the column.

What is interesting to me is just how quickly the coronavirus impact is felt even in areas well outside the few hot zones. For example, Maersk Line, the largest ocean container carrier, has canceled more than 50 sailings from China to the rest of the world since late January. That represents hundreds of thousands of containers full of goods and components that will be significantly delayed getting retail shelves or factory floors.

Airlines are now massively cancelling flights into and out of China. The same thing is happening now for flights to/from Italy, where a modest virus outbreak has occurred.

It won’t take a whole lot more for global commerce to basically shut down – and what happens then? Economic chaos at minimum, that’s for sure.

Among the eye openers from this crisis is the news that the Western pharmaceutical industry is hugely dependent on finished products and ingredients from Chinese factories. If that supply chain is cut off for any extended period, you may soon not be able to go down to CVS to pick up your prescriptions because the drugs just won’t be there.

The Wall Street Journal last week wrote an interesting article noting how much the supply chain world has changed since 2003, when there was another but relatively contained coronavirus outbreak in China. Keep in mind China only joined the World Trade Organization, which dramatically expanded its market reach, at the end of 2001.

In 2000, China’s share of global trade was 1.2%. It was 34% in 2018. Interestingly, the rise has been much less in US trade, where China’s share has grown from 2.1% in 2000 to a much smaller 7.2% in 2018, but that still more than tripled over the period.

So when China’s supply chain get a cold – in this case unfortunately in a sort of literal sense – the rest of the world might get pneumonia.

The Journal piece includes the story of Mostafiz Uddin, who owns a bluejeans manufacturer in southeastern Bangladeshi. He said he has been unable to fulfill an order for 100,000 women’s jeans because he can’t get the fabric he needs from China.

“I am just waiting,” he said. “We have no option.”

Or consider Australia, still heavily dependent on exports of coal, iron ore, wheat and other commodities to fuel its strong economy. China accounted for nearly 40% of Australia’s exports in 2019. Coronavirus is a huge risk to its economy even if it doesn’t get a single case.

This with, if I may daresay, at least for now what is a relatively small level of cases outside the worst areas of Wunan city in China. If this thing really does become something like a pandemic, the costs will monumental.

Dr. Yossi Sheffi, also of MIT has written a couple of excellent books on supply chain risk management (e.g., “The Resilient Enterprise”), so he comes with some credentials in terms of offering thoughts on the current coronavirus crisis.

Writing recently in the Wall Street Journal, Sheffi offers five actions companies should consider right now:

1. Set up a central emergency management center: At this point it can be virtual but should include a clear roster of participants with clear decision-making rules in case of a pandemic.

2. Review the company’s product portfolio and the customer base in order to set priorities: If capacity is reduced, there will need to be rules for which products should be built and which customers should be supplied first.

3. Review suppliers: Who makes critical parts? Are there alternate sources? What is the suppliers’ inventory status?

4. Plan for operating to maximize cash flow rather than profits.

5. Maintain communications with federal and local authorities, as well as Chinese and other Southeast Asian friends and colleagues on the ground.

I am going to focus on number 3, relative to the point I said I would come back to regarding Toyota – and that is the need to map your supply chain at multiple tiers, an exercise Toyota undertook with vigor after Fukushima – but never could fully complete.

But such an exercise will prove very valuable in the event of the next unknown unknown in terms of rapid understanding of potential disruptions. That mapping can also uncover risks a company didn’t know it had – for example, as many companies found in 2011, that in some cases dual sourcing to reduce risk was for naught because both of the two suppliers were dependent on the same single source for a part or other input.

So what’s the takeaway from all that? I would say that most of our risk models are still not sufficient for the job – and too much reliance on China is a very risky proposition indeed.

What are your thoughts on coronavirus and supply chain? Let us know your thought at the Feedback section below.

Your Comments/Feedback

Srihari

Senior Consultant, Infosys

Posted on: May, 22 2016

Great article. I am a little suprised not to see BNSF in the mix while I understand their financial mode/operation is a little different.

That would only give a complete perspective with all the players in the pool.

Mike O’Brien

Senior editor, Access Intelligence

Posted on: May, 26 2016

Surprised to see Home Depot fall off the list; thought they were winning with Sync?

Julie Leonard

Marketing Director, Inovity

Posted on: Jun, 27 2016

Using the right tool for the right job has always been a best practice and one of the reasons, we feel, that RFID has never taken off in the DC as exponentially as pundits have been forecasting since 2006. While these results may seem surprising to those solely focused on barcode scanning, the adoption of multi-modal technologies in the DC makes perfect sense for greater worker efficiency and productivity.

Carsten Baumann

Strategic Alliance Manager, Schneider Electric

Posted on: Aug, 19 2016

The IoT Platform in this year’s (2016) Hype Cycle is on the ascending side, entering the “Peak of Inflated Expectation” area. How does this compare to the IoT positions of the previous years, which have already peaked in 2015? Isn’t this contradicting in itself?

Editor’s Note:

You are right, Internet of Things (IoT) was at the top of the Garter new technology hype curve not long ago. As you noted, however, this time the placement was for “IoT Platforms,” a category of software tools from a good number of vendors to manage connectivity, data communications and more with IoT-enabled devices in the field.

So, this is different fro IoT generally, though a company deploying connected things obviously needs some kind of platform – hoe grown or acquired – to manage those functions.

Why IoT generically is not on the curve this year I wondered myself.

Jo Ann Tudtud-Navalta

Materials Management Manager, Chong Hua Hospital, Cebu City, Philippines

Posted on: Aug, 21 2016

I agree totally with Mr. Schneider.

I have always lived by “put it in writing” all my work life. I am a firm believer of the many benefits of putting everything in writing and I try to teach it to as many people as I can.

This “putting in writing” can also be used for almost anything else. Here are some general benefits (only some) of “putting in writing”:

1. Everything is better understood between parties involved. There are lots of people types who need something visual to improve their understanding.
2. Everyone can read to review and correct anything misunderstood. This will ensure that all parties concerned confirm the details of the agreements as correct. This is further enhanced by having all parties involved sign off on a hard copy or confirm via reply email.
3. Everything has a proof. Not to belittle the element of trust among parties involved, it is always safest to have tangible proof of what was agreed on.
4. There will be a document to refer to at any time by any one who needs clarification.
5. The documentation can be useful historical data for any future endeavor. It provides inputs for better decisions on related situations in the future.
6. This can also be compiled and used to teach future new team members. “Learn from the past” it is said.

There are many more benefits. Mr. Schneider is very correct about his call to “put it in writing”.

Sandy Montalbano

Consultant, Reshoring Initiative

Posted on: Aug, 24 2016

U.S. companies are reshoring and foreign companies are investing in U.S. locations to be in close proximity to the U.S. market for customer responsiveness, flexibility, quality control, and for the positive branding of “Made in USA”.

Reshoring including FDI balanced offshoring in 2015 as it did in 2014. In comparison, in 2000-2007 the U.S. lost net about 200,000 manufacturing jobs per year to offshoring. That is huge progress to celebrate!

The Reshoring Initiative Can Help. In order to help companies decide objectively to reshore manufacturing back to the U.S. or offshore, the nonprofit Reshoring Initiative’s free Total Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring. http://www.reshorenow.org/TCO_Estimator.cfm

Robert

Transportation Manager, N/A

Posted on: Aug, 30 2016

Good article! I am sending this to my colleagues who work with me. We have to keep this in mind. Thanks!

Ian Jansen

Mr, NHLS

Posted on: Sep, 14 2016

SCM is all about getting the order delivered to the Customer on date/ time requested because happy Customers = Revenue. Using the right tools to do the right job is important and SCM is heavily dependent on sophisticated ERP systems to get right real data info ASP.

I’ve worked in a DC with more than 400,000 line items and measured the Productivity of Pickers by how many “picks” per day.

I’ve learned that one doesn’t have to remind Germany about your EDI orders.

Don Benson

Partner, Warehouse Coach

Posted on: Sep, 15 2016

Challenge – to build and sustain effective relationships at the level of the organizations that are responsible for effectively coordinating and colaborating in an otherwise highly competitive environment

Jade

Admin, Fulfillment Logistics UK Ltd

Posted on: Oct, 02 2016

Of course we all need to up our game. We need to move with the times, and always be one step ahead of what the future will bring.

Mike Dargis

President of asset-based carrier based in the Midwest, Zip Xpress Inc. (at ZipXpress.net)

Posted on: Oct, 03 2016

Thanks for the article, but I know there’s a lot more to this issue than just the pay rates. Please check out my blogs on the subject at www.zipxpress.net.

Blaine

Inventory Specialist, Syncron

Posted on: Nov, 16 2016

Lora, great article! I agree that companies choose the ‘safe’ solution more often than not. My solution is a bolt-on for legacy ERP’s and we even face challeneges of customer adoption. Most like to play it safe and choose an ERP upgrade, which is more costly, time consuming, and has lower ROI across the board. Would love to learn more about your company, we are always looking for partnerships.

Blaine
[email protected]

Bob McIntyre

National Account Executive, DBK Concepts LLC

Posted on: Nov, 21 2016

This is a game changer in GE’s production and prototyping. It also has huge implications across the GE global supply chain with regard to the management of their support and spare parts network.

Kai Furmans

Professor, KIT

Posted on: May, 22 2017

I am referencing to the comment that leasing of warehousing equipment (beyond forklift trucks) is a vision for 2030.
Just recently in Europe, such a business model has started, see here: https://next-intralogistics.de/

I am following with a lot of interest, how the business develops.

Stuart Rosenberg

Supply Chain Consultant, First Choice Supply Chain

Posted on: Jun, 05 2017

If we limit the standard on judging or determining the best supply chain to just three calculations it does not tell the entire picture. Financial performance metrics are valuable as they capture the economic consequences of business decisions. But supply chain managers make decsions and use organizational resources that impact a company’s financial well being. Where is a firm’s earnings over a period of time determined by sales less product costs and general/adminsitrative costs? Where is the metric for determining the sources and uses of cash from three perspectives – operational, investment and financial? Where are these supply chain metrics: on-time delivery, lead time, response time to customers, product returns, procurement costs, network distance, inventory carrying costs, forecasting accuracy, sourcing time, etc,. Without knowing the results of all these supply chain calculations the there must be a question as to the accuracy of the 25 top supply chains.

Dustin Calitz

Project Commercialization Manager, Mondelez

Posted on: Jun, 06 2017

I feel this ranking misses the mark in SC. It does not seem to consider a key indicator in days inventory on hand, which is key to determining a SC company’s ability to forecast, manage inventory costs and reduce aged stock. In additiion I realize it’s difficult to understand what goes into the customer survey, but would I assume specific metrics are being asked. For examples customer’s opinion on service level differentiation and the ability to deliver the right product on time, which should then be allocated a bigger weighting than 10%. It would also be interesting to take a view of the above list’s SKU portfolio complexity, seasonality and launches/promotions. I would again assume some companies on the list above have a far more complex SC to manage and lead, ultimately requiring a lot more innovation within a SC to stay ahead of competitors, and ultimately satisfy their customers demands. I understand above metrics are difficult to measure, as mentioned in the article, but they somehow need to be considered to give a true reflection.

Michael Hurd

Lean Consultant, Unemployed

Posted on: Jun, 10 2017

A Very Good Article…

While some feel that lean is a scam that pushes for more out of the personnel and out of the companies through reduction of waste and adding value for the customer, there are several things to remember:

1) Lean methodologies are designed and implemented to reduce time wasting, so this may seem that you are working harder as an employee.

2) Lean methdoligies only work when everyone from the janitor to the owner of the company get involved and back the program.

3) Lean methods are there to make you work smarter not harder, although it may feel you are working harder.

4) YES… Sometimes lean methodologies fail! This is due to project overun or taking on too large a problem and trying to fix it all in one go and not taking the smaller problems that are associated with the large problem and fixing them first. Sometimes fixing the small problems leads to resolution of the larger problem.

Akhil

Director Supply Chain , skuchain

Posted on: Jul, 31 2017

The Supply Chain technology is not considered a problem because traditionally supply chains are thought to be cost centres unlike sales functions. The tendency, in general, to limit expenses and cost cutting on upgrades for technology and for talent have been hindering progress for the businesses. Supply chains lack real time visbility and above all trust across the value chain (not that the participants are dishonest) rather it’s about the cascading effects referred to as the bull-whip effect which causes higher magnitudes of disruptions.

Supply chain real time information should top the list .

Another problem is that of multi homing as so much data is available across several feeds of IOT/Email/Internet /Mobility/ERP that organisations tend to have issues around finding a single platform to collate them for meaning analysis.

Blockchain (if deployed appropriately) can be a great solution for solving the issues around the supply chain.

Mike Ledyard

Vested Program Faculty, Vested Way / University ofTennessee

Posted on: Aug, 04 2017

Excellent article. It very much points to the need for Shared Risk / Shared Reward as we teach at Vested. Suppliers will respond when they are made part of the team, and they have a lot to bring to the game. The service provider is the subject matter expert in the services provided, and in an excellent position to enhance the capabilities and services offered by the shipper.

Andrew Downard

Managing Director, AD Supply Chain Group Pty Ltd

Posted on: Aug, 05 2017

As the article points out it is not a lack of technology that is holding back performance but rather a failure to form the right sort of relationships. As well as the length of such relatiohships, practitioners should consider employing arrangements that incentivise both parties to innovate and deliver levels of performance and profit that neither thought possible. By far the best model I have come across to achieve this is the Vested Outsourcing model developed by researchers from the University of Tennessee. See www.vestedway.com for information on the model and case studies that show how others have benefited from creating a Vested deal.

Najma

logistics, threelineshipping

Posted on: Aug, 23 2017

Very informational article. The major focus of logistics is on e-commerce. There is a need to optimize every component of logistics by following the latest trends and technologies. Thanks for uploading this article.

Sameer Shukkla

Consulting Partner, Wipro Inc.

Posted on: Sep, 17 2017

I have recently co-authored a white paper with my colleague wherein we have looked at 2 fundamental guiding principles –

1. Always have enough to Sell / Produce
2. Do not have excess to Sell / Produce

These 2 Golden Rules can be the foundation of keeping optimal inventory levels and for organizations to achieve the same. We have looked at a framework which tries to reduce the phase mismatch between Demand & Supply, and tries to bring the shape of the supply curve closer to shape of the demand curve.

We have classified symptoms and underlying root causes for the above “Phase mismatch” and “Curve Mismatch” between Demand and Supply, and then talked about addresssing those individual root causes to strive towards Leaner Inventory levels while maintaining or improving service levels.

So to answer your question, we feel the Companies which have addresed these causes have been able to keep DIO horizontal or even going down, while others have not been able to control rising DIO because of not addressing the root causes.

Simon Eagle

SCM Consultant, Camelot MC

Posted on: Sep, 17 2017

You ask why turns are flat or declining despite lots of attention and technology. The answer is, I think, 2 fold: the supply chain environments VUCA (Volatliity, Uncertainty, Complexity, Ambiguity) is on a continuous upward curve and this means that forecast accuracy inevitably declines in parallel – and much of that inaccuracy is hidden by the statistics. For instance a company with, seemingy good, 80% mix accuracy will find that figure is skewed so high by the few high volume / low variability items. 80% of the items will be achieving considerably less than 60% error.

So most item level forecasts used for driving replenishment through an MPS (be it ERP or APS) are simply leading to unbalanced stocks, service threats and continuous expediting / fire-fighting. These schedule interrutions are “variability” that is disrupting flow and, thereby, increasing lead-times, using unplanned capacity and generating excessive (and still unbalanced) inventories.

The replacement in ex-stock supply chains is “enterprise(s)-wide” pull which also uses “push” for extreme/exceptional events. Its other key characteristics are that the supply chain is decoupled and is demand-driven. And now it can be implemented using SAP since they announced they they have co-developed an enhancement for IBP that supports this transformational way of working – up to 50% inventory reduction, requiring less capacity and shorter lead-times all while achieving planned service levels. See https://www.camelot-itlab.com/en/camelot-demand-driven-lean-planning-suite-for-sap/ and https://www.linkedin.com/pulse/supply-chain-flow-what-why-how-simon-eagle/

John Smith

Research & Development, Octopus Tech Solutions

Posted on: Sep, 18 2017

IoT is without a doubt starting to become a major factor in the profitability of various companies. In the manufacturing sector, we will see it come into the front by the end of 2020 completely. Various sectors have already adapted IoT solutions like the security industry or companies offering BPO Services India. Contact centers not just in India and China but across the world have adapted technology following the principles of IoT. The manufacturing sector is soon going to follow.

Girish Maniyar

Chief Manager Development Initiatives, Asian Paints

Posted on: Sep, 28 2017

I can speak with some context. While efficiency and tools can reduce inventory, we also see the number of SKUs and new products increasing, and also the number of sales/depot points. This means the inventory in such cases, can start with very high number and with more customization and choices available to the consumer, so there is no end to the long tail of products available within a category. It is unlikely that the slow/dead goods are written off so easily to be not included here.

A larger question, would it be purely an IO problem or also a Demand Planning (Forecast Error) problem? A higher cycle time of service but a better fill rate can improve inventory performance, by aggregation. But a bad forecast can do away all the good work you do in inventory planning.

Do you have numbers for decorative coatings in the list? I did not see something there only for decorative coatings.

Reo B Hatfield

Chief Operating Executive , BestTransport

Posted on: Oct, 20 2017

My opinion is that peaks and valley are just nice graphics to explain. Smooth responses save the day. 3PLs just adjust to the climate and the areas of movement of Logistics. One purpose of the 3PL movement was to adjust to an always changing market. They will never be fixed and will flex as the logistics changes. 3PL companies have vast knowledge of their business. Their success is their ability to move up and down as the market flows. They bring a level playing field to the transportation world that in the past was rigid but looked good on spreadsheets. Industry graphic personnel like to be able to answer all the changes because they can only see documents. 3PLs see the needs, the issues, the positive changes and the knowledge to know why and when to adjust. They (3PLs) have smoothed the waves of the past and everybody likes to see the spikes so they know something is there to clearly report on. Smooth sailing is boring but sure gets you where you want to go.

Catherine Dennis

Supply Chain Manager, Indak Mfg Corp

Posted on: Oct, 26 2017

So the horrific and severe worldwide allocation of electronic components is not an issue? Don’t tell that to the automotive buyers. It’s HORRIBLE. Lead times out to up to 76 weeks. Why not write about that? It’s killing us, our customers and the big automakers.

Huub

Logistics Manager, Shell

Posted on: Nov, 11 2017

I suggest McKinsey to do a bit more research in Prof Gattorna’s dynamic alignment. This article only scratches the surface a tiny bit. Much more to be found reading about the alignment concept.

Joseph George

Farmer, Field Vista

Posted on: Dec, 07 2017

Primarily Vision is required followed by Assigned Focus on objectives. Or maybe just love for USA. The market will not find its way unless it’s for organic vegetables and RRR. Two to three years later will take two to three years longer to the end of the decade, and this is viable today. God bless america from its present distraction.

Gary Buchs

Owner Operator , Self, Landstar Business Capacity Owner

Posted on: Dec, 17 2017

In My Opinion, the fact that capacity will tighten should be obvious to everyone engaged in the transportation.
Capacity to move freight isn’t how many trucks or trailers are in the system or what a computer
program says, it still is truck driver based and poorly-managed companies won’t be able to imporove
this fact. Investing in people is still most important!

Get ready to pay higher prices for goods and services. I think we could lose 10% of Capacity in many areas.

Dan

Pres., Bioptechs

Posted on: Dec, 20 2017

After all the ground we have lost in the productive sector and the additional burden that loss of our productive momentum has placed on our society, somebody tell me why so many people are against the actions necessary to restore our vital productive infrastructure! It is like the left enjoys shooting itself in the foot!

Jayaram

Business Development, Raghava Logistics

Posted on: Mar, 04 2018

Great article and thank you for summerizing the predications.

What does it mean to country like India where the labour is still cheap? Where the logistics cost is still on the higher side compared to some of the developed nations?

Herb Shields

President , HCS Consulting

Posted on: Mar, 06 2018

I agree that robots can replace some amount of manual labor in logistics centers. However as you mention, the labor pool is shrinking. We need more training programs such as the one provided by the Greater West Town organization in Chicago. Www.gwtp.org. (It is a program that your readers should find interesting.)

Billy

Associate, BJO

Posted on: Mar, 13 2018

Thanks for this very informative article.

Doug Murless

Country Manager, krunchbox (www.krunchbox.com)

Posted on: Mar, 18 2018

Gone are the days when consumers will wait for a retailer to have the product back in stock, those days are done. We live in the “I want it now” society and with Amazon in their pocket consumers can easily “now” it to themself the next day right from their phone.

The importance of product availability is under the microscope at all retailers as an empty shelf equals lost customers, a poor customer experience and entirely abandoned purchases.

We are on a mission at krunchbox to help suppliers fix their product availability and sell thru and improve their buyer relationships, hopefully before their retail partner fines start rolling in and or we see more retailers close.

NikhilSingh

Executive, Carmatec INC

Posted on: Mar, 21 2018

You are correct There are government programs to encourage investment at small and mid-size manufacturers, but McKinsey says these programs generally have smaller budgets, less certainty of ongoing funding, and more constraints on their mandates than comparable programs in other countries. Policy makers should examine which existing initiatives are producing the most promising results, then scale up those efforts and commit to them for the long term.

Chuck Nemer

Trainer, The Guru of Biz

Posted on: Aug, 16 2019

Nice metaphor and nice picture. I’d like to see a bit more meat on the bones if you’re going to completely sell me on the concept.

Charles Quail

CLO, Belair

Posted on: Jan, 20 2020

The truth from the road is that rates were so good, that 2018 was the best year we had since 1997. So as we saw this happening, we saw carriers increased their fleets to capitalize on this gravy train, thus depressing the rates for 2019 from overcapacity. They also flooded the used truck market, and sales dropped 70%.
We know because we also were thinking of retiring, but cannot sell our lightly used 2019 Mack Anthem because of this. So we claim it was not the high cost structure, it was the greed.