Digesting the shocks: how supply chains are adapting to COVID-19

© istock.com

© istock.com

As the world grapples with the human and economic crisis unravelling before us, supply chains are finding themselves squarely within the public eye and experiencing unique challenges of their own.

Prof. Ralf Seifert (affiliated at EPFL and IMD) and Dr. Richard Markoff describe the various shocks undergone by supply chains since the start of the health crisis.

In summary:

First, the supply shocks with the disruptions to the availability of goods sourced from China.While some companies had already adapted their supply chain by preparing them for crisis situations (such as after the Fukushima disaster), others in the interests of costs, and at the sacrifice of agility and resilience, have been relentlessly consolidating production and extending sourcing.

Then came the demand shocks, where people stock up on consumer staples in order to comply with restrictions on movements, in some cases buying months’ worth of goods in a single day. But in most of the cases, the supply chain professionals behind the scenes have with a herculean exceptional effort, managed to answer to the demand, despite that classic planning models are not built to accommodate such severe peaks in demand.

This stage is followed by the aftershocks. In the current situation, "shortage gaming" is particularly dreaded. This describes how, when there is a shortage of a product, the tendency is for downstream actors to inflate their supply needs artificially, in order to claim a greater share of a scarce resource. This will require vigilance moving forward to be sure that visibility into true supply priorities is not lost as pipelines are refilled.

Finally, the new normal stage: the effects of the recession, the extent of which is not yet known, reveal the gap between supply chains that are spinning incredibly hard to keep up and others being forced to ramp down. For supply chain planners, one pitfall to avoid in order to move forward is the dynamic called the inventory bounce. When demand reaches a new steady state that is lower than the previous steady state, there must be a cut in production to allow the pipeline of stock to lower to a new steady state level. At that point, production actually increases a bit to match the new demand.

This situation can be seen as an opportunity for some who are seeking a different cost/resilience trade-off and look to localize production and sourcing.

Research on supply chain resilience

Prof. Seifert has been working on Supply Chain resilience for some years, namely by collaborating with Roche in examining challenges in the pharmaceutical supply chain and modeling benefits related to supply chain risk management. He has also been awarded a grant by the SNSF to model disruptions in Supply Networks.