2020/06/24

Supply Chain Management: Consequences of the Covid 19 Crisis

Relevance of Supply Chains: Measures to Secure and Optimise

By Michael Wettklo, Dr. Thomas Krause, Michael Meissner, Felix Theisinger

Die Covid-19-Pandemie trifft weite Teile der Wirtschaft schwer: In vielen Branchen ist die Nachfrage eingebrochen und Lockdown-Maßnahmen beinträchtigen viele Lieferketten in massivem Umfang. Kurzfristig macht dies Aktivitäten zur Gewinnung von Transparenz und Absicherung von Produktion und Materialversorgung durch die Lieferanten erforderlich. Mittelfristig müssen wirksame Maßnahmen zur Absicherung der wichtigen Lieferketten gegen künftige Störungen wie Handelskriege, Brexit oder Klimawandel ergriffen werden, da deren Eintritts­wahrscheinlichkeit deutlich gestiegen ist. Technologien aus der Digitalisierung können dabei eine wertvolle Unterstützung leisten.

Covid-19 has hit the world's economies to an extent that hardly anyone would have thought possible before. In a lockdown, both public life and everyday economic life were drastically reduced. Distance rules and the shifting of work to the home office wherever possible restricted everyday life.

The associated uncertainties for employees led to private reluctance to buy, especially for higher priced purchases, and thus to a considerable weakening of demand. On the supply side, there were also delays in delivery and, as a result, production stoppages, although the supply of food and everyday consumer goods to the population in the industrialized countries could be maintained almost without restriction. Covid-19 is therefore having a drastic impact on demand and supply chains alike.

As Covid-19 infections decline, gradual easing is now taking effect. Governments are implementing economic stimulus packages to stimulate domestic demand and safeguard jobs. What does this mean for companies? How well has risk management worked to secure their own supply chains? How should they prepare for the time after the lockdown? What "lessons learned" are there from the crisis and what does this mean for the future?

Stable supply chains ensure the viability of companies

It remains to be seen whether the company's risk management could have foreseen the dangers of a pandemic in general and specifically in the case of Covid-19. The SARS outbreak in Asia in 2002/2003 had demonstrated the fundamental danger of a sudden epidemic and was classified by the WHO as a global threat. However, as the consequences of the outbreak at that time were relatively small compared to Covid-19 and, moreover, geographically limited, only very few companies implemented appropriate preventive measures.

The question of whether the risk of global pandemics will increase in the future will have to be answered by experts when the origin and consequences of the SARS CoV-2 virus have been analysed and understood in sufficient depth. However, the need for companies to make their supply networks more stable and resistant to external influences in the future is already apparent. The frequency and speed with which events such as natural disasters, social unrest, trade wars and protectionism can occur, with a potentially large negative impact on companies, are undeniably increasing.

In contrast, logistics chains are becoming more and more sophisticated, with collaborative planning processes (S&OP), reduced inventories, just-in-time/just-in-sequence delivery and the consistent exploitation of comparative cost advantages through production relocation to low-wage countries. All measures that are more likely to make a supply network more vulnerable than robust. Covid-19 has drastically demonstrated this in many places.

Nevertheless, some companies manage to maintain even such complex supply chains during the Corona crisis. Why is this so? Which measures are suitable to make supply networks more robust and flexible?

Demand planning is essential for managing the entire supply chain

A realistic and timely assessment of expected customer demand is essential for the management of the entire supply chain, both within the company and in the supplier network. The forecasting methods used by planning systems to determine customer demand are overburdened with the assessment of the effects of a drastically and rapidly changing market demand, as triggered by Corona in some industries. Shifts in market demand due to rapidly changing customer demand behaviour can also hardly be predicted. However, since an exact picture of the expected market development and the short to medium-term customer needs derived from it is important, new ways and approaches must be found here.

In the short term, the expertise of the sales staff is primarily required to check the plausibility of the results from the planning systems and to adjust the planning parameters taking into account crisis-related and in this form unforeseeable special effects such as slumps in demand, shifts in the demand structure or "hamster purchases". Communication via market channels, direct contact with customers and the use of market analyses by external economic services can provide valuable information, for example, to correctly assess when customer demand will pick up again. This also requires ongoing monitoring of economic developments in the sales markets affected by the crisis. Suppliers are particularly dependent on the forecasts and predictions of their direct customers, as they lack direct contact with the customer of the end product in B2B business.

Consequently, the continuous exchange of information to increase transparency between all companies along the supply chain is of great importance. With the help of digitalization, suppliers on the downstream levels are increasingly succeeding in establishing their own "digital touchpoints" with end customers and using these to estimate the development of demand.

In the medium to long term, it should be examined how early warning indicators can be derived from the course of the crisis in order to be better prepared for similar events in the future. These early warning indicators must be included in the risk management of the supply chain and continuously monitored there. However, in order to be able to correctly interpret their course and to define threshold values for warnings appropriately, the course of the corona pandemic must be recorded within the company, including the experience gained, the data collected and the measures that have proven to be effective.

For this purpose, scenario techniques can be helpful in order to map the pandemic course in one's own company in a model-typical way and, on this basis, to make the development of the early indicators and the resulting customer demand effects comprehensible. Modern risk management software solutions support this process. They facilitate the recognition of dependencies and the derivation of cause-effect chains, among other things by using artificial intelligence in the evaluation of the data material, for example through pattern recognition procedures.

The processing of the perception of the crisis and the recognition of the indicators relevant to the company for a "what if" assessment must be linked to the appropriate countermeasures in order to arrive at a master plan. Only the linking helps to identify threatening developments early on, to gain time for suitable countermeasures and to avoid having to make the same considerations a second time by resorting to documented best practice procedures. This also includes the early recognition of a recovery in customer demand and the associated measures for adjusting planning systems, communication with suppliers and restarting production.

Create transparency over the supply chain

If such a hardened sales plan is available, production and logistics are included in the integrated Sales & Operations Planning (S&OP). Here, too, the procedures normally used in a crisis reach their limits, as the usual security of supply of important components can no longer be assumed. It is imperative to gain transparency about which components and/or services are indispensable for maintaining your own production. This is the first priority and provides the basis for the subsequent analysis of the security of supply and, based on this, the derivation of which end products can only be produced in reduced quantities or not at all. It is also necessary to take into account the value contribution of the parts in question to the company in order to decide which end products should be produced for which customers in the event of bottlenecks.

In the short term, a cross-departmental team from production, logistics and purchasing can be set up for this purpose, in order to determine a rating of the criticality of the parts and their value contribution on the basis of the BOM items. The subsequent analysis of the supply situation for the identified critical material groups or services is then carried out by Logistics and Purchasing in close communication with the relevant suppliers. If bottlenecks are detected or threatened, it is helpful to identify at short notice the parts stocks available within the company as well as those available at suppliers and the quantities in transport. Safety stocks and stocks from spare parts supply must also be taken into account. If even these are not sufficient to cover the demand, the only way out is to search for alternative materials and/or suppliers.

However, in order to achieve transparency across the entire supply chain, the analysis must not be limited to the direct first-level suppliers, but must also refer to their suppliers in the same way. The risk of supplier failure is generally much higher at the sub-levels of the supply chain than with the company's direct suppliers. To counteract this, sharing the necessary information on demand, supply capacities, inventories and capacity utilization within the partner network is of particular importance. Suppliers may be reluctant to do this, as they may feel restricted in their freedom of movement by being too open. This conflict of objectives must ultimately be resolved on a contractual level between supplier and customer. On the other hand, early identification of impending bottlenecks also makes it possible to support suppliers in overcoming them by the purchasing company

In the medium to long term, it is necessary to store criticality in various degrees of hardness and the value contribution of a material or intermediate product in the master data. This can be done in the form of a parts atlas, which forms the basis for an application-supported assessment of value added contribution and risk. In this way, manual efforts in an ad hoc driven procedure can be replaced by the generation of corresponding reports from the ERP systems, which leads to a considerable time saving and enables a more agile approach.

In addition, the goal must be the creation of a digital image of the supply chain, including its geographical distribution and taking into account the transport routes. On the one hand, it provides the basis for monitoring the flow of goods and on the other hand it forms the basis for simulating imminent crises or disruptions in the future. The use of cloud platforms enables cross-company collaboration and a central view of all partners on the same data. The technologies for digitizing and further automating production as part of the development of the Smart Factory and its representation as a digital twin also contribute to increasing transparency along the entire supply chain, while at the same time safeguarding the legitimate interests of all parties.

Optimize delivery networks in the direction of resilience

Once transparency has been established with regard to the partners in the supply chain, the next step is to check its resilience and then optimize it where necessary.

In the short term, the aim is to secure the direct supply of the groups of goods and services identified as critical, both for direct suppliers and for sub-suppliers, in the best possible way. Here, the exchange of information along the supply chain is of decisive importance. The best possible transparency of planned requirements and delivery dates in an adjusted rolling forecast "downstream" as well as information on current production capacities and inventories and the short-term identification of supply bottlenecks or logistics problems "upstream" determine the action and information exchange in crisis mode.

In the medium to long term, however, ad hoc-driven action must be replaced by planned action - if only to conserve own resources. This requires a risk assessment for the entire supply network, which also takes into account geographical and logistical risks in particular. The starting point for this is usually the 360-degree assessments of suppliers. If the suppliers for critical product groups are located in high-risk areas or are geographically concentrated in a few locations, this represents a high risk of default. This can either be solved by the suppliers themselves in the long term through dialogue with them or requires the company to actively search for further suppliers in order to achieve the necessary geo-redundancy. The extent to which Covid-19 will lead to general structural shifts in the relocation of production sites cannot be estimated at this time.

In this context, a precise analysis of transport routes is also necessary in order to minimise logistical risks due to considerable delays at logistical hubs such as ports or airports through diversification. Reasons for this may include limited resources in quarantine zones, personnel bottlenecks due to the pandemic, lack of container sites or empty containers, transport routes changed at short notice or the loss of logistics providers. And even if the required material is delivered by the supplier just over the border in the neighbouring country, this can suddenly become a problem if border traffic is restricted or extreme traffic jams occur due to more complex handling processes.

In general, a robust supply chain should always have at least two suppliers with geographically separate production and delivery locations. The greater the proximity of the suppliers to the production sites of one's own company, the greater the probability of being able to maintain a supply even in the event of drastic events such as Corona. Examples of this can be found in the automotive industry, where important core suppliers with their production sites are usually located in the immediate vicinity of the plants. The additional costs arising from regional supply must be balanced against the assessed risks of a longer production stoppage due to supply bottlenecks - this too is a task of risk management, which has become all the more important.

Impending or already occurred production losses due to a lack of demand can - even if they are only temporary - place a massive burden on the financial stability of suppliers. Consequently, the continuous monitoring of key financial figures based on publicly available sources, balance sheet analyses, processed data from business services and the scanning of news in social media is becoming even more important.

If bottlenecks become apparent in the supply chain for key suppliers, the company must weigh up whether measures to stabilize the supplier are not more advantageous on balance than the development and integration of new suppliers. Here, too, the importance of transparency along the entire supply chain is evident, as it gives partners early warning of impending difficulties and thus opens up options for action before the baby is born. Ultimately, however, in the interests of maintaining one's own production, scenarios in the event of insolvency of critical suppliers must also be considered and kept up to date.

Not only externally, but also internally, Purchasing, in cooperation with Production and Product Marketing, can take measures within the framework of Product Engineering to reduce dependencies on suppliers and thus increase the resilience of material supply. Recourse to simpler components or those for which there are several suppliers, possibly even regionally available, can reduce risky dependencies on critical suppliers as early as the product design stage.

Managing the recovery and learning from the Crisis

In a phase of significantly reduced infection figures due to the security measures taken and the implementation of initial easing measures, the question arises for companies that were affected by a massive drop in demand as to when and to what extent demand can now be expected to recover and consequently restart their own production. The after-effects of the Corona crisis have led to a severe economic crisis, the consequences of which the governments of many countries are trying to mitigate with comprehensive economic stimulus and aid programmes. How this will affect private consumption and companies cannot be predicted with certainty at this time. The further course of the pandemic also remains uncertain, at least as long as no vaccine has been found and is available in large quantities. Companies will therefore have to cope with a high degree of uncertainty for the foreseeable future.

Nevertheless, developments are already discernible that will lead to changes in the supply networks in the post-Corona period. The need to make supply chains more transparent and more robust against external disruptions is unmistakable. In these times of rapidly advancing digitalization and automation, the necessary tools, processes and technologies are increasingly available to come close to this goal.

Digitization and automation provide the necessary tools, processes and technologies

In an ideal case, a supply network is supported by a digital image. This digital twin can provide the necessary transparency over the delivery network in real time. Smart analysis tools - using artificial intelligence if necessary - detect deviations and determine risks. With a simulation module, scenarios can be developed and options for action derived from them. In the event of a crisis, concrete proposals are then available which can be implemented quickly and greatly increase the resilience of the supply network.

In very few cases was such a digital twin available at the beginning of the corona crisis. The few existing examples clearly show how much support for one's own business can arise from this. It is therefore worthwhile in any case to start building up the network. In a first step it is sufficient to compile all the information about your own supply network in digital form. This can then be used to develop a first version of the digital image in the short term.

However, technology alone will not be sufficient in some sectors to achieve the desired resilience. This will also lead to structural changes in the supply chains, for example by diversifying the suppliers used, possibly in conjunction with the increased use of regional suppliers to reduce geographical/socio-economic and logistical risks. But also the redesign of contracts to achieve more transparency and a strengthening of the partnership between customer and supplier is an option.

This makes four things important for companies:

  • Improve the ability to understand and forecast customer demand, even in the event of significant Events
  • Increasing transparency, especially through digitalization and resilience in supply chains from an end-to-end perspective
  • Expanding risk management and collaboration with suppliers and their sub-suppliers along the entire supply chain
  • Learning from the crisis and safeguarding the experience gained and the successful countermeasures taken in order to have them operational and available for future incidents

In order to achieve these goals, it is useful to look at the skills that the company lacked during the peak phase of the crisis, had to be built up in a short period of time or are now needed for the phase after the pandemic shock after leaving the ad hoc-driven action. On the basis of a skills map, the current level of maturity can be recorded and fields of action identified holistically and consistently. In the next step, suitable measures, procedures and digitisation technologies can be identified specifically for the skills that urgently need to be improved in order to achieve the desired improvements quickly. These then form the basis for project planning, comparison with projects already set up in the company and the derivation of a resilience-oriented implementation roadmap.

This procedure should be flanked by "lessons learned" workshops to review the procedure in the crisis and to identify the contents and procedures that should be recorded and prepared for the future in terms of business continuity.

For the companies, the Covid 19 pandemic can be used to derive a variety of measures that are suitable for preparing for the considerable disruptions in the supply networks that are to be expected in the future, and to counteract them by increasing resilience in their own company as well as in the entire supplier network. Digitization and automation can make a major contribution to value creation if they are used in a targeted manner and in the right places. Capability maps and heat maps provide a suitable stable framework for increasing transparency, resilience and digitization in a targeted manner and to the extent necessary. "Lessons learned", best practices and initiated measures can thus always be clearly assigned and their impact evaluated.

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