How Supply Chain Strategies Are Evolving During Covid Time?

From the time WHO declared Covid 19 as pandemic and countries world over stated imposing lockdown, severe impact on production and consumption started surfacing. The crucial link between producer and consumer i.e. the supply chain started breaking. Air travel almost halted to an extent that as of mid- April 2020, 64% of the world’s 26,000 inservice aircrafts were grounded. Cargo ships – that carry almost 80% of global trade – operated at a much lower capacity and with frequent interruptions at the loading and unloading points. As per UNCTAD estimate, of December 2020, global merchandise trade may have fallen by 5.6 per cent in 2020. Quite naturally, when the logistic component is affected, the supply chain gets the impact. 

Throughout the period of pandemic and even before, innovative ways of strengthening the supply chain have been evolving. All  the stakeholders in the process – the consumer, manufacturer and the supply chain agent -are learning. 

The disruption is unprecedented

Before the imposition of the second phase of lockdown, a mid-size manufacturer in Hyderabad, India was building up their stock to be delivered to Delhi, from where it would be distribute The sudden lockdown in Delhi, disturbed the entire plan and once the market started opening up, his clients were not willing to lift the material because of low visibility. For them, the market is seasonal and once one season is missed, they will have to wait for the next season. In another case, an active pharmaceutical ingredient manufacturer in Vizag could not meet supply commitments to his clients due to discontinuation of supply of chemicals from China. In both the cases, the impact on business continuity, financial health and livelihood is severe. 

Such disruptions are rampant during this period of Covid. Somewhere, the seller is at a problem, somewhere it is the buyer and in many cases it is the logistics/ transportation agent. The issues are continuing ceaselessly even today with different parts of the world passing through lockdowns affecting the supply chain. 

Based on a survey conducted in March 2020, 75% of companies reported supply chain disruptions due to Covid 19 related transport restrictions and almost 44% of businesses lacked the strategy to deal with disruptions of such a magnitude. This reveals the shere unpreparedness of industry in dealing with the supply chain disruptions that happened due to Covid 19. Though many other instances like, the Tsunami of 2004, Fukushima Nuclear disaster of 2011, the US trade restrictions on China had rapped the industry at different times, nothing has been so damaging as Covid 19. 

Complex supply chain of today’s business

In the modern context, the supply chain is complex with many permutations and combinations. Take the case of certain chemicals used by a mid size fine chemical plant. They have a list of close to five thousand chemicals (feed stock or FS) that are used for manufacturing their product basket consisting of about forty finished products (FP). The demand of specific FS from the list depends on finished product orders. Barring a very few common FSs, they can not have a large stock of any FS, simply due to storage, cost and self life reasons. FSs are sourced from countries like China, Korea, Germany, Italy, the US and also within India. Some of the FSs come in bulk in Singapore and some come in Srilanka, from where they are repackaged and transported to Indian ports. Some are further repackaged and sent to their plant. It requires road transport, once any of the FS reaches Indian port.  Some of the PSs are procured by the company from some other Indian manufacturer, that imports the chemical, processes them and supplies the FS to the company for consumption. Thus the supply of FS from Indian suppliers is also import dependent.  

The distribution of finished products is also equally logistically dependent with links to a dozen of countries.

The linkages in the material flow, crossing over multiple countries makes it a complex supply chain system with the involvement of,

  1. Multiple ports
  2. Multiple modes of transport (surface, water)
  3. Several points of handling including repackaging
  4. Number of storage locations
  5. Maintenance of product quality
  6. Involvement of multiple agencies
  7. Management of total lead time
  8. Management of commercial aspects like insurance, freight cost.

Delivering material on time and with right quality becomes the foremost important aspect of the supply chain. A broken link impacts the entire system with a snowball effect.

Evolving strategies in supply chain

Predominantly, supply chain planning has been built on the points of demand and supply. On the supply side the cost of procurement always took the front seat. Intense competition in the market pulls down price and a customer invariably expects a lower cost of acquisition. Cost of production in turn depends on the cost of labour and logistics. Thus developed countries started looking towards developing countries for supply support, primarily for labour intensive products, wherein the saving due to low cost of production remained much lower than the cost of logistics. This reason supported the emergence of several countries in Asia to grow economically. It helped employment through export oriented business models.

As these developing countries started matchuring and the cost of labour started increasing, the sourcing slightly expanded to other countries in Asia like, Thailand, Bangladesh etc. 

Along with these shifts, industry also started adopting technology and data to make the supply chain more reliant. Covid 19 impact has now jerked the industry to think of further changes in the supply chain. Some of these changes or thought processes are,

  • Diversifying supplier network: 
    • Diversified geographical locations affected the supply chain severely during covid time. An article published in HBR in May 2020, reveals that CEOs in the US, Canada, Europe and Australia are planning to develop supply chains that are totally exclusive of China. The strategic idea of one plus i.e China and one additional pattern is evolving. 
    • Buyers in India and many other countries suffered when production and transportation were affected in China. To come out of this challenge, companies in India started sourcing material from within India and countries other than China.. 
      • An importer of private label electronic thermometers from China plans to set up a small manufacturing plant in India.
      • A project developer importing important project components from Germany in place of the original supplier based out of Taiwan.
  • Decentralising operation: 
    • The example of a Hyderabad based manufacturer explained earlier resulted into a perfect case of near sourcing even for within the country cases. Discussing with the buyers and creating buffer stock with its clients at special commercial terms. The company is also planning to set up small finishing lines in different territories with a significant client base.
  • Diversifying source countries and near sourcing
    • In the past companies at times registered single suppliers or multiple suppliers from one geographical region. Now they are trying to increase the number of suppliers for the same product and from diverse geographical regions. 
    • In some of the cases, companies are trying to source from within the country.
  • Planning on inventory levels:
    • Companies are re-strategise safety inventory level and work-in-progress, though this may increase the cost of production.
  • Perfecting demand modeling
    • Increased use of Artificial Intelligence in predicting demand, for the purpose of managing supply chains with greater efficiency.
  • Reducing cost 
    • Shorter warehouse contracts
  • Plans by logistics operators
    • Expanding warehouse network
    • Increasing warehouse capacity
    • Warehousing automation
  • Adoption of mathematical modeling. 

A survey by Gartner conducted with more than 1,300 supply chain professionals during September 2020 through November 2020 found that,  

  • Eighty seven percent of respondents plan investments in supply chain resilience within the next two years.
  • Eighty nine percent of supply chain professionals want to invest in agility.

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