Uncertainty Ahead: The ‘elusive’ responsive supply chain
Yesterday, I watched a recorded session(a webinar) on the ‘Supply chains in COVID-19 Era’. There were many business leaders and industry experts who expressed their views on the subject. The panel discussion got mainly focused upon on ‘what kind of supply chain they wanted’ and I somehow felt that ‘how to make it happen’ was (sadly) missing in that discussion (maybe it was by design, but still I felt uncomfortable).
I have observed that most of the time whenever we listen to the top management about their expectation from the supply chain. We mostly get that they want company’s supply chain to be proactive, agile, and should be in a position to react to the varying market demand. Their view-point represents exactly what a supply chain should do.
To get more clarity we can expand the stated viewpoint -the ‘varying market demand’ signifies the variability, as well as the uncertainty in the demand. Next, the extent of the problem depends upon the degree of variability and uncertainty of demand; i.e higher the uncertainty or variability, it is much more difficult to deal with that kind of demand. The ‘agile’, and ‘proactive’ here signifies the supply chain to churn out the product mix — in quantity as well as in sequence as per the actual demand of the consumers.
Let’s get back to the point of how a supply chain should be in the COVID-19 era.
The current situation of COVID-19 is one such situation, which has created an environment of a very high degree of variability and uncertainty in the demand for the businesses.
Let us understand this with an example. Let’s take the automobile business.
Below is one of question which this business is facing currently:
Will the fear of public transportation (due to COVID-19) lead to a spurt of demand for two-wheelers /car ( to prevent getting infected from other people in bus/train)?
We all can say that there will be some impact, but it is very difficult to predict whether it will be a significant one. Such a situation creates a dilemma for top management:
Should they wait for the demand to show up, and then react accordingly? Or start preparation now, so that when demand shows up, they can fulfill it.
I am guessing some of you must be wondering: ‘is it really a conflict’? and if yes then why.
Let’s understand the supply side of the equation to get a deeper understanding of why this dilemma exists in the mind of the top management.
Let’s continue our automobile example.
Fulfillment of demand can be ensured if the product required by the customer is available at the dealership. A customer is most likely would not wait for a product he/she desires. Sometimes, waiting for just more than 1–2 days is considered long by many customers. Specifically the fastest-growing segment of the customer population — millennials (for them it is mostly like ‘I want it NOW’). So top management understands that if their product is not available, customers can walk to other brand stores and get the readily available product from the competition.
This brings us to the next question: Why would a product not be available at the dealer?
A car or a bike has to travel via the supply chain, which has the following entities- sub-vendor, ancillary vendors, plants( where the product is assembled), warehouses, and finally dealers, before it lands in the hands of a customer.
There are typically two challenges in such supply chains:
1. To manufacture what is actually in demand
2. To put an already manufactured product to a location where the customer is going to come and ask for it.
First problem: There can be supply related challenge of individual parts from vendors or sub-vendor and we all are aware that manufacturing can’t happen, even when a single part is not available at the plant (~ a car/ bike typically have thousands of parts). This issue is mostly termed as ‘supplier/vendor unreliability’. In the present times, the unreliability problem is getting really aggravated due to a shortage of manpower, and the availability of working capital with the vendors. This leads to a situation where many of the sub-vendors/ vendors are finding it difficult to work even at half of their pre-COVID-19 capacities, thereby disrupting production lines of the original equipment manufactures.
We can generalise this for other businesses, which have a similar supply chain configuration (vendors- plant-warehouses- dealer- distributor). So the obvious conclusion is:
Even when the market had a certain demand for their products, manufacturing for that demand is going to be a bigger challenge in the current condition.
Second problem: There can be a situation where a specific bike/car model is available at a dealer, but there is no demand for that bike/car model (due to colour or configuration choices, etc) in that geography. On the other hand, at the same time, another dealer might be getting the customer demand for that model, but he/she doesn’t have the inventory available at this location.
Do you see what has happened?
A supply chain on an overall level has the inventory for the product, which a customer has liked and wanted to buy, but not at the right point, which most likely results in a loss of sales for the dealer and the company.
This case somehow feels much more painful than the first problem. You know why- because we lost sales, even when we had finished product in the supply chain.
Further, the supply situation is likely to get worsened, as the demand variability and uncertainty are interdependent on the reliability of the supply chain.
Let’s understand this ‘interdependent’ aspect by taking the viewpoint of a dealer/distributor in our automobile example.
As we said, manufacturing is going to face a challenge due to increased vendor unreliability. Now, when dealers/ distributors, downwards in the supply chain face this unreliability, they most likely are going to place an inflated orders; just like all of us did during lockdown- when we faced the situation of unreliable supplies, we kept higher than usual inventory of groceries/essentials in our homes. It is simply human nature.
So when the bloated orders are fulfilled by the manufacturers, then it will eventually lead to a much more aggravated situation where inventory is not available where the demand is present and vice-versa.
Now, you must be thinking, “yes, this seems likely, but how is this an interdependent case? It seems more like a one-way effect”.
When the inflated orders(spike in demand) would hit the manufacturing plant and vendor operations. It is going to cause an increase in unplanned setups, as well as expediting of material from the vendor(or sub-vendors) in some cases. Unplanned setups, and expediting(read firefighting) cause frequent disruption in the production plan, leading to wastage of capacities. This wastage is happening in an environment, where capacity is already limited due to working capital and manpower issues(discussed in the first problem).
All of this results in further deterioration in supply chain performance (reliability). It’s seem like a vicious loop.
At this point, I am sure you have got an understanding of ‘why there is a conflict in the mind of top management’.
Let’s summarise: ‘If they start production now as per the expected demand and demand doesn’t show then the huge pile of inventory can potentially financially ruin the company. On the other hand, if they don’t start now and when the demand shows then they might miss the opportunity as their supply chain won’t be able to deliver due to all of the above-discussed constraints.
Now, to the most obvious question is- ‘is there a way out of this situation?’
As a TOC(Theory of constraints) practitioner, I can confidently say that a pull-based production(S-DBR) along with buffers in the supply chain and stock rationing as per need of the downward nodes of the chain can effectively tackle both supply-side problems. TOC replenishment solution significantly lowers the supply lead time of the chain. Thereby, enabling the supply chains in successfully dealing with a high degree of uncertainties and variabilities in the demand.
I believe that the TOC replenishment solution is the need of the hour for supply chains facing such a high degree of variability and uncertainty.
