Covid-19 Swiftly Exposes Damaging Defect in Inventory Management
Commodities affected includes auto parts, dairy, meat, masks, and toilet paper, to name a few.
Matching supply and demand has always been an industry problem. Over the past ten years, leaning out of supply chains meant increased responsiveness. It also meant reduced costs and improved customer service.
Smarter inventory planning techniques and Just-in-Time (JIT) seemed to fix that. It was a win-win solution that translated into competitive advantage.
But the lessons of Covid-19 make us ask whether our supply chains are too lean. In particular, Covid-19 has turned inventory stockage planning on its head. With blank sailings still rising, resilience and flexibility have become critical to inventory management.
Continue reading to learn how Covid-19’s after-effects may impact supply chain flexibility and resilience.
The Unintended Consequences of the Dash to Lean Logistics
To get started let’s look at why global supply chains became so lean.
Years ago, cost-cutting was all the rage. As CEOs/CFOs looked for areas to cut costs, logistics provided a promising target for cost-cutting. And logistics is still a promising target today. It’s promising because logistics costs comprise up to 55% of a product’s cost.
Transportation, warehousing, and inventory carrying costs make up the areas that attract cost-cutting. By reducing inventory, you can reduce the cost of all three of the above supply chain processes.
Taking a zero inventories approach, companies did well in matching supply and demand.
Manufacturers achieved Just-in-Time (JIT) inventory best practices and suppliers achieved “just enough” inventory best practices.
Leaning out supply chains worked under normal conditions. But today’s conditions are anything but normal.
Manufacturers and suppliers succeeded in cutting costs. But Covid-19 has shown us, lean logistics comes with adverse effects. Risks have increased. Customer service and quality have declined. And revenues and profits have fallen. Those are some of the individual but related effects.
When taken as a whole, we now see that leaning out of supply chains has resulted in a loss of resilience and flexibility. That explains the shortages we’ve seen in global supply chains. It also exposes the vulnerability of global supply chains.
In today’s environment, we have uneven, unpredictable demand. That will likely continue even as the economy returns to its former operating level. Additionally, global supply chains will continue to strive for speed, timeliness, quality, price, and customer service.
Likewise, the New Normal will also strive to achieve the same objectives. But in the New Normal, the ability to manage disruptions will rise as a differentiator. The ability to manage disruptions will set leaders apart from laggards. Companies mastering this competency will gain competitive advantage.
Supply chain optimization will take on a slight twist. Businesses will focus on balancing cost with resilience and flexibility. Also, Black Swan events, like Covid-19, will become more important in inventory planning.
- Holistic Optimization: Conduct better analysis of total costs.
- Continuity of Operations Planning: Undertake better disaster recovery planning.
- Large Inventories: Plan for more buffer stock due to supply chain shocks.
- Data Analytics: Employ stronger predictive analytics in the ramp up to normalcy
- New IT Tools: Use artificial intelligence to factor in weather, seasonality, etc.
- Long-term focus: Seek long-term partnerships with experienced and trusted partners.
- Customer-centric planning: Place the customer at the center of inventory planning.
The common thread among these features is the customer. That means the customer will take on a more prominent role in up-front planning, replacing cost.
Customers’ demands are not declining – they’re increasing. Only business with resilient and flexible supply chains can meet customers’ growing expectations.
Matching supply and demand still matters from any point of view like cost, customer service, or performance. But smarter inventory planning requires a broader view. It also requires the consideration of supply chain resilience and flexibility.
Martin Reeves, Simon Levin, and Daichi Ueda make the case in an article, The Biology of Corporate Survival that companies are dying young because they haven’t adapted to their environment. They either don’t grasp the change, as we’re seeing with Covid-19. Or they are slow to adapt. Or they choose the wrong strategy.
The marketplace is becoming increasingly complex, meaning uncertainty and unpredictability will abound. Stability belongs to a former era. This places a premium on resilience and flexibility.
Businesses must focus on what’s predictable and what’s controllable. They must also broaden their scope beyond first tier suppliers to second and third tier suppliers.
Not doing so can lead to catastrophic failure. So, digging deeper with the aid of technology and collaborative partners, while focusing on the customer, will define the New Normal.
Companies that fail to adapt rapidly risk losing out to more adaptive companies. Moreover, because control is spread out among second and third tier partners, trust and cooperation will become more important. Success will go to businesses that reinforce collective action.
Preparing for the New Normal
Now is an opportune time to rethink how your supply chain meets your needs.
We are operating in increasingly dynamic times. To survive and thrive your business must have the ability to absorb shocks. And recovery must be quick.
Is your supply chain prepared for today’s dynamic times? Now might be the time to work with a dynamic partner who plans with the customer in mind.
Contact American Global Logistics if you’re rethinking your supply chain. We have a solid record of performance based on customer support that’s second to none. You can rely on to us to help you adapt to the New Normal.