What the Pandemic Has Taught Us About Supply Chain Resiliency
The current pandemic threw global manufacturing into disarray this spring, disrupting regional and international networks. As the world inches toward an uncertain stability, businesses worldwide are analyzing this new landscape and trying to apply the lessons they’ve learned.
“COVID-19 has placed an unprecedented strain on supply chains globally,” said Samad Masood, head of Europe for the Infosys Knowledge Institute. “But thankfully, the world does seem to be settling into a new — perhaps precarious — normal.”
Masood moderated a panel discussion this summer to examine how global supply chain leaders are managing these challenges and how their approaches have changed. The recent panel included supply chain executives from Alcon, Syngenta, and Western Digital, in addition to Dinesh Rao, an executive vice president who leads Infosys’ enterprise application services.
Each company faced different hardships when the pandemic disrupted the world economy and global supply chains. All their careful planning and projections were rendered unreliable at best. Here’s what they encountered when economic systems ground to a near halt earlier this year and what they are doing to become more resilient.
When COVID-19 emerged in China, Western Digital and many other companies did not immediately feel the disruption. Factories were closed for the Chinese New Year, so a slowdown already was built into manufacturing schedules. But after the holiday, holes appeared in the supply chain.
Although the company manufactures much of its equipment in Shanghai, one of the primary suppliers of printed circuit boards was in Wuhan, where the pandemic originated, said Mohan Dhamodaran, senior director of Western Digital’s Supply Chain Centre of Excellence.
Western Digital did have some inventory available, but Dhamodaran said the factory closure in Wuhan “hit us hard with reduced capacity and service levels…That’s when we realized the impact of this pandemic [on] our supply chain.” At that point, company officials realized they needed a more diversified set of suppliers across regions and countries.
The pandemic’s effect on Alcon, the world’s largest eye device company and a Novartis subsidiary, was significant but not uniform among its units.
On the consumer side, Alcon sells contact lenses and supplies that its customers need every day. “We do see some fluctuations and some bullwhip effect on the channels side [shift from in store to online], but people will still need their contact lenses and their solutions and eyedrops,” said Hoany Thompson, Alcon’s head of process improvements and global supply chain sales and operations. “That end is a little steadier.”
However, the ban on nonessential medical services cut into their business providing supplies for elective eye surgery, such as cataract operations. This made supply-and-demand planning particularly difficult as varying government restrictions started, ended, and sometimes restarted. Emergency surgeries weren’t affected, so the nonconsumer part of the business did not shut down completely.
The company knew there was pent-up demand for nonemergency eye surgeries that would boost sales eventually. “It’s very localized by county, by state, by city,” Thompson said. “What were the rules of elective surgeries? When was it going to open back up? So, it was quite difficult working with local planners and trying to understand that for their markets.”
The pandemic’s initial impact on Syngenta was minimal, particularly compared to companies that operate just-in-time supply chains. Syngenta’s sales are seasonal, with customers making decisions months ahead of time. Also, agriculture fell into the essential services category, so Syngenta and similar companies were not forced to close manufacturing facilities.
“You make your agreements. You have seasonal assumptions on acreage, on market share. Execution becomes relatively predictable as long as those relationships are maintained,” said Matt McCall, the company’s global integrated business planning lead.
Most of Syngenta’s supplies were already in place. Instead of its business slowing to a crawl, the company had to grapple with wild swings in demand from both existing and new customers reacting to global supply chain uncertainty. By the end of the season in North America and Europe, the bottom line looked normal overall, but the typical patterns were disrupted, and many assumptions were incorrect.
At Western Digital, the business processes were created for speed, matching supply and demand weekly. That allowed company leaders to quickly see their geographic vulnerability because so much of their manufacturing was in China.
Western Digital shifted parts of their supply chain to other sites in Asia, including Malaysia. “Even though initially there was an impact of 50%, slowly we could ramp up to 60% or 70% as we brought more suppliers on board,” Dhamodaran said.
Even then, the supply chain was still concentrated in one part of the world. “We did have alternate sources, but all in the same geographic area,” Dhamodaran said. “So that’s when we started to understand the risks.”
McCall said Syngenta already had a broad supply chain in place for structural reasons. Unlike Western Digital, his company couldn’t shift production quickly.
“It’s very similar to a pharmaceutical-type setup, where the source that makes your products is registered and can’t be switched easily,” he said. “It takes a long, long time to find another supplier. … We’ve been rigorous about multisourcing, but I know it’s not a luxury that all industries have.”
At Infosys, the crisis has shown the need for a better understanding of risks embedded in supplier relationships. We measure them on all the performance metrics, but the visibility of the supplier is something that we don’t have a way of measuring. A strategic supplier might not be able to scale up, and [that could] potentially disrupt your entire supply chain.
If you don’t look for this kind of risk, Dhamodaran said, you will see only the financial rewards that result from having a smaller network of suppliers. He said many companies now need to seek a more balanced approach.
“Our sourcing team on the supply side, on the procurement side, [has] really been looking at the resiliency within the suppliers to distribute that risk,” Dhamodaran said.
Factory closures were a significant source of disruption at the start of the pandemic, but transportation also created significant barriers. At Western Digital, the logistics costs increased substantially as a result of the cratering air travel industry. Logistics became the bottleneck.
Dhamodaran said that until the pandemic struck, his company didn’t realize how much it relied on commercial airlines. About 60% of Western Digital’s cargo was transported on passenger airliners rather than cargo planes. Initially, transportation expenses increased to three to four times the previous cost.
“Once the commercial airlines shut down, this airlift of products had to be on cargo planes or we had to find charters,” he said. “And then as things evolved, commercial airlines transformed into cargo airlines as well.”
McCall said Syngenta didn’t have to struggle with the significant manufacturing closures that affected other sectors. Instead, many of the slowdowns occurred at customs and when global shipping lanes shut down. A fourth-party logistics deal with the pharmaceutical giant Merck, however, provided some relief for Syngenta.
“They really helped mitigate a lot of those logistical bottlenecks and difficulties,” McCall said. “If that [were] not in place, we would have had a huge impact on supply availability locally.”
Optimized supply chains
This crisis has forced companies to look closely at how companies are balancing their supply chains. What are the trade-offs of cost versus responsiveness?
“The perception has completely changed,” Dhamodaran said. “Now our finance team doesn’t look at inventory as bad or evil. It’s a good balance between working capital and having the right inventory with the right service level to the customer. … It’s OK to have that entitled inventory.”
Western Digital now has a monthly process to understand the inventory needs for the entire supply chain, from finances to risk to service levels. “We don’t have the luxury of a few months of inventory,” he said, “but having that short buffer could help us during spikes.”
McCall said the approach to optimizing inventory seems to run in cycles. Stability is elusive.
“We always seem to have one season where inventory is a major driver,” he said. “We must find ways to lean ourselves out. Then that will be shortly followed by ‘We have a big opportunity, and we need to maintain the highest customer service levels possible.’”
Going forward, McCall said, companies need to be more responsive and dynamic.
Thompson said managing supply chains will be among the most important challenges in business. “The pendulum is definitely going to swing away from cost and squeezing out every bit of inventory to more risk management,” she said. “It definitely will force some of the tougher conversations.”
Before the pandemic, changes to Alcon’s forecasts were locked down two months ahead of time. Now the crisis has forced executives there to rewrite those rules, Thompson said. The company has recently allowed planners to update forecasts during the same month so they can account for the latest information and new assumptions.
“I think the key is speed,” she said. “The people as well as the processes as well as the systems enablement.”
At Syngenta, McCall said the company wasn’t set up to react quickly enough, which hampered executives’ “ability to understand whether we have new demand opportunities. … For us, the big challenge was our monthly supply-and-demand balancing processes, which became too slow to keep up with the changing environment.”
Syngenta already had invested in new technology to make decision-making plans and processes faster, more collaborative, more transparent, and more data-driven. However, the pandemic exposed weaknesses in the company’s processes.
“In the end, we still weren’t really ready to cope with that shifting demand from a decision-making perspective,” McCall said.
Although most companies have abundant data, that hasn’t necessarily served them well during a once-in-a-century event. They need new tools to look at that data in different ways, the panelists agreed.
“We paused our stat forecasting for the past two months because looking backward will not help you,” Thompson said. “So, moving to more of a causal-based forecasting would be better with an AI [artificial intelligence] type of an engine to correlate the different parameters.”
At Syngenta, the old forecasting models were not useful because of the influx of new variables. “Luckily, we started very recently to experiment with a data science approach, which is brand-new for us,” McCall said. “A couple of pilots were a bit successful in calling some of those demand shifts using a data science predictive model, a machine learning approach with variables we’ve never considered before.”
This has allowed Syngenta to analyze new scenarios more quickly, which is particularly important in a rapidly evolving situation. “It took far too long for us to even come up with one or two scenarios,” McCall said about the old approach. “By the time we had a couple of scenarios and we went to make a decision, the market assumption had changed again.”
Infosys’ experience found that the pandemic has pointed companies in the direction they need to go. That includes more powerful forecasting models that use AI and machine learning. It is more reacting, living, breathing, and sensing as opposed to looking at past historical data.
While there wasn’t disagreement among the panelists, each finished with slightly different recommendations or spins on the various topics. Every company will have its own distinct challenges and solutions.
“I would definitely suggest looking at the business processes to see what in your organization you can change to be more reactive,” Thompson said, emphasizing near-term adjustments.
The more a company can directly integrate its different elements, she said, the better it can react. “This is almost a once-in-a-lifetime crisis,” Thompson said, “but in supply chain, we deal in daily crises. Some are going to be small, some are going to be astronomical, like COVID.”
At Syngenta, speed is the critical new element of the company’s direction. “No matter what industry you’re in, the speed of decision-making needs to increase,” McCall said. “The only way to do that is by leveraging technology … and people skilled to understand and interpret the information and make better decisions. You need both sides of that equation.”
Dhamodaran said Western Digital needs a more responsive supply chain, including a new look at logistics. “Challenge all the assumptions that have been built all these years,” he said. “This event is a wake-up call.”
This period as an unprecedented time that requires new thinking. Corporate leaders will need to pay close attention to signals they receive from their data and also closely examine the trade-offs they make in their daily operations.
We must go back and look at cost versus responsiveness and cost versus resilience. We will have to fail fast, learn fast, modify, adopt, and start up and keep running.