Unprecedented demand shocks of a differing nature
Who would have thought that, as we entered 2020, toilet roll would become the most sought-after product in the world? Or that so many people would be working and schooling from home? Or even that our travel plans were about to be cancelled? This new reality has created immediate and hard-hitting demand shocks for global supply chains. Never before has planning been so under the spotlight.
Certain types of demand have been largely destroyed (such as 2020 spring clothing collections), whilst others have exploded in the short term (toilet paper and home-working supplies). This has garnered news headlines, yet the impact of shifts in distribution channels has been under-reported, even though they are just as significant. Volume levels have not necessarily changed, but have shifted to other distribution channels. For example, lunches have moved from restaurants to the grocery channel as people work from home. Even the consumer demand boom for toilet paper was not entirely driven by stockpiling; there has been a shift from commercial to consumer channels as people are now using the bathroom at home,as opposed to the office.
Rigid and highly concentrated supply chains have struggled the most to adapt to the demand shifts caused by Covid-19, but even the most flexible networks have been unable to respond where planning processes are slow or rigid. Indeed, many problems with ‘steady state’ planning systems have been exposed by the pandemic, but this has really just magnified the problems that planners face from smaller shocks every day, such as price changes, competitor promotions or supplier shortages. Even before Covid-19, consistent surveys show that 50% of companies were not happy with their S&OP processes.
Enter the new era of ‘event-based planning’.
Planning for the uncertainty of reopening
Demand (and supply) shocks have rattled global trade. Whilst this has been devastating, the swift and definitive nature of it has meant that businesses have been able to quickly assess the impact on demand patterns. The demand during reopening is going to be much less certain for a number of reasons. For example, different regions are experiencing increases in mobility at different rates and consumer confidence will return to different sectors at different times. We may quite quickly become comfortable with buying a packaged sandwich, but we may not want to go to a restaurant. Likewise, we might quickly return to local holidays while avoiding international travel for some time.
This is going to be hard to predict and planning systems will need to continually sense, adjust, and recalibrate.
Scenarios are the bedrock during uncertainty
With such uncertainty, most businesses should have multiple scenarios planned. There may be comfort in having ‘the plan’ but in reality, during an unpredictable return to a ‘new normal’ we need to be able to respond to a multitude of situations. To do this, we need multiple scenarios in our planning systems and agility in our supply chain networks to match the range of necessary responses.
The fundamental building blocks of plans must change from a sum of ‘steady state’ product and / or customer forecasts to an event-based, scenario-driven plan. The plan needs to be based on events and scenarios that can be updated and activated or deactivated real-time. The simple construct is as follows:
- Events are things that could happen, such as a businesses reopening in June or a supplier going bankrupt.
- Scenarios are a combination of such events (such as reopening businesses in June with no supplier bankruptcies or reopening in June with multiple supplier bankruptcies).
- The plan is a base plan, overlaid with a set of selected scenarios.
While this seems so simple and necessary, the reality is that the majority of today’s planning processes and systems do not inherently support this approach.
The lessons for planning from Covid-19
What the global pandemic has shed light on is that global supply chain systems are in real need of a rethink. So, what needs to change to prepare businesses for the next crisis?
1. Event- based planning
We need real-time, event-based scenario planning to respond to changing situations as demand and supply side shocks become increasingly frequent. Consider the pandemic a “stress test” of your planning systems. What hasn’t worked well in this situation is not working well with smaller day to day challenges.
Over the past decade, many organisations have focused on making supply chains as lean as possible, supplying goods around the world rapidly and cost effectively. But the pandemic has exposed a number of cracks in global supply chains, and organisations that have previously focused on developing the lowest possible cost supply chain could well be those who have struggled the most over the last few months. Just like a flood is a good reminder as to why we pay for insurance, Covid-19 is a good reminder as to why we need agility. Long-term lessons for global supply chains may include an increase in local sourcing, which even though more expensive, will deliver shorter planning replenishment times and more resilience.
The changing face of demand during the Covid-19 crisis has shed light on how supply chains need to adapt for the future. Agility, real-time planning and digitalization are all needed in tandem to ensure that global supply chains are resilient and can weather any storm. Having the ability to quickly pivot in a crisis and plan for significant mobility changes, will become the make or break for business continuity in the future.