Updated: Jun 2
Over the last 3 decades, globalization led manufacturing efficiencies and transportation economics have made product supplies very dependent on the Chinese manufacturing ecosystem. So much so that many countries’ transport lines faced their worst hit due to COVID outbreak as they woke up to a new world with stringent lockdowns and dynamically changing regulations. Industries and brands that are heavily reliant on the Chinese ecosystem for their supplies were the worst affected due to the sheer scale of this pandemic’s outbreak.
In this article, I will cover ‘Why’ companies, especially SME product companies, should plan for such disruptions, specifically by de-risking their supply side.
(a) Covering the source first
Building a reliable supply is the first step to building robust supply chain resilience. Let us face it: You may have everything covered for your product to sell, but if you do not have reliable frequencies of stock, you just cannot sell. Hence, we start here. In order for your product to reach your last mile customer or retailer from the factory, economics entails demand and distribution to fall in place.
However, in the current CoVID-19 situation or any other disaster-affected time periods for that matter, both demand and distribution are definitely not in one’s hands. Currently, in India, distribution is determined by which zones are more impacted by CoVID, and local delivery laws (which are also dynamic). On the other hand, demand uncertainties are very much tied up with other factors such as consumer behaviour, disposable incomes and household priorities as such. We will cover some of these aspects in later blogs in the Indian context.
Therefore, we assume we work on whatever is the most important thing to control, and start with the Supply Side.
(b) Bullwhip Effect & Supply Shocks
If you are a niche product (Gourmet snacks, Organic tea, Herbal body wash or Recycled Apparel for instance), catering to an exquisite market and you are contract manufacturing, it is probable that most brands in your segment work with a small number of manufacturers. In a given geography, a country like India, this subset could be less than 20, especially those with experience in your product niche.
In theory, what a market and hence a brand in that market should try and avoid is 'A Bullwhip Effect', due to which orders become more variable upstream in the supply chain. In practice, once this occurs, inventories, commitments and service levels from the supplier-manufacturer are bound to go haywire. With lesser number of such suppliers, the end result of this in many instances will eventually be an increase in price, which is referred to as a 'Supply Shock'. (a negative shock if supply is constrained and prices go up). This is detrimental to the market, and eventually to your business. For instance, we saw commodities like some vegetables and fruits go through this phenomenon in the first phase of CoVID-19 lockdown, and on the contrary, global oil stocks experienced a positive supply shock.
(Source: "Does the Bullwhip Still Strike?" by Prof Ralf Seifert with Olov H. D. Isaksson)
It is clear from these two points that de-risking your supply is not only important for your own business, but also for the industry or market you are trying to cater to. This may seem a very obvious point, but in an everyday hustle, these are some vital strategies that could be missed.
The HOW! How to de-risking from a Supply Crisis during and after CoViD - LinkedIn post