The current COVID-19 situation highlights the supply chain management challenges in any turbulent time. In this blog we identify five key points: preparedness, larger good, anticipate and not react to events, responsiveness, and an intelligent stochastic estimate of demand. Specific examples are provided to highlight critical aspects of each of these within the context of questions that often arise about supply chain during the current COVID-19 challenge. This blog is part of Arkieva’s COVID-19 commitment, especially with respect to models.
Although Supply Chain Management (SCM) is not normally a hot topic of conversation at a gathering, this has changed with COVID-19. The other day someone said (at the appropriate social distance), “I heard you are an expert in Supply Chain”. The term, “heard you were an expert” immediately sends a chill down my spine and a warning light in my head. I replied, “I have been fortunate to have worked with and continue to work with experts in this area”. It turned into a great conversation with great questions. Topics ranged from where active agents in drugs are produced to supply of masks to grocery store shelves. I stressed these key points
- Preparedness: the just-in-time approach to production and distribution generates substantial value in minimizing inventory and identifying the most effective producers of each component which in theory optimizes the firm. However, it is critically dependent on the smooth flow of goods from raw materials to delivery of end-product and no supply interruptions. Assessing this risk and ensuring contingency is still not well thought out on a regular basis.
- Larger good: The core concept of optimizing the performance of individual organizations and personal freedoms and responsibilities are a known cornerstone of prosperity (however that is defined). However, for some situations ensuring the larger good can and does run opposite to “optimizing performance” and is critical to prosperity. Examples made clear with COVID-19 are the need to maintain “contingency” resources in health care; the need for health care to operate as a unified system in some situations, and everyone’s health is directly dependent on everyone else’s health across all outcomes.
- Anticipate and not react to events. The world of “data-driven decision making” tends to rely on monitoring events in real-time and then reacting, as opposed to anticipating and preparing. For COVID-19 two areas that are clear examples are tight quarters in production facilities for meatpacking and chicken farms and care for the elderly (assisted living, nursing homes, skilled care facilities). If the gas is on the floor and the match is lit, it is far easier to blow out the match, then drop the match and then deal with the fire. Anticipation requires community intelligence.
- Rapid Responsiveness. As much as anticipating or preventing a serious event is optimal, in practice fires do occur and response is needed. The faster the response the better (either to put out the fire or capture a business opportunity). A quality plan supports responsiveness.
- All planning begins with an intelligent stochastic demand estimate — a range of possible demands across time with a probability and an urgency.
Question 1 was on the production of gowns and masks. They are reasonably simple to make (compared with ventilators and COVID-19 testing kits). Why the delay in responding? First- all production and distribution respond to the anticipated demand which includes safety stock. Often this demand signal is the placement of an order or an estimate from sales. This was late in arriving. Second, even the simplest item requires production facilities, raw material, machines, and a trained labor force. These can not be added instantaneously, require investment capital (loans or investors), and a belief that the additional demand will be sustained across some period.
Question 2 was the location of the production of active ingredients for medicine. Active ingredients are a critical component of pharmaceutical products important to health care. Early in the COVID-19 challenge there was a concern of a shortage since many of the key active ingredients are single sources in China. Although this might be optimal for the firm in most cases, it raises questions with respect to preparedness and the larger good.
Question 3 involved grocery stores. We started with the well-known shortage of paper towels and toilet paper. I explained the total demand across time remained the same, but COVID-19 acted like a promotion activity on steroids – pulling demand from the future into the current period as individuals and small firms become local inventory locations. The ability to produce these products is enough to meet demand across time, but not the short-term explosion in purchases. I still find it very difficult to go to a store and not by paper towels if I see them available – even though I have run out of storage space at my home and Arkieva.
The most recent and interesting example was one passed along to me by Arkieva COO, Sujit Singh, a real expert in SCM, involving flour for baking. Although the demand for wheat is down at bakeries, the demand for groceries has grown dramatically since folks are doing more baking. Certainly, this makes sense, but one most data-driven decision making would not anticipate. “Fortunately, there is no shortage of wheat. Demand has outpaced the speed at which new products can be created and delivered, even as our mills run at full capacity. In some cases, getting more products onto shelves has been delayed within stores themselves as many are operating with fewer staff and reduced hours.” This demonstrates the importance of community intelligence and maintaining some extra raw material in the supply chain.
The current COVID-19 challenge accentuates critical questions that have floated around supply chain management for some time.
- The balance between optimal efficiency if “all goes well” with maintaining some “extra” when all does not go well.
- Handling multiple objectives beyond just minimizing costs.
- Managing risk.
In this blog we have identified some critical concepts to effectively handling challenges in turbulent times and illustrated them with examples. Although COVID-19 is a very serious situation, I hope some of the examples have provided a bit of humor. Remember these critical rules:
- Simple solutions that sound rational at a first look are a dangerous distraction from the real work that needs to be done.
- Complexity exists, whether you recognize it or not; best to recognize it.
- The Models are Incomplete, the Intuitions are Unreliable.