In these unprecedented times organizations have to deal with an extremely high degree of uncertainty on both demand as well as supply side.
Demand variability is at its peak because the consumer priorities have shifted and they are more focused on procuring the essentials. They are also open to switching brands. Additionally, there is a limited retail and distribution window available due to lock down restrictions. Demand Planning has become extremely complex as there is no relevant history due to changed buying behaviour.
On the other hand supply variability is also at its peak. There is limited production capacity available either because the factories are shut or are operating at a limited capacity due to labour and social distancing constraints. Apart from this, suppliers are also facing a similar challenge and some of the key ingredients are not available. Lockdowns are also leading to delays in dispatches as vehicles have to find new and longer routes through green zones. Apart from this factories are also losing capacity due to longer repair cycles, shortage of key utilities and consumables.
Organizations which can make the most out of these times will emerge as eventual winners and rest will struggle and may even perish. One critical aspect in this extremely constrained environment will be to get the Supply Chain planning right in order deal with the above uncertainties. A two pronged strategy will be important to weather this storm – (a) Maximize Postponement to deal with Demand Variability; and (b) Optimize the product mix to make the most out of available supplies.
1. Dealing with Demand Uncertainty :
The best way to deal with extreme demand variability is to delay or postpone to the maximum extent possible but not one step further. Delay till you are reasonably sure but not so much that you lose the customer. Remember, holding on to the loyal customers and acquiring new customers is still the key. Different organizations will have to identify the right postponement strategy depending upon the buying lot (or MOQ) of the customers, lead-time of shipment, lead-time of production and sourcing, warehousing capacities etc.
- For a make-to-stock company it will be important to produce key SKUs and stock at central or regional warehouses but not further, and dispatch from these warehouses based on the demand. Downstream warehouses can work with bare minimum inventory. Make to stock Organizations can also consider trimming out the long tail of SKUs with high variability (strangers). Getting the inventory plan (stock norms) right based on new demand and supply variability estimates will be a critical aspect at this stage.
- Make-to-Order companies may look at postponing the intermediate or Raw Material Stage production and consider producing finished goods only against confirmed orders.
2. Dealing with Supply Uncertainty :
Organizations will have to maximize from the given resources (through optimized supply planning) and will need to decouple as much as possible from upstream uncertainties.
- Making the most out of given resources – Since the capacity available is limited due to lock downs and social distancing constraints, making the most out of the asset hours available will be important. It will be critical to identify and prioritize those products which give maximum revenue per hour of Factory asset utilized. Products with low revenue per hour of asset utilized will have to give way to the ones with higher revenue per hour. The Supply plan must account for these factors to maximise the revenue.
- End-to-end Planning – E-2-E planning will have to be done including vendor level planning (particularly for the key raw materials) to ensure that the products planned can be produced by the vendors also while working under constrained environment.
- Decoupling from the upstream inventories – It will be important to keep sufficient or optimum safety stocks for critical Raw Materials to deal with the upstream supply variability. These are raw materials which are a part of a number of important finished goods and may have supply shortages due to the COVID situation. It will be important to buy bigger lots of such raw materials whenever the vendor capacities become available. It is much safer to stock material at RM stage as this at a much lower cost and can help delaying decisions or postponement till the last moment.
While these are difficult times it is not all over for the organizations which can demonstrate resilience. The ones which can make right products available to the customers will gain at the cost of competition. Fickle minded customers will make a switch and this is the right time to grab new customers. It is important to plan right in order to stay ahead of the curve and gain in terms of market share so that you emerge much larger after the COVID dust settles.