“The coronavirus could cause supply-chain disruptions that are unlike anything we have seen in the past 70 years,” said Professor Yossi Sheffi of the Massachusetts Institute of Technology in a recent op-ed in the Wall Street Journal.
Three things make the COVID-19 outbreak especially troubling from an economic perspective: a drop in supplies of parts and materials from China on which the rest of the world increasingly relies, a drop in demand because a scared consumer base is staying at home and not buying stuff, and something called the “bullwhip effect.” As defined by Sheffi, it means any decline in demand along the supply chain, as one party attempts to compensate not only for the current drop, but also for an anticipated one.
Sheffi’s advice for counteracting the gathering supply-chain crisis includes the sensible idea of planning operations “to maximize cash flow rather than profits.” This goes to the heart of our approach to scrutinizing supply-chain operations.
The question is: How do we actually manage risk? Apparently, as companies have prioritized the pursuit of profit over the last 20 years, by greatly increasing it. We’ve seen a massive reduction in how much inventory manufacturers, wholesalers and retailers believe they need to keep in the supply chain in order to ensure business as usual. This trend seems especially ill-advised when considering the greatly increased physical distances that inventory needs to travel. Add to that sharply reduced levels of oversight and control over low-cost goods made in factories you’ve never seen and never will, and you face the very real risk of things suddenly grinding to a halt. Just-in-time and quick-turn-time strategies have released a vast amount of working capital into the business environment (and shareholders’ pockets), but they’ve come at a cost. We’ve ended up with supply chains highly vulnerable to exactly the kind of global event we’re witnessing today.
What to do about risk, now it’s turned to jeopardy? There’s not a lot out there in the way of good advice. In my opinion, we’ve been talking an awful lot of nonsense about mitigating risk for an awfully long time. This article by the McKinsey consultancy demonstrates a standard approach, advising corporations to demand transparency in their operations so they can identify and manage risks. All good — but how do you actually respond when your supply chain falters at both the supply and the demand ends? This is where even the best brains seem to freeze up. McKinsey’s advice is a typically vague exhortation to head off disaster by promoting “shifts in culture and mindsets.”
The only mitigating approach seems to be the one that’s essential to handling the COVID-19 outbreak itself: don’t panic. In the same way that the public is being instructed to stock up on essentials without going on a wild shopping spree, businesses need to secure more inventory or spare parts in preparation for the resurgence of both supply and demand, while avoiding the kind of panicked actions that have led to absurd shortages of toilet paper. Like a run on a bank, the trouble with fears of a dire shortage is that they create the dire shortage. I can’t help picturing a supermarket manager in Sydney delivering the equivalent of George Bailey’s speech in It’s a Wonderful Life, in which he prevents a disastrous run on Bedford Falls’ Building & Loan by explaining the basics of liquidity to the mob, except with a toilet roll. Truly, if humans were rational beings, the shelves would be clear of thermometers, not face masks.
The inescapable fact is we’ve become too accustomed to the idea of risk without considering the downsides, because we believe everything will work out just fine. The irony of a Hollywood industry that falls back on low-risk sequels while promoting storylines where protagonists shoot for the moon and never miss should perhaps be questioned a little more closely. What if John McClane had failed to single-handedly defeat that gang of armed terrorists at Nakatomi Plaza? What if Indiana Jones hadn’t made it under that descending stone wall? What if you build it and nobody comes?
Maybe the shift in culture and mindset we really need is less of a seat-of-the-pants attitude in a desperate race to profit, and more of a holistic view of what it means to be a responsible corporate citizen in this fragile world. Quite aside from risking supply-chain breakdown, when we’re encouraged to move fast and break things, we end up with children laboring six days a week in coffee fields, and worse. As you wash your hands for the umpteenth time and wonder whether you’ll be able to work from home for the next month, give a thought to what a genuinely lower-risk supply chain might actually look like. It’s almost certainly not as lean and mean as we’ve gotten used to.
Helen Atkinson is a contributing writer to SupplyChainBrain.
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