With more than a million companies in the DACH region on short hours, it’s time to ensure your supply chain is resilient. But many crisis management tools have a short-term focus. How can you deal with disruption now while laying the groundwork for longer-term improvements?
If you are concerned about how the COVID-19 situation is affecting your supply chain, you are not alone. Drawing on our experience in supply chain management and scenario planning, we have set out some steps you can take to improve resilience and reinforce your financial performance. Not only in the short-term, but to deliver lasting benefits once the current situation is over.
Achieve full transparency
If companies knew what they had in their value chain at any given time, they would make different decisions. Yet partial transparency is usually due to a disconnect between financial and supply chain data, and can be remedied.
Begin by identifying your critical components. Review your bills of materials to catalog which are sourced from high-risk areas and don’t have ready substitutes. Create a risk index for each based on uniqueness and location of suppliers. After the priorities, assess the risk of interruption from tier-two and onward suppliers. And for risks that could stop or slow production – or increase operating costs – actively coordinate with tier-one suppliers or identify alternative suppliers if possible.
Assess realistic customer demand
Crises may increase or reduce demand for particular products. Estimating realistic final-customer demand is therefore key. You should question whether demand signals from immediate customers are credible. And make smaller, more frequent orders to smoothen the peaks and valleys that produce cost and waste. Adding flexibility to contract terms may help, as can prioritizing customers by strategic importance, margin and revenue to safeguard vital relationships.
Optimize production and distribution
I’ve seen too many times how constrained supply chains, slow sales, and reduced margins combine to put pressure on earnings and liquidity. Scenario planning helps project financial and operational implications. While most business projections tend to be optimistic, now is the time for a dose of realism if you are to free up cash.
To ensure best use of available capacity, determine which products are of highest strategic value, important to health and human safety, and have earnings potential. Understanding current and future logistics capacity by mode is also essential, as is prioritizing capacity and time sensitivity. Build the full picture by using insights from your marketing and sales, operations, and strategy staff.
Take a longer-term view of resilience
Understandably, dealing with immediate concerns will be your priority. But once you are making progress, start to design a resilient supply chain for the future. Formalize processes and tools created during the crisis, and collaborate with suppliers to reinforce the entire supply ecosystem. Digitalizing supply chain management can improve speed, accuracy and flexibility - helping anticipate risk, achieve greater visibility and coordination across the supply chain, and manage resultant issues. Coming out of the crisis, take a complete look at your supply chain vulnerabilities and the shocks that could continue to expose you.
Let me sum up the core steps that might help you assess pressure points along your supply chain.
1. Develop a baseline and scenarios
Using data you already hold, work out baseline demand, supply and financial forecasting. Identify internal and external data that could enhance your demand and supply forecasts, aligning high-risk areas and informing the scenarios to be simulated. The outputs should be an approach with clear recommendations on what data and signals to include. And concrete high-risk scenarios based on demand shifts or supply disruptions.
2. Simulate scenarios
Stress test the scenarios through end-to-end simulations. Map and model supply and demand forecast scenarios to financial implications, leveraging your business expertise. This helps you understand the implications of demand and supply scenarios, and provides a quick diagnostic of high-risk areas along the supply chain. So you can develop financial modeling and P&L simulations based on these forecasts.
3. Develop a management Cockpit
The Cockpit should link clearly to financial implications and models. Enabling transparent planning, adjusted for risk scenarios, it helps you create a dashboard with a view over your risks and exposures. Fully tailored, it contains a detailed supply chain and financial mid-term forecast per scenario, including cost breakdowns, top line, bottom line and inventory impacts.
4. Implement the Cockpit action plan
This involves determining a clear action plan per scenario. Done correctly, it will give you an overview of your supply chain and financial impact forecasts per scenario. And recommendations to mitigate the risk of no supply, and your financial exposure. This provides a solid basis for a longer-term outlook on your supply chain to ensure lasting risk mitigation.
Read more about these steps and our insights into resolving pressure points to enhance control and performance – in our new white paper.