The COVID-19 global crisis has highlighted the critical and often invisible role supply chains play in our everyday lives, writes Jan Godsell
Brexit created a great deal of uncertainty for UK supply chains. The sophisticated planning systems that underpin many of our retail supply chains were tested further to model the response to different scenarios. Inevitably, this led to the strategic positioning of additional inventory, and more dynamic planning. As the spread of COVID-19 gained momentum across Europe, consumers started to panic buy. As humans, we fear loss more than gain, a bias known as myopic loss aversion, part of prospect theory. It’s this tendency that fuelled spikes in demand for hand sanitiser, toilet roll and paracetamol, as consumers stockpiled and stopped buying products in line with their rate of consumption. Empty shelves fuelled the panic, and the phenomena spread to many everyday essentials.
‘Spike’ management: smoothing the peak
As it became apparent that consumers could not self-regulate, and purchase at the rate of consumption, responsible retailers intervened. Rationing was introduced to regulate demand. This had two benefits. Firstly, it ensured a more equal distribution of products. Secondly, by limiting the rate of demand, it gave the supply chain a chance to catch up. For many products there was inventory in the supply chain, it just couldn’t be replenished at the same rate as consumer demand. Retailers also began to recognise that promotions were distorting demand, and many switched to a fixed price strategy to discourage buying more than needed. During this period, UK retail supply chains have truly demonstrated their dynamic flexibility. Their agility. Their ability to create responsive supply chains that have accommodated unprecedented changes in volume and mix.
From equality to equity
Rationing was the right policy to help smooth the peak. Many countries are now in lock-down, and demand is beginning to stabilise. There is a natural uplift in demand for many products, as our demand shifts to the home. For instance, as we ‘stream and chill’, there is an associated increase in demand for bandwidth and comfort eating products. Demand for tea and coffee have increased, as we no longer frequent coffee shops or the company drinks machine. As the situation begins to stabilise, and planning systems begin to recognise the new norm, retailers face a new challenge. Whilst rationing might provide equal access to products, not all consumers needs are equal. A family with four children will require more food than a couple. A couple with new born twins will require twice as many nappies as a couple who have just had one child. The new challenge is one of equity to ensure that everyone gets what they need, but this does not necessarily mean the same amount. Another dimension of equity, is access. Those who are at greatest risk and are self-isolating, or those at the front-line of our COVID-19 response, require preferential access. Whether this is to online delivery slots, access to stores or food parcels. Retailers are shifting their focus from equality to equity, and this will be further refined as they adjust to the new norm.
From dynamic to structural flexibility
There are some products, fundamental to our response to COVID-19 that have seen an unprecedented increase in demand. This includes hand sanitiser, paracetamol, personal protective equipment and ventilators. Such fundamental changes in demand require a fundamental change in the supply chain response. The supply chain needs to demonstrate structural flexibility. This is the ability to reconfigure, to create new supply chains to fulfil demand. It is easier for supply chains to be structurally flexible, when they are local, rather than global. Ineos plan to build a hand sanitiser plant in North East England within 10 days, to provide one million bottles of hand sanitiser per month to the NHS. The main ingredient comes from a plant in Scotland. They will replicate this model in Germany. Structural flexibility requires a focus on economies of scope (efficiency through variety) rather than economies of scale (efficiency through volume), as it is easier to switch production. It can also require a cooperative approach, as organisations collaborate with their competitors to share the bandwidth for assets. It is also easier to achieve, if supply chains are designed with a greater number of nodes in the network. Having two factories is more structurally flexible than having one, as volume can be switched between them. This requires a different approach to costing, one that looks at the longer term and factors in an option value. This may result in a supply chain cost that is more expensive today, but provides greatest flexibility in the future.
COVID-19 is a global crisis that has highlighted the critical and often invisible role supply chains play in providing consumers with their everyday essentials. Supply chains have risen to this challenge and are demonstrating unprecedented levels of dynamic and structural flexibility. They have moved beyond the spike, and are flexing for success.