COVID-19: 6 steps to manage supply chain risks
The COVID-19 pandemic has created a shock for supply chains around the world. Some products have seen a sudden rise in demand, while it has dropped rapidly for others. Shipping cycles and patterns have also been disrupted by shutdowns.
Businesses that are not properly managing their supply chains could run out of materials and parts, or end up with finished products that can’t find a buyer.
“Companies need to figure out what is the demand change in the market for their products and how they’re going to manage their cash flow,” says Ali Lajevardi, Director, Business Development with BDC Advisory Services.
“If you build up your inventory for the current market, what is going to happen afterward when there is a recovery? We need to act short term, but there is going to be a long-term impact from the changes that we implement today.”
“There needs to be an alignment between the sales forecast and the operations to make sure the demand is known by the operations team,” says Lucie Le François, Senior Advisor, BDC Advisory Services. “There are going to be a lot of changes, so you need to be flexible in creating and implementing your plan.”
Lajevardi and Le François, who both have extensive experience helping entrepreneurs manage their supply chains, offer the following advice for entrepreneurs who want to minimize risks in the current crisis.
1. Gather your leadership team
The first things entrepreneurs can do is gather a team of leaders from sales, purchasing, production, logistics and financing to give alignment, prioritize and ensure operations can continue during the crisis or restart once it is over.
This team should meet daily to revise your sales and operations plans and be ready to adjust if any issues arise. Put your people and employee at the centre of this.
Companies need to have daily operations meetings to review risks and make sure you are on top of mission critical activities.
“Companies need to have daily operations meetings to review risks and make sure you are on top of mission critical activities,” says Lajevardi. “For the management team, it’s a balancing act with rapid decision-making cycle.”
2. Determine the level of demand for every product
Next, key customers need to be contacted to determine their needs in the coming weeks.
This will create a forecast of expected sales, which will inform your inventory purchases as well as your cash flow forecast.
Lajevardi says another result of this exercise should be a simplification of your product range. “Instead of making 10 different versions of 10 things, with limited inventory, pick five products and focus on those for the short term.”
You will also want to review your production plan to prioritize certain items that are in demand, while reducing others that aren’t needed.
3. How much inventory do I have on hand?
The next order of business should be to look at your current inventory levels for various types of goods:
- finished goods
- work in progress (WIP)
- raw material and inventory that’s ready to be transformed
“Many companies don’t have visibility on their current stock level,” says Le François. “Yet it’s critical right now to know what you have on hand and to classify it according to its importance. It will help define priorities, establish what is available for production and sales, and also help assess out of stock risks.”
It’s critical right now to know what you have on hand and to classify it according to its importance. It will help define priorities, establish what is available for production and sales, and also help assess out of stock risks.
A simple way to classify items in your inventory is to complete an ABC analysis. The principle is that 20% of your stock account for 80% of the value of the business. The intent in a context of shortage of resources is to put your efforts and focus on A products that will have a significant impact on your operations.
- Category A—Items you can’t afford to be out of stock ever “your bread and butter”
- Category B—Items with lower sales or use but that you must still keep in stock
- Category C—Low-volume items with high carrying costs that will not make a large contribution to your bottom line
Some companies might be tempted to hold onto more stock than usual because of current volatility, but overstocking risks tying up your cash into inventory that can’t be moved.
One solution can be to hold onto less finished products, since raw material might be easier to dispose of.
4. Analyze inbound and outbound supply chain risks
With a clear idea of what you want to produce or distribute, your next step is to identify risks across your supply chain.
One simple way to do this is to break down your supply chain into inbound (how resources get to you) and outbound (how products get to your customers) risks.
- Will suppliers be able to supply what you need?
- Have lead time delays been changed?
- If suppliers shut down for a time, will materials have the same quality once operations resume?
- Do payment terms and conditions need to be renegotiated?
- Will previously agreed upon delays and quantities need to be changed?
- Will current conditions cause delays at the border?
- Have international suppliers, in China for instance, been disrupted?
- Will shipment quantities or transport methods need to change?
- Do you have staff to receive shipments?
- Will they be willing to handle materials coming in from infected areas?
- Do we have enough storage capacity? Is there a risk we could run out?
- Do you need to change or adapt your packaging to meet new safety regulations?
- For B2B businesses, are you able to sell products directly to customers?
- Can your products be sent to customers?
- Are trucks and delivery drivers available to deliver shipments?
- Do you need to change transport modes to accelerate your shipments?
You can use the risk assessment grid to further analyze and prioritize risks. Based on this exercise, you may need to review your inventory policy and parameters suck as safety stock, minimum orders, etc.
5. Develop contingency plans
Having identified your risks, you should look for ways to mitigate them. Prioritize issues that have a higher risk score.
For example, many businesses are now doing shipping in smaller quantities to allow for more flexibility. Companies are also shopping around for new carriers and different rates. Still others are turning to brand new modes of transports; reviewing new options and comparing to routine ones.
Businesses should also be looking for alternative suppliers. Local suppliers, for instance, might be more attractive since goods won’t have to cross borders.
Also keep in touch with your main suppliers on a regular basis. Try to get visibility on their stock status and let you know if issues arise. They are also aware of what they send to who. Other clients might have supplies they are not using and would be willing to sell you.
6. Communicate, and think long term
As you navigate the crisis, it’s important you remain strategic about the choices you make.
“Even if we don’t know how long this crisis will last, we can be sure it will create new operational and supply chain norms, with technology, more than ever, being at the centre of it all,” says Lajevardi.
He also stresses the importance of keeping daily communication channels open with your clients, partners and suppliers.
“Open communication, internally and externally, not only helps your organization address its short-term needs, but it also helps position yourself for the new market context once the storm has passed.”