COVID 19: The Supply Chain Lockdown- 1st Blog

COVID-19, the virus that shook the world. It’s funny that a microscopic organism can get the world to a standstill. Economies have come to a halt and doctors and civil servants have become the new heroes, fighting this deadly disease from the frontline. One can only imagine the atrocities countries and hospitals would have to endure, if global lockdowns weren’t implemented. We do appreciate the steps the government at the center and especially at the state level have taken to avert a dangerous situation. Keeping supply chains and logistics as a part of essential services was a smart move and our clients (into medical equipment and Food Products) at Wareport have been able to conduct their businesses due to this ruling. This situation, however challenging, is also very interesting. I have been reading several articles on supply chain disruptions and I’ve kept my ear close to the developments in industries and how they plan to tackle this situation and what manufacturing companies are looking to do, to be prepared for any situation in the future. ‘Business- continuity’, is the new jargon making rounds. The industry is looking at a complete revamp of business processes. It is critical for you and I to be updated and adapt to these changes. I’ve taken the liberty to elaborate this situation in a series of articles. The order of each topic is as follows.

1. What was the immediate impact of the Pandemic?

2. How did the lockdown effect the current systems?

3. Which industries were affected the most? Which industries and companies were the least affected?

4. Vulnerabilities exposed in the Indian and Global Supply Chains, by COVID-19.

5. How are companies dealing with this shocks?

6. What are the short term measures companies are taking to deal with demand and supply shock?

7. What are the steps to recover from this pandemic?

8. What is the new normal in supply chains? What will the post-COVID world look like?

9. How to deal with this pandemic for MSME’s and micro companies

10. The way forward

1. The Pandemic:

It is important to understand what is different about this pandemic. Countries have suffered with similar outbreaks in the past. The Spanish Flu and the SARS and MECS outbreak, rapidly spread through continents. It seems that countries are better prepared this time. Also, the speed at which the this virus spreads, is something countries haven’t seen before.

 Trump may say a million things against WHO and their handling of the pandemic, but the transparency of information they maintained actually helped many countries prepare themselves to fight this disease. A heavily populated country like India, declared nationwide lockdowns, which is something the country hasn’t experienced before. Unlike yesteryears, we know that there is only one way to mitigate the spread and that is by social distancing.

 Saturday, 21st of March, I remember retiring for the day after a hectic day trying to file my return along with my CA. The panic hadn’t set in yet. Whispers of the pandemic were everywhere, but no one took it too seriously. At 8PM, India heard their PM announce- A Nationwide curfew for a day. Businesses weren’t still worried. They took it as lightly as a weekend home.

 24th March the month long lockdown was announced. No business were ready for this. It came as a shock, even though growing trends in the global COVID-19 scenario, clearly indicated that India, a population of 1.3 Billion people and a poor health infrastructure, would have to take some drastic unthinkable step.

Q1. What was the immediate impact of the Pandemic?

India noticed a complete standstill of operations. All supply chain’s froze and manufacturing plants stopped functioning. This created a huge crisis. The outcomes of this economic crisis are called ‘shocks’ to the economy.

 a. The Supply Shock:

A supply shock is an event caused by an external stimuli, in this case the pandemic, that causes the supply of goods to rapidly increase or decrease. This includes services as well. This sudden change effects the equilibrium price of goods and services. So the lockdown saw many industries stopping production. Although demand existed, their regular availability in local markets reduced. This caused prices of the ready stock to sky rockets. Also, inventory was stuck at all nodes of the supply chain.

A similar thing happened in the global markets as well. MNC’s have their source their raw materials and distributed the finished goods to multiple locations, around the globe. The first country to report the virus and to shut down it’s borders and to halt business processes was China. Production schedules in the rest of the world, where the virus hadn’t created an impact yet, got hampered. Similarly, Italy, the largest buyer of Textiles (for the Fashion industry) suddenly had it’s inventory stuck at ports, in-transit or at borders. So even before the virus hit Italy, companies there started noticing disruptions in their supply chain.

b. The Demand Shock

A sudden event that causes the demand for goods and services to suddenly increase or decrease, usually temporarily, is called demand shock. During this pandemic, economies experienced a positive and negative demand shock, where-in demand for goods drop severely (Negative), for example Oil and the tourism industry and demand for essential commodities spike in demand (Positive). A lot of basic amenities that people use on a daily basis, became unnecessary during the lockdown.

‘Systematic demand shocks’, is something that economies experienced for the first time. Demand shocks are a common phenomenon, that take place due to market volatility. But what happened during this pandemic is unimaginable. People started hoarding and stocking up on staples and essential commodities, in order to comply with severe lock down restrictions.

Something that has been discussed as an example in several webinars and discussion forums globally, is the example of toilet paper. A commodity whose demand can be easily forecasted and whose consumption is usually stable, became a rare commodity, due to this unprecedent peak in demand.  

Some measures taken by the Government of India were actually very commendable. Categorizing transportation, warehousing and other activities in the supply chain as essential services, helped restacking the shelves of retail stores. But, this worked perfectly till stocks lasted. What happened next, was something experienced planners and forecasting software’s could never predict.

Models that dictate replenishment from manufacturers to distribution points to retail counters are heavily mismanaged and lack sophistication. Most of the processes are manual, where no data analysis or logic is used while making decisions. These models were designed to support smooth and continuous demands. Stockouts and inventory pipelines being emptied out, lead to a lot of confusion. Companies had to redirect inventories, find ways of cutting overheads and operational expenses, redefine priorities and override IT supply proposals.  

 On the production side, non-essential commodities remained shut, all throughout the lockdown. An ambulance is allowed to move around the city, helping the sickly to reach hospitals, but spare part vendors were ordered to keep their businesses shut. What would happen if the ambulance suddenly broke down? No business can function by itself, there is always dependency.

 What I am slowly inching at is that for the first time in history, Demand and Supply Shocks hit the economy suddenly. This is how the pandemic affected the economy. The outcome of this situation caused ripples, I term as the bullwhip shock.

 c. The Bullwhip Shock

The result of the demand and supply shocks, hitting businesses at the same time, along with government restrictions and regulations, resulted in aftershocks. The bullwhip effect in a supply chain takes place when demand spikes tend to amplify as you move up the supply chain. A small change at the consumer level can lead to excessive changes in production. This not only causes increase in operational expenses, but also results in dead stock and stockout situations. The key driver that leads to such an affect is the inability to view the nature in which demand varies. This is why, visibility is required in any supply chain.

Robust demand plans won’t work in the future. It is critical to be lean in demand planning as well. It is critical to reduce the OPEX and CAPEX as much as possible. Also, it is important to take short term solutions in logistics, into consideration.

So this brings us to a solid explanation, as to what was the immediate effect of the lockdown caused by the pandemic. I agree all this was a bit too technical. But it requires us to understand the basics of economics and the fundamentals of the market, before deep diving into examples.

How did markets respond to such a sudden change?

Unfortunately, very poorly. Traditional processes of logistics are robust and opaque with no flexibility. Reliance on age old demand forecasting formulas won’t work anymore. Building a lean supply chain, needs to be made the epitome of every decision. We cannot wait for a pandemic to evolve our supply chains.

 I really hope I’ve given justice to this topic. In the series of articles that will succeed this topic, will elaborate on key parameters and drivers and will expand on many more specifics. With all my experience and after discussion this topic with experts, I will also list how companies (SME and MNC) can find a way out of this crisis and how they can learn and adapt. I will also expand on business continuity and how it can be executed.  

Thank you.

About the Author:

Kunal N. Bafana

A Global Supply Chain graduate has been consulting several SME’s in trying to improve their e-commerce, omni channel supply chain strategies. He is the CEO of Feronex Smart Logistics PVT LTD (New age on-demand logistics company), MD of Western Services India (a 3PL) and manages a portfolio of warehouses in Maharashtra. Wareport.in is one of his visionary products.

Wareport is an On-Demand flexible storage solution, where we can guarantee our customers a minimum 20% reduction in the overall warehousing/inventory and storage expenditure. We promote the sharing of warehousing assets, capacities, infrastructure and manpower.

The following are benefits our customers would receive;

1. The ability to increase and decrease their warehouse capacity, rent, manpower and space according to their demand

2. One package cost. Avail all warehousing services at just INR 1000/Pallet/month (Inclusive of rent).

3. No time and space bound contracts

4. No security deposit

5. Completely Plug and Play

6. Complete access to our state of the art inventory and order management system.

7. 100% traceability and visibility in the supply chain