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How does the Coronavirus pandemic impact the supply chain ?

· INSIGHTS

The Coronavirus pandemic has undoubtedly transformed our way of living, working, and consuming, and we have yet to discover its full impact. Already, most renowned supply chain specialists have drawn the list of the potential changes:
 

1. From globalization to regionalization

Especially in the industrial sector, the keyword was optimization and cost reduction, which ultimately meant sourcing from low labor cost countries. As soon as China closed their borders with the rest of the World, many companies had to rethink their strategy.

Taking an example from one of our clients: Alstom decided to diversify their supply sources to European countries, which, even with the cost increase, will reduce the risk of shortages.

Another example from France, regarding mask production. Most masks were first purchased from Asian countries, but, as the pandemic grew, the production got moved back to the homeland.

2. A change of perception and in strategy

Before the pandemic, the supply chain was perceived as the back staged buddy: important but not critical. It is now seen as the main protagonist, as companies have to support variability in demand and production sources. Forecasts will need to become more and more accurate, and safety stock will be taken into consideration. The question we may now ask ourselves is: will JIT (Just in Time) strategy be the way to go for the next decade? What percentage of stock will companies bear? What seems to be sure is that companies will need to minimize the risk of shortage if they want to become key players in their industries. In the retail industry, they noticed during the crisis a sharp increase in the variety of products offered in stores. The franchisees also had more width in choosing their own local suppliers. In the train industry, many suppliers are interconnected. When one is facing a critical shortage, Alstom decided to create a stopgap solution where other types of suppliers are asked if they have such an article in stock.​
 

3. Human dimension: the comeback


We could have thought that, due to social distancing, the Human factor in this "optimization operation" would be discarded, but researchers tend to think differently. Labor will be one of the key assets to play with to get out of this crisis: from a wide range of industries and even with the improvement in AI technologies, this "human touch" will be what makes the difference. TPS (Toyota Production System) calls this "human touch" the "autonomation," which has been proven to be very effective during the crisis: 80% of automating and 20% of improving from human expertise. Many companies noticed a shift in communication and change management: younger employees helped older ones with using information systems, more contact with our "professional entourage"…

4. Forecasting in the COVID era

Every day, companies use forecasts to plan their activities, communicate with external stakeholders and prepare them so that supply chain activities can happen on time at the right quantity and quality. Forecasts allow resources like people and money to be allocated in a schedule that can be smoothed. Forecast accuracy comes to measure the reliability of the communicated data as demand can be very variable. When forecasts are accurate, planning activities are made easier, as well as resource allocation. On the other side, when forecasts are not accurate, they can generate many uncertainty and disruptions among the supply chains. In this case, stakeholders are less likely to trust each other, overstocks are generated, and emergencies tend to happen and create stress. Demand variability is nowadays high with the pandemic situation, and forecasts tend to be inaccurate. Stakeholders are impacted by production stops and closing factories, increasing the stress all along the supply chain.

This sums it up: the COVID 19 pandemic has shown us the limits of our established systems. It has drastically changed how we perceive the supply chain through local sourcing to putting back the "human factor" as the key characteristic of the optimization equation.

Article written by:

 

Gaetan Vaujour, Philippine de Ganay, Emilie Papillon, Amaury Philips

If you want to dig deeper into these topics, these links might interest you:

https://unctad.org/system/files/official-document/diaeia2020d2a5_en.pdf

https://hbr.org/2020/05/will-covid-19-have-a-lasting-impact-on-globalization

https://www2.deloitte.com/be/en/pages/risk/articles/covid-19-managing-supply-chain-risk-and-disruption.html

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