As the COVID-19 outbreak progresses, I’ve been watching the effects on supply chains and the impact of true demand (N95 masks) versus hyped demand (toilet paper). Both examples are currently seeing stock-outs, but the toilet paper shortage is more of a logistics issue than a physical supply problem.
N95 masks have both a physical quantity limitation (12 million in the national stockpile) and a logistical problem: there are over 6,000 hospitals in the US. If we do the math on that, assuming an average of 2,000 masks and 500 staff members per hospital, you’d have a four-day supply. This is obviously rough math and doesn’t include the hospital’s own supplies, but there is clearly a demand-side forecasting issue that would need to be reevaluated.
Coming out of this crisis there are many risks, but also opportunities to prepare for the next crisis.
Avoiding the bullwhip effect
The biggest risk with any demand spike will be the bullwhip effect. This occurs when consumer-level demand spikes, causing a distortion in the demand signal that is amplified the further up the supply chain we go. This can lead to large, chunky orders, over-production and ultimately excess inventory throughout the supply chain.
There are a few solutions to this phenomenon. Increased replenishment frequency in smaller quantities can smooth out the flow, as can just-in-time ordering, integrated multi-level supply chain optimization and–in an ideal world–orchestrated demand signal sharing between retailers, distributors and manufacturers. None of these solutions are easy to implement, but identifying a potential bullwhip effect should be on everyone’s radar.
The opportunity that presents itself is to apply a postponement strategy in reorganizing the supply chain post-crisis. In this scenario, we need to analyze the entire supply chain to determine the ideal quantities to hold at each level of the chain. Ideally, the endpoints will hold the least stock, while each level up the supply chain will hold progressively more stock, postponing the push of stock down the supply chain until it is truly needed, and where the forecast accuracy is highest.
Implementing the postponement strategy relies on the integration of the demand signal throughout the supply chain and a clear understanding of the logistical capabilities to distribute stock within the supply chain. A well-implemented postponement strategy can in many cases handle even the most unforeseen spikes in demand, allowing time for production to ramp up if the increase in demand is predicted to last.
Currently, the supply chains in the United States seem to be faring well in this crisis, apart from some strategic products. Stores may be depleted for periods of time, but that is largely due to consumers over-purchasing out of fear rather than a fundamental flaw in the supply chain. Ultimately, there will always be a cost versus availability evaluation that retailers need to make, but fortunately, there are strategies and systems that make that decision a whole lot easier.
Peter Leith has over 15 years of demand planning experience, implementing solutions for Fortune 500 companies on five continents and defining the product strategy for a leading demand planning software provider. Peter currently works with brand owners to implement end-to-end digital transformation solutions.
By Peter Leith