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Riding the Black Swan: It’s Not Too Late to Make Your Supply Chain More Flexible

Over the last several decades, companies have embraced globalization and modern supply chain management practices to reduce excess inventory, improve cost structures, and increase fulfillment velocity.

Over the last several decades, companies have embraced globalization and modern supply chain management practices to reduce excess inventory, improve cost structures, and increase fulfillment velocity. Firms that invested in just-in-time production and inventory management saw profit margins widen and, 11 years into the longest-running bull market in history, few could have imagined a demand or supply shock great enough to threaten the global supply chain … let alone both at the same time.

Many argue that the scale and far-reaching impact of COVID-19 makes it a “black swan”. Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader, first wrote about the concept in his 2007 book, The Black Swan: The Impact of the Highly Improbable. A black swan event is “characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.”

When news of the virus started to trickle out of China, it was distant news. Very few realized or recognized how quickly it would become front and center across the globe. The impact of the spread of the virus happened slowly and then very quickly. From the supply perspective, businesses with suppliers in China had to manage delayed or canceled shipments due to factory shutdowns. Those with suppliers in neighboring countries started to consider alternative plans in case other regions were impacted. From a demand perspective, firms suddenly found themselves wondering who would purchase their products during a time of record unemployment and consumer fear.

Like never before, the world’s eyes are on the supply chain.

Social distancing, the only proven method to prevent the spread of the virus, quickly impacted the economy. Foot traffic came to a halt as retail stores, bars, and restaurants closed their doors. Retail leaders like Apple, Nike, and Nordstrom, proactively closed to set an example, while Walmart, Target, and Walgreens—normally competitors—banded together to provide communities with essential goods. Even Amazon announced that it was suspending Prime-level delivery promises for nonessential goods to increase the throughput of essentials items like toilet paper, hand-sanitizer, food, and diapers.

The last black swan was the 2008 financial crisis; COVID-19 is the latest. More than two months into most shelter-in-place orders, many have settled into a life of social distancing and working from home. Meanwhile, the news continues to change every day, and as some states reopen their economy, many businesses face a fast-approaching new normal. Unfortunately, the uncertainty makes it difficult to define what “new normal” actually means.

Like never before, the world’s eyes are on the supply chain, but there is still a lot that can be accomplished in spite of uncertainty. Fortunately, flexible solutions exist so that companies can respond more nimbly to disruptions without making the steep capital investments that a lot of traditional supply chain solutions require.

Supply chain leaders don't fear monsters, but a black swan is a whole different animal

Business leaders aren’t afraid of bad news, and supply chain leaders expect a level of disruption because they are actually quite common. Bad news and traditional disruptions can be quantified and controlled. And, challenges often present opportunities to step back, assess what is broken, and then fix it.

Then, there’s the black swan. With COVID-19, we have lived in uncertainty for weeks, the health of the economy is unclear, and it’s likely we have already entered a major recession. Amidst the uncertainty is chaos, while business leaders fight fires they simultaneously must look forward and try to figure out what’s next.

Perhaps this is why, from a supply chain perspective, COVID-19 is so unsettling. Logistics leaders must consider tough scenarios in the coming months. Upstream operations were forced to close during the first wave—will the second wave look the same? If the second wave comes, when will it hit—during Q4 peak? How will operations be impacted if production facilities or fulfillment centers are forced to close? Will we have enough time to execute contingency plans, and will they be enough? Where and how can I most efficiently store any excess inventory during the downturn? How can we quickly move sales online and support order fulfillment? And, when the economy recovers, will my business be prepared to deal with a potential resurgence of demand?

In times of trouble, flexibility is everything

When uncertainty is the enemy, you cannot plan for every eventuality. Instead, you must have a flexible strategy that allows you to adjust operations and adapt quickly.

Supply chains aren’t known for speed, they are known for optimization, which isn’t the same thing. Under normal conditions, efficiently moving goods is important; during a pandemic, goods need to be moved quickly, to when and where they’re needed.

Almost ironically, despite the emphasis on supply chain efficiency, COVID-19 has exposed some relatively large inefficiencies. Responding quickly in times of need—being resilient—requires a level of redundancy. Flexible, modern logistics solutions enable retailers and brands to be resilient—they don’t take months to implement, they often have variable-cost structures, and provide services that alleviate the burden of the moment.

The right software tools give businesses the visibility they need to anticipate and avoid potential challenges and the ability to respond quickly when disruptions occur.

If you can’t see, you can’t fight

One of the most frustrating things about any crisis is having to deal with the influx of decisions that need to be made, especially with constantly evolving—or even contradictory—information.

Without a clear view of information, making decisions becomes exponentially more difficult. In fact, Gartner (1) recently released the report, “Coronavirus Requires Supply Chain Leaders to Adopt Enhanced Decision-Making Abilities,” in which it says 80% of supply chain professionals said decision-making could be improved, 76% said disruptive changes have increased in the last few years, and 72% said disruptions are becoming more impactful.

Consider warehousing and fulfillment. Many companies use a patchwork of different partners located across the U.S. If each hub has its own business practices, software, and reporting capabilities, getting a holistic view of one’s entire network is a challenge when the world is normal. It becomes a liability during a crisis.

If the nodes in your supply chain operate independently, now would be the perfect time to implement a common reporting template, especially since it’s unclear how long until the world doesn’t go back to normal, but enters a new normal. For now, designating a single point of contact to present a “state of the supply chain” brief at a weekly war room could also be a positive step.

Building flexibility into your supply chain to avoid disruptions

During “normal” times, supply chain managers typically prefer to keep inventory levels low. Unfortunately, when a crisis like the one that we are currently facing hits, this drive for efficiency may leave companies facing shortages. Even if firms have sufficient inventory in their warehouses, they may have trouble getting it to their retail and distribution partners. This is exactly what many supermarkets have dealt with as customers rush to purchase supplies in bulk.

Compounding the situation is the fact that adding new warehouses and fulfillment centers to your distribution network isn’t fast or easy. This is true during the best of times, but, when a crisis hits and everyone is struggling to find room for excess inventory, finding reliable partners can feel impossible. Not only do most public warehouses and 3PL providers require multi-year contracts, but the simple act of negotiating terms and filling out paperwork can waste valuable time and energy—which is only multiplied if you have to source providers in various regions.

Fortunately, modern on-demand warehousing networks make it easy to dynamically add or remove warehouses from your network. So, if demand shifts, geographically or otherwise, you can quickly adjust your supply chain strategy accordingly. For example, with FLEXE, there are no long-term contracts—you pay for the capacity and services you use at any given time. And, all of the warehouses in the FLEXE network use the same software and reporting platform—even across disconnected providers, which provides fast, actionable data.

As with so many things in business and life, we cannot control everything that happens to us and, unfortunately, we cannot even plan for every eventuality. The best we can do is to build flexible plans and systems that allow us to respond to uncertainty with confidence.

Other digital logistics solutions include:

  • Supplier management: Anvyl provides supplier relationship management tools for real-time visibility, automation, and collaboration.
  • Freight forwarding: Flexport delivers “visibility and control, low and predictable supply chain costs, with faster and more reliable transit times. All from a powerful technology platform.”
  • FTL and LTL trucking: Convoy provides shippers with a digital freight network to reduce transportation costs, while enabling carriers to keep trucks full.
  • Post-purchase communication: Convey’s delivery experience management platform enables retailers and brands to better communicate delivery status on eCommerce orders.

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Citation:

  1. Gartner’s “Coronavirus Requires Supply Chain Leaders to Adopt Enhanced Decision-Making Abilities, 14 February 2020, Sarah Watt, John Johnson”