The COVID-19 pandemic is disrupting the global supply chain and causing uncertainty across sectors. To better understand the ongoing implications of COVID-19 as a global supply chain disruption, we are speaking to a number of industry experts on a variety of supply chain topics.
Our first interviewee is Dr. Kevin J. Dooley, PhD., a professor of Supply Chain Management from the W.P. Carey School of Business at Arizona State University and Chief Scientist of the Sustainability Consortium at the Julie Ann Wrigley Global Institute of Sustainability. His domain of expertise includes supply chain sustainability and complex adaptive supply networks.
The below is the adapted text from our interview with Professor Dooley, in which we discuss:
- What makes COVID-19 a unique, global supply chain disruption,
- How to build resilience into supply chains
- The new mindset that will be required to become resilient,
- Steps that retailers and brands can take now, and
- The dynamic between COVID-19 and supply chain sustainability
Disruptions are usually supply OR demand
What is a supply chain disruption?
A supply chain disruption, quite simply, is when there is some change in supply and/or demand that makes us manage the system differently and react to that new situation. There are two ways that the supply chain industry has looked at supply chain disruptions.
The traditional supply chain disruption is around a moment in time—an event that takes supply away from you. Maybe a factory goes down for some reason, or there’s a fire at the plant, a labor strike, or an extreme weather event. In that moment as a downstream buyer, you have to decide how you’re going to react to that—how do you manage and mitigate the disruption to your business?
On the flip side is the famous bullwhip effect, which is when there’s an unexpected disruption in demand. The bullwhip posits that there are some fairly significant increases or decreases in demand that will invariably disrupt the supply chain upstream. In fact, what we find with the bullwhip effect is that if there's a change in the demand signal, that inventory variability tends to increase the farther upstream the supply chain we go. So, retailers and brands are left with lower variability of inventory, but upstream the suppliers are left with huge inventory variations as a reaction to that change.
COVID-19 is disrupting supply AND demand
Why is COVID-19 different?
What's different about COVID-19 is, first of all, the length of time of the disruption. We often think of a disruption as a singular event that may range from minutes to a week-long event, after which we can start to recover. COVID-19 is far longer in magnitude in terms of its duration.
Then, when we look at what it’s impacting, we’re seeing two key things. First, COVID-19 is simultaneously disrupting supply and demand. Secondly, we also have changes in demand—not decreases, but increases across different categories, which are creating different ripple effects on supply chains.
COVID-19 is simultaneously disrupting supply AND demand. That's not normal.
One obvious example is on the scarcity of toilet paper, but one non-obvious place I’ve been thinking about is waste management. Typically, you have waste and recycling being generated at a business and maybe two different companies pick that up once a week. But, those aren’t necessarily the same two companies that pick up residential waste and recycling. Almost overnight, people started working from home. Garbage and recycling was quickly displaced to the home environment; one channel is starved for demand, the other has too much.
The colloquial term for COVID-19 disruption? “Chaos.”
As a disruption, COVID-19 is multidimensional. Is there a name for that?
Half-jokingly, I suppose the colloquial term for the COVID-19 disruption is “chaos”. There's a common theory that's used in technology design and studies called “normal accident theory”.
The premise is that when you build a complex system, it is bound to fail, which comes down to two things. First is when a failure occurs. If a system has a single point of failure, it can react to it, but if two occur by chance or one causes another, then it cascades and can’t catch up. The second thing is that systems become incomprehensible to humans. People can’t react quickly enough, and the machines that were set up as safety mechanisms end up making poor decisions.
On the other side of COVID-19, we’ll hopefully better understand how the system failed.
Right now, the pandemic is affecting every industry, vertical, and utility. In supply chain, because it’s tied to both supply and demand, the disruptions have a cascading effect. On the other side of COVID-19, we’ll hopefully better understand how the system failed—why the global supply chain was so dramatically impacted—and determine what needs to be fixed. Until then, we call it chaos.
Reactions to disruptions have been too slow
How have businesses responded?
You would think that information technology, in general, would allow more visibility and more visibility would allow better decision-making. The bullwhip effect suggests that no, people don't look at the global.
When we did a research study on the recession, we found that the bullwhip effect was true. Even though all of those suppliers upstream were reading the same newspaper stories as everyone else, they didn't react until it was too late. And I think we'll probably find that that's true here when we look back at our own national response. The managerial challenge becomes, how do we take advantage of the technology that we have that allows us to track...allows us to foresee things beyond our immediate buyer or supplier and make more intelligent decisions that way?
Most businesses don’t react because there isn’t an immediate disruption for the system to react to. In some ways it relates back to the normal accident theory. Your systems react to situations and make decisions as necessary, which they can’t do until something happens. But, if your systems could read the newspaper—if your ERP systems could read the stories you were, then it might make different decisions.
Supply chain resiliency comes from redundancy
Were businesses adequately prepared?
Certainly some retailers and brand manufacturers were more prepared than others, but I believe that’s due to an increase in reshoring initiatives in 2019 as a result of tariffs, not the pandemic.
My intuition is that when we look back, we will find that companies that fared better were already building redundancy into their networks or were more aware of their bottlenecks. Of course, that’s much easier to say in retrospect and we’re still not on the other side of this thing yet.
It’s very difficult to find your bottlenecks or pinch points if the system isn’t being pushed.
It’s very difficult to find your bottlenecks or pinch points if the system isn’t being pushed. Instead of focusing on which companies were better prepared, I think we will see a renewed interest in businesses understanding those bottlenecks better after COVID-19 exposed them. Figuring out ways to avoid specific pinch points being overloaded, and in a lot of cases, breaking as a result.
In terms of the pandemic, it’s a convenient headline to say, “Oh, companies are now afraid of China.” But that isn’t a useful position or necessarily a huge change point since we just got done dealing with the trade wars. Generally speaking, if your position is to get out of China and consolidate facilities in another singular region, then that just doesn’t make sense. And, that was true before the pandemic.
Instead, you have to recognize that supply chain resiliency comes from redundancy. So if you’re saying, “We have operations in China, and now we’re going to create some redundancies in different geographical areas, too.” Now, that’s logical.
Basically, you need some kind of buffer
What is an example of how the supply chain can be more resilient?
Think about inventory and the concept of “leaning out” [or leaning away from lean manufacturing]. If you look at the inventory-to-sales ratios for U.S. manufacturing in the 1950s and 1960s, there was a lot more inventory on hand. In the early 1990s, right around the peak of the lean manufacturing movement, there was not. Since then, inventory levels have come up a bit, but not to where they should have been to offset the impact of COVID-19 or create any sort of supply chain resilience.
Basically, you need some kind of buffer. I’m not saying lean manufacturing is bad, but in some ways it’s gone too far. We’re seeing the implications of that now.
I’m not saying lean manufacturing is bad, but in some ways it’s gone too far.
Redundancy is counterintuitive for most supply chain professionals where their entire careers are built on optimization and efficiency. But, in terms of true supply chain resilience—redundancy is the efficient solution.
Even though holding more inventory doesn’t sound economically feasible, it becomes so once it’s industry-accepted. That is going to require a new mental model for supply chain leaders.
To make it really happen, there must be a metric
What will it take to invest in supply chain resilience?
Supply chain professionals are accountable for a series of metrics that are centered around optimization by way of reduction: Inventory reduction, reduction of holding costs, inventory turns, and in some cases, supply base rationalization and reducing the number of suppliers. If those are the metrics for which you’re accountable, it’s difficult to rationalize a series of increases to make the supply chain more resilient.
The unfortunate reality is managers rarely get rewarded for risk management. If risk isn’t uncovered, there’s no recognition—no opportunity to save a project and be a hero.
The supply chain needs some kind of resilience or flexibility metric that is well-accepted and acknowledged.
The supply chain needs some kind of resilience or flexibility metric that is well-accepted and acknowledged. It’s similar to packaging and a problem that exists in the engineering domain. The function of packaging isn’t to be thicker, thinner, lighter, or heavier; the function is protecting the product. But there has been consistent movement to optimize the economics and make packages thinner.
At some point, you reach that optimal where you can't thin it anymore without endangering the product itself, which is the reason you have packaging in the first place. Holding inventory serves that same purpose. It provides insurance, but if our metrics don't take into account the benefits of inventory, then they're creating an industry that is lean, mean, and unprepared.
Survival of the fittest is about differentiation
What kind of retailers and brands will survive COVID-19?
Unfortunately, not every business is going to survive the pandemic or the subsequent recession, especially if they weren’t doing well pre-COVID-19. I’m not an expert in retail, but I believe that most of the large-scale enterprises that have enough capital will survive and I also think the specialty retailers with brand recognition or those that occupy niche markets will be ok, too.
The immediate risk I’m seeing is the number of stranded assets and excess inventory. Every category is different, but it’s unlikely that whatever pent-up demand there is will be great enough to consume the overflow of goods in the market right now.
Single-category retailers will have the hardest time, unless they have a strong product brand behind them. Those that have relied on convenience of location, like the mall, or proprietary supplier relationships, what do they have to compete on? What is their point of differentiation? A nice website won’t cut it. Everyone has the same product and everyone has the same price, so most people will just end up at Amazon because it, too, is convenient and it also has brand recognition.
An opportunity to pause and improve
Are there steps retailers can take now or key considerations to keep in mind?
On the other side of this, whenever that’s going to be, we will likely be living in a whole new environment.
Personally, I like the people who are saying, “Let’s use this as an opportunity to change things and make them better.” It’s like the saying from Machiavelli, “Never waste the opportunity offered by a good crisis.”
Right after a catastrophe is just about the only time you can sell upper management on making an investment in risk management—like employing additional suppliers or holding more inventory. If you don’t, three to six months will pass and the immediacy is gone and forgotten.
I like the people who are saying, “Let’s use this as an opportunity to change things and make them better.”
Compositionally, every business is different so next steps will vary. Enterprise retailers and brands have the capital to invest in new, fancier contracts or have backup suppliers when one goes offline. For smaller businesses, if half of their supply base is no longer in business or is temporarily offline, they may need more support from service providers on how to rapidly find and certify new suppliers, but because they’re smaller, they can probably move a lot faster than an enterprise business could.
That said, anyone that does survive must face the workforce issues that are arising. Every business in retail and logistics is going to have to solve the challenge of high unemployment rates or transitioning workers into new departments, like distribution and fulfillment to help support online retail. There will be a period of time required to train and onboard. As a result, I do think there will be a renewed buzz around automation and robots—not to replace humans, but to optimize the road ahead for employment.
Bold, previously inconceivable ideas will transform supply chain
Will the pandemic finally force the supply chain to transform?
Opportunism is not the right word because it has a negative connotation, but people are going to use this as an opportunity or a launch pad of sorts. Entrepreneurial people, innovative people, will now be able to put forth bold plans that would not have had an audience a year ago.
It’s not about if things will change, but how they will.
It’s like the chaos theory. Right when the system is at the precipice of stability and instability—at the moment of collapse—is when innovation occurs. Those bold, previously inconceivable, ideas make everything a little more unpredictable, so it’s less about whether or not change will occur, but about how things will change.
2020 is still a big year for supply chain sustainability
Has the focus on supply chain sustainability changed?
I have not seen a decrease in demand for sustainability. From my perspective, consumers’ growing interest in sustainability has not changed, nor have investors’ and companies’ long-term investments in becoming more sustainable.
I’m an optimist here. You have to be an optimist when you work in sustainability, but I think this pandemic is giving people a high degree of confidence that sustainability is the right thing to focus on. Anecdotally, people around the world have noticed the benefits of cleaner air, cleaner water, less noise, and less traffic. So, again, it's an opportunity to see not what a “less active” society looks like, but what a “conscientiously active” society could be.
The ways we consume are changing. Our value systems are changing.
In many ways, this is changing people’s lifestyles. We’re figuring out that video conferencing with our friends or teaching classes that way may not be great for every occasion, but it works, and one output is fewer carbon emissions and waste. The way we consume is changing. Our value systems are changing.
There’s a renewed sense of minimalism. Consider millennials. When you cross minimalism with millennials, that’s where the “experience economy” comes in. It’s not difficult to imagine that entire generations will care less about physical materials and more about investing in experiences.
Redundancy and optionality will soften the blow next time
Will we ever be able to proactively plan for major supply chain disruptions?
No. I think that the disruptions will increase in number because of climate change and frequency and severity and concurrency. And so, it's a matter of planning for that different future, and planning for more adaptation—planning for redundancy. Part of redundancy is having multiple sites, multiple suppliers, etc., and having options for supply.
If you can only buy a particular component from a single supplier or a single type of material is the only one that will work for you, then you're stuck, you don't have flexibility. So, redundancy isn’t just on the supply chain design side, but even on the product design side.
We need to think about how we build in more options so we aren't faced with the same level of disruption the next time this happens.
A new mindset: Overcoming supply chain disruption
Dr. Dooley’s insights on supply chain disruption, particularly around redundancies and diversification, challenges the supply chain industry to think differently.
The last 30 years in the supply chain have focused on lean management, operational efficiencies, and trying to build a successful bridge to supporting eCommerce. As the frequency and magnitude of supply chain disruptions increase, there is a new dimension to supply chain efficiency, and it’s helping businesses figure out how they can be flexible enough to manage any disruption.
New, flexible logistics solutions make it possible to build low-risk redundancy into supply chain networks, react quickly when a disruption occurs, and modernize the supply chain to manage new operations and workflow.
About Dr. Kevin J. Dooley
Dr. Kevin J. Dooley is a Distinguished Professor of Supply Chain Management in the W.P. Carey School of Business at Arizona State University, and a Senior Sustainability Scientist in the Julie Ann Wrigley Global Institute of Sustainability. As Chief Scientist of The Sustainability Consortium, Dooley leads a global research team that works with over 100 of the world’s largest retailers and manufacturers to develop tools that measure and track progress on critical product sustainability issues. He has published more than 100 research articles and co-authored an award-winning book Organizational Change and Innovation Processes. Dr. Dooley has provided training or consultation for over 200 companies in the areas of sustainability, supply chain management, quality, and technology and innovation. He obtained his Ph.D. in mechanical engineering at the University of Illinois.