More than ever, businesses need to anticipate and communicate changes in demand to be able to respond effectively in the short term and thrive when the tide turns. And they need to do it fast.
If we have learned nothing else since COVID-19 made its entrance onto the global stage, we are now brutally aware of the importance of the supply chain, the visibility of demand, and the ability to make decisions at speed with the right players in the room. The critical questions that supply chains are being forced to address are, “How is demand changing?”, “How do we respond effectively?”, and “How do we prepare for the return to whatever the new normal looks like?”
At Deloitte, we work on time horizons reflecting the short-, mid- and long-terms. We call them Respond, Recover, and Thrive. For the purpose of simplicity, I am going to talk about global supply chain challenges and what we need to do under those time-specific banners.
Right now, we are seeing different sectors and industries at different stages. Businesses now need to think about how that change reflects back into their supply chains:
- In retail and hospitality, we have observed a huge change in behavior patterns since the implementation of social distancing, changes in consumer confidence, and the closing of the majority of retail and hospitality outlets. As a result, those sectors have seen a massive shift in demand, and now need to think about how they keep their businesses alive and surviving.
- In resources, we have seen continuing demand in most cases but are starting to see supply chain impacts, particularly in the providers of maintenance spare parts impacting availability.
There is a big focus in the Respond phase on cash and how it is managed—where do we spend cash, what inventory do we invest in and how do we decide which suppliers to pay? How do we make those long-term decisions for the good of the business? It is important that when we make those evaluations, we look not only at our own liquidity and cash flow but also at that of our suppliers.
We find that there is a real lack of data available in businesses across their supply chains, which impacts the ability to look two, three, and four levels deep into the supply chain to see which suppliers and sub-suppliers are being impacted. As the initial challenges of the shutdown of manufacturing and logistics networks in China have passed, we have seen the same challenges move into manufacturing bases in Europe and the U.S. with implications around the availability of particular sub-components, parts and finished goods.
- Identify the impacts of changing demand on supply chain and build mitigation measures.
- Leverage planning to reduce cash outlays and preserve cash.
- Evaluate working capital and liquidity requirements—yours and your suppliers.
- Assess digital capabilities and enable data-driven insights to identify areas of risk in the supply chain.
Increasingly, many industries are already turning their minds to this. They need to move from traditional forecasting models into scenario-based approaches because the demand data for the last few months is not a good indication of what they are going to need to supply. External leading indicators are needed to tell them that it’s time to refocus and rebalance their supply chains to get ready and go again–they cannot rely on the “normal” cues from customers or anymore. A lot of focus is on identifying bottlenecks and alternative sources of supply as organizations start to think about the resilience of their supply chains and how they might diversify their supply options in the short- to medium-term.
There is a strong focus on integrated, cross-functional teams driving more rapid planning processes and a devolution of decision-making much closer to the front lines. Traditional month-long S&OP processes have not stood up to the speed of decision-making that is required in these times.
We’re finding that pricing discipline to eradicate inconsistent and decentralized price execution can improve profit margins. Consider that a 1% increase in price can yield upward of 10% in operating profit in many cases and that generally, stronger discipline around pricing can also help protect against the downside as customers put greater pressure on margins during a severe downturn.
- Shift forecasting models to scenario-based and include external leading indicators and predictive intelligent planning.
- Focus on supply market and identify bottlenecks and alternative sources.
- Focus on cross-functional teams and devolved decision-making to enable more agile planning processes.
- Improve the pricing discipline.
Long term, it will be interesting to see how organizations reconfigure their supply chains to improve resilience. Industry 4.0 and a proliferation of IoT are driving increased levels of visibility and connectedness and we expect this to accelerate in response to the lessons of COVID. Such steps could include more onshoring and “nearshoring” of production, greater automation, and using additive manufacturing to create new supply chain options. We expect to see an increased focus and investment around the digitization of supply chains, particularly regarding enhancing visibility and integrated planning.
Our analysis shows that most high-performing companies that successfully navigated prior recessions continued to innovate, introduce new products, and position products and services for growth. The current crisis provides an opportunity to focus R&D on the products, services, and packaging likely to be most attractive over the next several months and after the crisis has diminished.
- Institutionalize crisis and resilience planning.
- Reconfigure the supply chain with increased focus on resilience and Industry 4.0.
- Plan for new product launches, marketing, and R&D, and position products and services for growth.
- Accelerate digital initiatives and aim toward truly integrated planning.