Q&A: Reimagining the supply chain post-COVID-19
Patrick C. Penfield (pictured) is Professor of Practice – Supply Chain Management and Director of Executive Education at the Whitman School of Management, Syracuse University. He is a Certified Fellow in Production and Inventory Management (CFPIM) and Certified in Integrated Resource Management (CIRM). Penfield has over 15 years of industry experience in Supply Chain Management working for companies including Johnson & Johnson and Philips Electronics. He was recently interviewed by the folks from Sage about the impact of COVID-19 on the supply chain – here is what he had to say…
Sage: What has COVID-19 taught the supply chain industry?
Prof. Penfield: Above all, we have begun to understand the vulnerability of the global supply chain. The reason for that is threefold:
- We were unprepared for this particular situation
- The requirements on supply chains are changing daily
- Those changes are not universal; they depend on the sector, consumer sentiment etc.
I’ve been in supply chain management for 15 years and academia a further 17 years, and I can honestly say that here in the US, we’re very good at it: we’re nimble, agile and capable; and certainly the bigger companies can usually see trends rapidly enough to react. They want to be proactive, because supply chain efficiency is all about optimizing for customer demand. But COVID-19 caught everyone flat-footed.
A further issue is government reaction. I don’t want to pick on any specific government; we could complain about China failing to disclose the severity of the disease, or all our governments for being either slow or ineffective to react. Equally, all the governments in the developed West have done an extraordinary job of pulling together resources where they can. So business has to recognize that they cannot always rely on government support being in the right place at the right time in the case of truly Black Swan events.
Sage: How has business performed?
Prof. Penfield: We will rake over the coals of this event for years to come. For now, it’s too early for an academic analysis, but anecdotally our experiences and the stories we see in the press point to elements of both success and failure in the management of supply chains, again with the caveat that government interventions have influenced both.
In terms of realignment, we have seen some extraordinary pieces of work, where large companies have changed their operations almost overnight. From Walmart and Amazon to UK supermarkets like Tesco, the largest players have not just managed to keep the lights on, they have thrived. Many wholesalers in individual sectors have successfully developed direct-to-consumer offers where their retailers have shut down; again in a matter of days.
Here in the US, though, even in food sectors, we have seen some dramatic failures, too. We are throwing out milk, vegetables and fresh produce because the suppliers in these sectors have been accustomed to half of their product going to individuals and half to bulk purchases. The bulk purchases have stopped, but they have not been reactive enough to flip the switch and focus on individual purchases.
Sage: But moving to a consumer model is hard…
Prof. Penfield: Yes it is, but consumers are still there. That’s the key message: certainly there is a practical issue around packaging and branding, for example. But people do still want milk. Now, it’s true that Amazon has deeper pockets than a typical midsize manufacturer, but online shopping has been developing for the past fifteen years. Amazon, Walmart and the like are certainly pioneers, but both facing the consumer and facing back into the supply chain, digital tools are now available to simplify and optimize the supply chain across the board. In fact, a producer today faces a much lower cost to optimize their business than Amazon, which has invested for two decades to build these tools from scratch.
Where suppliers have fallen short is that they have allowed Amazon to capture their markets – indeed that was often true even before COVID-19. Many commentators suggest that the key output of the current crisis will be a rapid deterioration in the state of retail. I would agree with that possibility, but there is a more optimistic view: smart producers and businesses further up the supply chain will realise the value of investing in online channels. That means not only selling direct to consumers but also optimizing upward supply chains for flexibility when dealing with manufacturers and farms.
Sage: OK, but not everybody wants to become an online retailer, or indeed compete with Amazon…
Prof. Penfield: Indeed so. This brings us to dual sourcing. Perhaps the greatest lesson for supply chain professionals here is that we have focused so exclusively on leanness that it has made us blind to the importance of resilience.
I believe wholeheartedly in global trade and global supply chains. Globalism is better for business than protectionism and global trade fundamentally makes the world a better place; for businesses, consumers and whole economies. But supply chain experts then also must keep their eyes open to the world in which they find themselves.
The painful truth is that the pandemic was not completely without warning to the rest of the world. In February, China used significantly less energy than the same time the previous year. Also in February, the port at Long Beach in Los Angeles saw a significant reduction in the number of container vessels coming from China. There were signs of trouble ahead.
Larger businesses – and the smaller ones who partner with them, if communication was strong enough – could and should have noticed problems on the horizon. More importantly, they should have had a Plan B for alternative sourcing from other parts of the world.
I think that in a restructured vision of commercial supply chains, we will see many more businesses shoulder the cost of secondary channels, rather than putting all their eggs in one basket. And whilst China has traditionally been the least-cost supplier of choice such that this crisis really emphasizes the issue, I’m not specifically beating up on China – economic, geopolitical and social problems can develop anywhere. It’s crucial that businesses can flex to alternative sources.
Sage: Hindsight is a wonderful thing! What is the path to a ‘new normal’ for distribution, logistics and the supply chain?
Prof. Penfield: We are a step away from a conversation about the new normal. We know that governments want and need the economy to return to some semblance of normality, and they will encourage businesses to work out their operational needs. Right now, companies are wrestling with the day-to-day challenge of how to protect employees when they come into work, particularly:
- the availability of personal protective equipment (PPE)
- how to organize for social distancing where people might have previously operated in close confines
- and how to create a testing regime when tests become widely available.
These can be particularly challenging in labour-intensive parts of manufacturing and logistics, from food production to warehousing and distribution.
Only then will companies be able to raise their eyes towards the long-term, but where I am optimistic is that businesses will naturally aim to flex, initially for survival, but ultimately to find opportunity. That will include:
- Working from home for a large number of employees, many of whom (although by no means universally) are finding personal benefit in the change, too.
- As we discussed earlier, omni-channel retail; which means both traditional retailers embracing digital and wholesale/supplier organisations joining the direct-to-consumer market.
- A significant restructuring of business, particularly to focus on core activities, with a shorter timeline of strategic visibility and less speculative activity.
Less positively, as a globalist, I think we will see new types of protectionism, often driven by political sentiment rather than the facts, which will shorten supply chains; for example some countries will want to protect their food sources by growing more at home. This will mean changes for logistics business in the medium term.
Travel will take several years to return to 2019 levels. My area, academia, will certainly suffer as a result, as many colleges both here and in the UK attract a global cohort of students; but more subtly, changes to air travel will also affect global supply chains. When we travel less, we do fewer deals and operate closer to home. Furthermore, most people don’t know that passenger planes carry plenty of cargo, too; so the inevitable reduction in passenger flights will take its toll on commercial cargo.
We also need to realise that the base costs of transportation and logistics are going to go up. That may be mitigated by new efficiencies, but again, it will mean change and disruption.
These are just a few of the effects. Every business should be re-examining its supply chain, truly understanding it – because supply chains are granular and intricate; testing for vulnerabilities and understanding the impacts.
Sage: And what about the long term?
Prof. Penfield: Our industry is changing. The prognosis had always been that we would see automation truly have an impact on logistics by around 2030; and major players in the space have been moving down the automation, AI and robotics paths for a decade or so.
Now, when you have a situation where people are not permitted into a workplace, that will inevitably turn minds to the value of automation. Automation ceases to be a way to shave a few percentage points off operational costs, it becomes a financial imperative, either to keep the business going, or to shore up competitiveness. And one of the big arguments against automation; that the cost of deployment is greater, at least in the short term, than paying employees, falls out of the equation.
I therefore think that supply chain professionals will look back in a couple of years and see COVID-19 as a clear stimulus for the acceleration of automation in logistics. Add to that the rapid improvement of capability in autonomous vehicles and I think logistics will look different in five years, not 20.
There is unquestionably a societal cost there. It will cost jobs, but if I can say one consistently positive thing, it is that supply chains are populated by problem solvers. We have the world’s most flexible and opportunistic people. We will get through COVID-19 as we have got through every other shock to the system.
I hope that we don’t lose our global outlook because that would be a real shame. But as an industry, I am hopeful: disruption teaches us lessons, and those lessons – dual sourcing, inventory flexibility etc. – will feed strategies for everyone moving forward.