COVID-19 and the Global Supply Chain

As companies have mobilized supply chain crisis management, best practices are emerging, and the effects are apparent.

As identified cases of the Coronavirus disease (COVID-19) increase, so too do impacts on global supply chains. Raw material shortages and delays, shipping disruption and increasing costs and general uncertainty about future volumes have all created major obstructions.

Supply chain ramifications

For decades, industry professionals have worked to create efficient, complex, global supply chains. In many cases, narrowly focusing on efficiency has left supply chains highly susceptible to disruptions that cause irrevocable harm in both the near and long terms.

Managing through supply chain disruption is nothing new, and most organizations are quite adept at doing so. However, few have experienced a disruption as far-reaching and industry-agnostic as this pandemic. As a result, many companies find themselves woefully unprepared and under-resourced.

Regional manufacturers run lean on inventory and continually focus on improving inventory turnover regardless of source. This can be an effective working capital strategy, but it is detrimental during times of pronounced supply chain disruption. During such events, companies look for other sources, but keeping up with the shutdowns and capacity reduction caused by the COVID-19 pandemic has been difficult. In a recent conversation, a client lamented unsuccessful efforts to stay ahead of the virus. The client had moved production from Asia to Europe and then to the Americas, but each location was quickly affected. This frustration is palpable for companies deemed essential that are confronting multiple-part shortages across their supply bases. Transitioning supply is made even more complicated when redundant tooling and fixtures are not readily available or easily transferable.

Managing the crisis

A coordinated leadership response at the executive level is imperative. Real-time communication, fact-driven decision-making and support of initiatives are foundational and necessary.

Management teams need to clearly identify and understand the activities and processes necessary for effective business operation. The first step is to assess the elements of the supply chain that align with an organization’s most critical products and prioritize accordingly. A given organization has thousands of suppliers within its supply chain. Only 20% might be critical, and the failure of an even smaller percentage might truly be crippling to the business. It is thus important to focus on those suppliers first.

Once that subset of suppliers has been isolated, several further analyses are necessary. It is essential to assess the unique environment in which each supplier operates. Manufacturing and shipping difficulties can be better anticipated if the likelihood of potential labor shortages and transportation interruptions can be assessed to determine their impact. While this might be intensely volatile under the current circumstances, even a general idea of what is likely to occur can better prepare companies to deal with shortages and act accordingly.

Preparing for future events

Supply chain professionals often lament that they elevate to the level of strategic value only during times of crisis or when savings are required. History has demonstrated that it is entirely possible that many will forget the invaluable lessons we are learning today.

To prepare for future events, management teams should establish more sustainable supply chain risk management programs, including:

●    Defining and maintaining a crisis management protocol

●     Using strategic sourcing for supplier selection and ongoing evaluation

●     Risk-rating suppliers and establaishing risk-based monitoring activities, such as:

○     Establishing and maintaining supply chain visibility

○     Developing relevant supplier performance metrics

○     Proactively building out supplier contingency plans for high-risk suppliers and regions

While it’s difficult to take a long-term view in the fog of a crisis that seems to change every day, we expect that the companies that emerge in the strongest positions will be those now taking a “through-cycle” view of their relationships with customers and the communities where they do business as part of an integrated approach with marketing and sales. In the midst of the worst health crisis in more than a century, they will be at their best, addressing customers’ pain points with flexible payment terms, unbundling, and one-time promotions. In short, they will drive long-term value creation rather than seek short-term advantage.

In this brief memo, we suggest some “dos and don’ts” to help leaders navigate unmapped territory during the pandemic. The situation varies widely across industries and geographies, so we offer an overview of pricing considerations here, not specific advice for any one company.

Managing unprecedented variability in demand

1. Companies experiencing a sharp and unprecedented drop in demand

2. Companies experiencing an explosive increase in demand

3. Companies with muted or lumpy demand

Five things to get right during the pandemic

1. Make sure that every pricing action is legal, ethical, and community minded


2. Strengthen value-focused messaging

What to avoid

Taking advantage of customers

Relying on old price-sensitivity research

In a dynamic and evolving market, market price tests become obsolete after just a few weeks or months. To understand changing price points, companies should run new pricing-sensitivity research and market price tests immediately, particularly for higher-volume products and offerings.

Slashing list prices without considering other options

The manner in which price reductions are made can make a big difference in a company’s ability to sustain and build value over time. Rather than slash list prices, for example, companies may want to consider temporary promotions, non-monetary discounts, or discounts that help build volume.

Attacking competitors’ key accounts without preparing for a sharp response

Before making any strong competitive moves, leaders should understand their company’s position in the marketplace, anticipate competitors’ likely reactions, and plan how to respond. Price cuts may be easy to replicate, and they can change buyers’ long-term perceptions of brand value.

Next steps.

The COVID-19 crisis and the accompanying global economic downturn have spurred a continuum of demand responses across and even within companies. Despite the alarm and uncertainty, we believe organizations of all kinds can continue to rely on some best practices and guideposts.

For example, they should seek opportunities that preserve and sustain value, making each major decision in the coming months with an eye on the longer-term implications for the company and its employees, customers, communities, and suppliers. They can look for win-win scenarios to support customers and employees at a difficult time, remaining flexible and focused on preserving lifelong relationships.

In this terrible and confusing moment, each of us has new opportunities to show courage, compassion, and wisdom. And while no one knows how long this crisis will last, leaders can begin preparing now for the recovery, including using downtime to build capabilities and improve pricing processes. An unwavering focus on value can help organizations avoid extensive cost-cutting exercises that, in the long run, could do more harm than good.

 

Sources:

https://www.sdcexec.com/risk-compliance/article/21129428/covid19-and-the-global-supply-chain

https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/pricing-in-a-pandemic-navigating-the-covid-19-crisis#