Shocks to new normal : How supply chain adapting lockdowns

Hello all, My name is Vikas S Menon and i am a 2nd year MBA student at Amrita school of business, coimbatore. As this is my first blog, I would like to depict down about an article named “ Digesting the shocks” which is published in Institution for management development.

 

As the world tussle with pandemic followed by an Economic crisis, the supply chain is also experiencing unique challenges. Almost all countries forced to implement lock-down leads to public panic and further to supply and demand disruption. Still, the Supply chain is adapting changes during the lock-down facing the challenges and welcoming the new normal.

Supply-Demand shocks

 

The first challenge is supply shocks where the disruption in the availability of goods which consists of both finished goods for sales and raw materials to manufacture products in a factory. Companies are sorting out what production is feasible and how to meet demands. The first shock points out exactly to supply chain resilience and supply chain resilience levers. Companies have integrated supply chain resilience still some didn’t. Those companies sacrificed resilience in interests of costs have unceasingly consolidated production and expanding sourcing. The problems of resilience are less relevant to the food supply chain as they incline to rather more local than the non-food supply chain.

 

The second challenge is demand shocks where people are stocking up consumer staples. The consumers buying a month's worth of goods in a single day due to the fear of the unprecedented condition. For example, toilet paper in which a huge spike in demand before the lock-down is implemented. Perfectly forecastable products were out of stock due to this unprecedented situation and still, the supply chain professionals behind the scene helped to restock the store shelves with a herculean exceptional effort. The classical planning model is not built to handle such severe peaks in demand. This situation narrows down the companies to identify priorities, redirect inventories so to meet the demands.

 

The third challenge is the aftershocks of supply and demand. A small increase in demand at the consumer level increases the production at a manufacturer or their packaging suppliers. This situation points to the bullwhip effect but it is not sure that such action can happen or not. One classic cause of the bullwhip effect is due to the shortage of a product. In such a situation, the market artificially inflates their production requirement to demand a larger share of scare resources. Many replenishment systems use a simple moving average method to measure store-level requirements. With such an unpredictable demand spike, the supply planner will rearrange supply quantities manually scrabble to adjust the planning system. Since the lock-down restriction duration is unknown, it is impossible to predict how consumers behave tomorrow.

 

The New Normal and opportunities

 

Economists are predicting recession of unknown length and the supply chain is trying hard to keep up with demand. For supply chain planners, they have to avoid inventory bounce to move forward. This is because in the previous recession period the inventory bounce fooled some of the supply chain planners into taking that the demand was rebounding. Later, the bullwhip effect began and bounce was amplified leading to supply chain disruption. Companies are thinking about localizing production and sourcing while some are trying to be flexible in the case of technology. Automobile companies like ford and general motors are trying to produce ventilators while LVMH, L’Oréal, and Coty started producing hand sanitizer. Perhaps this would cause integrated manufacturing roles in the Supply chain which leads to various market segments.

 

This is an overview of my understanding of the topic. Let me know your opinion on the topic.

 

Thank you.

The Beer Game

Welcome Readers!

I am Sheerapthi Ramiya, 2nd Year MBA from Amrita School of Business, coming back with this week's read ! Hope my readers are doing well and I hope you enjoy :) 

No this isn't a game you play at pubs or bars or house parties. It does not involve drinking beer at all ! I understand that the topic would be of interest to some of you readers *wink wink*, but don't worry because I can assure you there will be beer in the end if you go through my blog. 

We all have been reading pages and pages on supply chain management, discussed the various players in supply chain, how they function, the LOPS (Logistics, Operations, Procurement and Sourcing) in supply chain, various strategy fits, etc. and its not going to end there. What if you wanted to see how supply chain works in action but you cant go to a factory because its a large scale thing which cant be brought in front of your eyes. 

Let me introduce you to the Beer game !

The beer game was invented by Jay Forrester at MIT in the 1960s. It was a result of his work on system dynamics. The beer game lets the players and the spectators experience the supply chain and its hiccups. I bring it to light because this game demonstrates a phenomenon what is called a "Bullwhip Effect"  in Supply Chain Management which will be explained as we go further. The game also demonstrates the might of information sharing, supply chain management, coordination and collaboration in a supply chain.

The Beer Game, like any other business simulation game, is a role play simulation. Four Players are involved in the game representing 4 stages of a beer supply chain. They are 

1) Brewery (Manufacturer)
2) Distributor
3) Wholesaler
4) Retailer

The task of this game is to produce and deliver beer. The goal of this game is to minimize the total cost of supply chain.  This goal can be achieved by carrying minimum inventory with you. Of course any game comes with set of rules, but for this game there are only two rules - You shouldn't run out of inventory and The players cannot communicate with their teammates . Each player must decide how many cases of beer to order from its upstream player, given the order quantity it received at that particular time period.

The only strength we need to have for this game is COORDINATION throughout the supply chain. The 4 players will have their vague idea of what the future demand will be. Each player has control over their part of the supply chain. But even without having the information of demand, there is a way to understand how the demand is. The players can Influence each other by increasing or decreasing the order quantity. And this influence will have an effect on the other players in the supply chain too!

But then again, coordination ,with the added influence, may not go as you expect it to go. This is the point were the "Bullwhip"phenomenon happens when things go wrong in your supply chain.

The Bullwhip Effect 

The Bullwhip Effect was first identified by Jay Forrester in his book 'Industrial Dynamics', but he couldn't coin a name for it. The term "Bullwhip Effect" was coined around 1900 when Procter & Gamble disturbing and amplified order patterns for baby diapers in its supply chain. The Bullwhip Effect is a well known result of lack of coordination in supply chains. Even when the demand for beer is stable, small variations in the demand will dramatically amplify as we go upstream in the supply chain. A clear visualization of this effect can be observed below.

The Bullwhip Effect hence produces a lot of inefficiencies which become greater as we go upstream in the supply chain. Problems with demand forecasting, low levels of trust within the supply chain, high stock levels, poor capacity utilization, etc lead to growing costs in the supply chain.

I have attached a YouTube video where a group of students play the Beer Game in action. Do have a look. We should definitely play this when we are back at ASB! (For those who are not able to see the video below use this link: https://youtu.be/qxpgM8paegQ )

In the end, we can agree on how flow of information, systematic thinking, coordination and collaboration among various players in the supply chain is very important. Even though this effect is not something new, it is still a situation which needs attention in supply chains.

I thank all of you who made it to the end of my blog. I would also like to thank Hema Maam for giving us this opportunity in finding interesting reads in the field of Supply Chain. Cheers to you all and have a great day!

P.S - I am a man of my word 

- Sheerapthi Ramiya

ASB, Coimbatore