Covid-19 will require supply chain management to evolve

The covid-19 pandemic has created a series of challenges for companies, which are demanding improvements in their management systems. One of them is certainly related to supply chains.

These chains have been organized mainly with economies of scale and cost reduction in mind. They are made up of organizations of various sizes, in various locations, in a globalized economy.

The pandemic has led to some concepts related to these chains being questioned and is already beginning to bring about changes, which will probably be incorporated into new trends, even after the most difficult period of the crisis.

In the case of medical supplies, such as ventilators, tests and masks, it has already become quite evident to everyone, for example, that depending on production almost exclusively in a single country is a major risk. This is the most visible case at the moment, but in fact the effects of the pandemic are forcing many companies, in different sectors, to rethink the design of their supplier network.

Thus, we are already seeing companies, especially multinationals, reducing the number of distant suppliers in places hard hit by the pandemic and seeking suppliers in their own regions.

On the other hand, there is the challenge of small and medium-sized local suppliers, who are facing enormous losses in revenue due to the sudden drop in demand resulting from social isolation. Many of them, because they do not have a very large “financial cushion”, are on the verge of bankruptcy.

This scenario is demanding an evolution in supply chain management, on the part of both buyers and suppliers.

On the buyers' side, the challenge will be to diversify the chain even further, securing options of regional suppliers, but without increasing costs or lowering quality as a result.

Some factors may make this movement easier. For example, the advantage of countries with low labor costs has been shrinking due to technological advances. We also see that the hidden costs of larger inventories and less flexibility, resulting from long import lead times, are beginning to draw more attention.

These aspects had already been driving some moves toward regionalization and, combined with greater sensitivity to the risks of shortages, will be given even more weight. Markets will remain globalized but, in some cases, will possibly become somewhat less concentrated.

On the suppliers' side, it will be more important than ever for them to reassess their production processes, aiming to eliminate hidden waste, which generates costs and undermines competitiveness. That way, they will become as competitive as, or more competitive than, their global competitors.

Large companies that already have good management processes can help their suppliers improve their ways of working. In lean management, it is common for companies that are advanced in the “lean journey” to involve their suppliers in adopting improvements, so that both evolve their processes, increase value added and solve problems together, making their chain more competitive.

This requires a high degree of cooperation and coordination among all the players in a supply chain. This is the greatest challenge, and it involves the evolution of the concepts of purchasing, product and process development, production and logistics, both internally and in the connections between the links of this network. The chain as a whole needs to develop short lead times and high flexibility, so that it can efficiently absorb variations in scenarios and demand with greater agility and security.

This is a critical period. The difficulties of supply chains are becoming more challenging every day. The adversities will only be overcome if buyers and suppliers work together, reviewing processes and improving management and coordination. Aiming not only at cost optimization and quality, but also at risk reduction, greater adaptability and the elimination of waste.