By now, we all know the global supply chain is in tough shape. COVID-related aftershocks continue throughout the global manufacturing community, and with each passing week there is a different example. This past week India declared a force majeure at its ports due to the COVID tsunami sending yet another shudder through an already exhausted supply chain. As the US economy begins to open and roar, any protracted shortages or delays from Asia-based manufacturers will only bring greater supply anxiety, increased costs, and expedient planning behaviors.
Because shortages at shelf are most obvious, consumer goods companies (CG) always seem to be the most impacted by whatever the current crisis. Each week, I hear from CG colleagues about some raw material shortage, resins for packaging, surfactants, pharma intermediates, and even food additives. As someone who has worked on both sides of the problem — as a supply chain planning director at a consumer goods company during the early COVID waves, and now as a supply chain director at a distributor and manufacturer of a wide range of chemicals — I have a real-world sense of insight into pragmatic approaches to best manage through the latest COVID temblors. Consider these lessons learned to aid in your own sourcing of raw and pack materials and save yourself some trouble. I certainly have the scars and the gray hair to show for my experience.
These suggestions boil down into three primary considerations: understand your lead times, plan smarter, and collaborate more. I hope that some of these approaches may help you better plan for your own business going forward, as we all continue to adapt and endure throughout these difficult times:
- Know your lead times for critical raw and pack supply. A reality-based understanding of lead times is critical to managing your supply chain. While one can add in additional lead time factors to capture expected delays and uncertainty in the supply chain, a reality-based understanding of lead times is an essential starting point. Realistic lead times will better enable your ERP planning engines to determine the best replenishment plan.
- Extend your forecast horizon. Because of the demand uncertainty associated with COVID, many CPG companies have shortened the depth of their forecasting horizons and are not adjusting their forecasts more than two or three months forward. Others are simply choosing to “roll with the punches,” taking a miss or a gain month-to-month and almost giving up on the planning process due to the perceived difficulty in managing demand. Unfortunately, this works against efforts to properly determine raw and pack requirements. Of course, I understand the need to be cautious. No one wants to over- or under-commit to a plan, but this non-strategy creates additional planning risk. I would suggest trend-correcting to reasonable expectations in the forward view (beyond the realistic lead times) while anticipating the likelihood of both risks and opportunities outside of the demand plan.
- Extend your forecast accuracy lag. Many CPG firms have given up measuring forecast accuracy – considering it an exercise in futility. I would suggest the complete opposite approach. I am not sure the effort will help improve forecast accuracy but understanding the error and the bias in your demand plan at supply lead time helps your supply planning and procurement teams better understand the variability and risk in the plan, and the direction of the risk. These are important factors for effective decision-making. In fact, I would suggest extending your “lagged” forecast measurement period to match your worst-case lead time for raw and pack materials. Managing forecast error helps in determining mix issues throughout your portfolio, which is where the greatest risk is observed.
- Band your forecast. Ok, I get it. It is really hard to forecast in uncertain times. For those organizations not willing to adjust their demand plans based on speculative consumer consumption and erratic order volumes, I would suggest you band your forecast — to accommodate for both risks and opportunities — then run supply planning scenarios to determine potential risks or pinch points in your supply plan. This allows you to hold your “call” (i.e., stick to your original budget, if you deem this important), while also helping alert your supply planners of potential upside or downside risk in the demand plan.
- Collaborate to a fault. More than ever, share your forecasts with your suppliers. This may require extending your commitments for production events or your MRP time fences much further out. But it goes without saying that in capacity-bound situations, the more information you provide into your supply line, the better. This may also warrant placing your purchase orders deeper into the horizon than you normally might, based on your best understanding of future demand. In fact, it would be smart to extend your detailed planning horizon to at least twice that of your worst-case lead time.
- Examine alternate paths of supply. Investigate using distributors, changing outbound or inbound port assignments, or re-sourcing to a different country of origin. And most definitely stop putting all your eggs in one supplier basket. Admittedly, COVID has been a moving target, and sometimes it feels like procurement groups are playing whack-a-mole with new sourcing problems arising daily. Thus, even more reason to diversify your suppliers of critical raw and pack materials — to give your supply chain maximum flexibility as COVID shifts regionally. Supplier diversification and multi-sourcing will be the most logical post-COVID best practice to emerge.
- Understand your minimums. This is vital. Any planner worthy of their title should know the minimum quantity of any raw and pack materials needed to “survive.” All too often the reflexive reaction to any supply chain risk is to over order to load up. Consider the more prudent approach of prioritizing your minimums. By understanding your minimums, you can more accurately deploy and leverage more expensive logistics (such as air freight) to overcome any supply line shortfalls or delays. And you should communicate these minimums to your suppliers so that they too can better manage expectations. Many supply chains are putting their minimums in the air and using ocean freighters to move the “additional requirements” more cheaply, thus striking a balance between need and want and cost.
- Prioritize both your requirements and your logistics. If everything is a priority, then nothing is a priority. When vessel space and container capacity are hard constraints, the proper next step is to make sure you are not making everything a priority. If everything is a priority it will lead to first in, first out thinking, and you may end up with a lot of raw and pack components for C-level SKUs, yet, come up short on your A-level SKUs. I would suggest establishing or enhancing a collaboration process to highlight priorities with your suppliers.
- Reexamine your product portfolio. No one should ever use constrained containers, vessels, or productive capacity on C-level items. In fact, to truly focus and prioritize essential raw and pack requirements you should examine your product portfolio to determine those items that you may want to consider shutting down until COVID clears (or maybe forever). It was not a surprise that Coke and P&G called for an examination of their product portfolios in the early throes of COVID. “Ruthless SKU Rationalization” was the headline from Coke. They were prioritizing. This is a wise approach to consider.
There are no simple answers to the global issues we face, but there are better approaches that have proven successful for many CG firms.
Patrick Bower is senior director of supply chain for Aceto. Aceto is a leading global chemical distributor and virtual manufacturer providing specialty chemicals, intermediates, and reagents to the life science and consumer goods end markets.