The fear that we would not have access to the most basic things in our lives changed our behavior so radically that the stores ran out of food. But thanks to robust supply chains and good forecasts, Norwegian grocery retailers had prepared for the coming storm.
Already in January this year, Norwegian trading companies and manufacturers received early warnings about what was on the horizon - manufacturers and distributors in China began to shut down. However, with the shutdown on March 12 here in Norway, it became really serious. This affected most sectors - and hit some of them quite brutally. What have, from a planning and operations perspective, been the most important challenges for these companies? And what are the challenges ahead? Let's take a look at this from the following point of view: For some companies, digitization has come quite a long way, but for the majority of companies, there are few effective tools for dealing with such sudden events.
Before you continue reading the article, think for a moment about which category your company belongs to in terms of Supply Chain Planning / Procurement / Supply of Goods.
Type A supply chain: High degree of digitization. Advanced planning systems with adaptive and self-adjusting forecasting models. Advanced wharehouse-, purchasing- and transport optimization. Manages integrated product supply and supports S&OP (Sales & Operations Planning). You adjust easily in line with - or even ahead of - changes. You are proactive and your effective and precise planning can create competitive advantage.
Type B supply chain: Low degree of digitization. Admittedly, the company has an ERP system that handles transactions, but the company does not have an application layer that conducts the planning that the Type A company does. When looking at future needs, you typically need to study sales history and set revised min / max points. You often use spreadsheets to help remedy the situation. You are in a reactive mode. The feeling of not getting everything done and being late is prominent.
Lock Down with consequences
The closure on March 12 has, almost regardless of industry, had rather dramatic effects:
- Food: Increase in grocery sales, decline (or rather Lock Down) in HoReCa (Hotels, Restaurants, Catering)
- Automotive: Decline in new car sales, but status quo or increase in spare parts and car accessories
- Construction materials: Decrease in new buildings projects and diminishing order reserves, but increase in products for house & garden.
- Retail: Several have gone out of business, diminishing visits to stores, but strong growth in eCommerce.
From a planning perspective, this is a very interesting topic. Think back to the shutdown week around March 12. Many of the people I have been in contact with established "crisis task forces" during the days before the shutdown and were in a good position. But many also were hit with the consequences reasonably straight in the face and quickly became lagging behind.
Everyone who plans logistics in Norwegian companies has now had to deal with a new situation for a few months. Many planning teams quickly had to deal with rapid and major changes. Here are some of the challenges they faced and needed to handle.
What happens now?! - what will be the demand for the future?
In grocery stores, demand has been increasing, and for shorter periods private households have been panicing and stocking up privately. But the increase also came in parallel with HoReCa closing down, seeing a 60-80% turnover decrease overnight.
Everyone who worked on planning immediately realized that something had to be done very quickly! For certain categories of groceries, it was necessary to quickly increase the forecasts - yes, for example on toilet paper, while one within HoReCa had to drastically downsize almost across the board.
This was important, because in these sectors there are many goods with high circulation. So too low forecasts in grocery would quickly lead to out of stock. In HoReCa, on the other hand, they needed to be reduced immediately, especially because continuing to buy on old forecasts would cause many goods to run into shelf life problems and would end up being obsolete. There were pretty hectic days in the week the closure happened as well as during the following weekend.
Not only in food, but in general, companies' ability to change quickly varied a lot. A small proportion of companies with a high degree of digitization and planning expertise could make changes relatively quickly.
However, many companies still lack effective planning support and have histirically based their planning on manual reviews of the item-level history and adjustments of min / max points to generate orders. In the fact box above, I have, with a little sharp pen, divided the companies into Type A and B companies.
Type A companies have elaborate and integrated planning systems that quickly enable the company to make changes. Type B companies do have an ERP system and maybe even a WMS system, but they often lack an application layer and expertise that effectively supports what we now call Supply Chain Planning, such as forecasting, warehouse and logistics optimization, freight optimization, capacity optimization, order optimization - and not least value chain optimization. This lack of system support and expertise makes the company exposed. And especially in crises like these, the company's crisis management has fewer strings to play, while the Type A companies are far better equipped - and thus adapt better and can even gain competitive advantage.
After the first shock
Without offending anyone, I think it's fair to say that Type A companies have handled the crisis in a far better way than Type B companies. The Type A companies were able to make their changes relatively quickly, and, after forecasts were adjusted in the period after the shutdown, their system support and adaptive forecasting models have been able to more or less run their automation, self-adjustment and exceptions management.
Type B companies have struggled: Due to lack of system support and expertise, they have worked intensively with their min / max adjustments to keep up. With thousands of items in need of adjustment, this has led to a lag in the adjustment and has required manual adjustments og the order volumes for individual products at the discretion of the individual planner. When several people at the same time experienced layoffs and home office, this has not been easy. So, in my opinion, the crisis has led to increasing overstocks and out of stocks and, not least, a good deal of expensive fire extinguishing in many supply chains. My point then is that this has probably been more prevalent in type B companies than in type A companies.
What do you think? Which category does your company belong to? Do you see some resemblence here?
Now the community is re-opening. This means that some companies now will experience increased demand, while some companies will experience a decrease in demand. And the degree of digitialization will again distinguish between those who cope with this well and those who will lag behind: With a gradual opening and increase in activity, the Type A companies' adaptive planning systems will have a good foundation for capturing the increases and implementing this in adjusted plans. For type B companies, this will still require many manual adjustments, one starts lagging behind, runs out of stock and eventually loses turnover and reputation with the customers. And perhaps one is now being bypassed by a competitor who is better at planning.
One sector that (fortunately) will eventually experience growth is HoReCa. One industry that, on the other hand, will eventually experience a certain decline in demand is the 3PL players in wine and spirits. Tax-free sales at Oslo Airport were quite abruptly marginalized, as were Swedish trade and the alcohol trade leakage from Norway to Sweden. So first, this industry had to model that demand shifted to the 3PL players supplying the Norwegian state-run Wine Monopoly. Secondly, it is anticipated that reopening the borders from a given date opens for Swedish trade and that new travel advice from FHI (the Norwegian Health Institute) opens up for more foreign trips and more trade.
Thus, it can be assumed that this leads to a fall in trade passing through the Wine Monopoly and thus will impact the 3PL players. But, at the same time, HoReCa will gradually be demanding more. One thing is the challenge of anticipating this future demand and possibly helping the planning models with new information. Another thing is that, when this happens, one in reality should have anticipated the change a lead time back in time! Otherwise, containers with volumes ordered for higher demand levels would already be on their way. Here we are in an area that is often referred to as S&OP and Scenario Planning: What is the probability that a particular scenario will occur? What is the consequence of not responding on time? Are we willing to place a bet on a particular outcome?
How do I quickly correct my orders?
In the first few days, this was about making corrections to adjust to changing demand levels in the future. Again, for Type A companies, who had advanced ordering systems, the orders were more or less a consequence of the corrected forecasts / plans. And typically the type B companies got busy adjusting their min / max levels.
The crisis created Bullwhip effects:
But still it was true that even if one had purchasing or planning systems, they might not be integrated - that is, capturing changes along the entire supply chain as a whole in one, seemlessly integrated process. As a result, many have had to work with forecast changes at both store- , regional- and central warehouse levels to keep up with the fluctuations. And because these changes often are captured too late and have significant impacts, it will also be similarly difficult for suppliers and transporters up the supply chain to be prepared for the upcoming changes.
When the systems are disconnected in this way, a very interesting problem arises, namely the so-called "bullwhip effect". This is the effect that occurs when a supply chain link does not tell the next link in the supply chain what they are going to be ordering, not just the next order but the future pipeline flow of orders. .
Thus, the next company up the supply chainy chain must take a guess on future demand . So, this becomes a matter of forecasting accuracy and building unnecessary safety stock throughout the supply chain. The farther back in the supply chain you come, the greater uncertainty about future demand and the greater safety stocks. This problem can be solved, and some type A companies actually do that successfully. However, for many companies this is still everyday life. And it means that in this situation, many companies at upper location echelons have large "buffer" stock levels "just to be on the safe side".
How do I secure supplies from my suppliers?
As the shutdown accelerated, many companies felt that access from China was gradually shut down. So it became a matter of quickly making the switch to other suppliers. But the same thing happened in Europe as well, which led to several interesting effects. so-called tactical purchases: We expect our supplier to now receive increasing demand from our competitors.
Let's be tactica by securing a for example half year's extra supply while we still can. For Type A companies, which have scheduling solutions with time-phased demand- and supply planning, It was easy to figure out what a half-year of extra supply meant for each item and do this operation across the supplier's product lines in almost no time. And not least, when these orders became very large - to split the orders intelligently on multiple containers with a spread in receipt dates.
However, for the B type companies lacking the planning support to do this, these operations became very demanding. Although many B typ companies wanted to, this became a matter of many manual operations and great pressure on the planning departments. And it lead to a lot of guesswork and approximities.
A crisis, but also opportunities:
A crisis is not just a crisis, especially when the company has expertise and system support. When you can re-plan with superior speed and precision compared to your competitors, you create an advantage. These benefits can come in areas your competitors don't even know exist. Here is one such example. At the time Norway shut down, the Norwegian currency Krone, weakened against both USD and Euro. And it was predicted to continue weakening. This was a moment of opportunity for some with necessary system support for speculating in currency trade: In fact, there were several companies that made forward buys. A Forward Buy is something you do when you either get better conditions from your supplier or you expect a price increase and thus can buy more at the old price. There were then several A type companies that quickly placed Forward Buys. In fact, some speculated on the suppliers having so slow routines that they first updated exchange rates their systems 2-3 days later. An apparent insignificant matter, you might think. Forward Buying is, however, one of the most profitable things a buyer can do, and several Type A companies reaped significant gains in doing so.
What will be the capacity requirement for my inbound transports and distribution?
Many companies have experienced a decline in demand, so this has not been a pressing matter in the first hand. But in cases where demand has increased, this was actually an important issue. Particularly in the grocery sector, where demand is often unevenly distributed across weekdays, there is a challenge related to the total capacity at central- or regional warehouses. The same applies for our example to wine and spirits.
The question often becomes: Now, that we have adjusted forecasts and increased orders; what do our demand patterns look like in the future? Will we at some point experience incoming volumes exceeding the receiving capacity at our warehouse? Or will we exceed storage capacity at some point? Does that mean that we at a point in time should expect to add on extra external capacity ?
These are fundamental questions many have asked. For type A companies, simulation of such scenarios is part of the planning process. An A type company can normally easily project future load on the available pallet locations in the warehouse and easily identify when one can expect to reach a capacity limit.
For the B type companies that are relegated to a min / max consideration of their logistics and lack system support, this is again very demanding. And again, even if you have a planning solution: If your planning solution is not integrated throughout your supply chain, your numbers will be based on you guessing what the lower echelon in your supply chain will be ordering. You are then likely to have too high demand variations and subsequently to high safety stocks in relation to the actual need.
What happens in the future?
In the short term: Well, the future is here now: It is now a question of adapting to a society that is gradually opening up. For type A companies, this will be a question of demand forecasts gradually increasing as sales increase. And thus also orders and a subsequent movement towards normal supply chain load.
But not for all. For some companies this again is a question of sudden changes (reopening of HoReCa) or reintroduction of foreign travel and reopening of borders. Then gradual, periodic changes of forecasts will not suffice; you need to plan for scenarios and stay ahead of the game so that the supply chain is set to this when it first happens, especially where the lead times are long. Many will also have to acknowledge that some of these changes, once they occur, occur on such short notice and on such a large scale that it can be difficult to fully account for it in advance.
Crisis planning - crisis management
Future planning often involve macro perspectives that normally are a bit distant for Supply Chain Planner or buyers. But in a growing number of companies, there is now a new understanding of the concept of risk management and scenario planning:
- What sudden events are we to expect in the future? The outbreak of Covid-19 was an event that almost nobody saw coming and could not imagine the consequences from. Can new waves come? Can other disasters happen?
- Which of these events can affect us directly or indirectly?
- What kind of change readiness do we need to have in order to quickly transform or change - and perhaps make it an advantage for ourselves - when first needed? From a planning perspective: How can we quickly and dynamically re-plan our entire supply chain?
- Do we have the necessary expertise, planning processes and systems to handle this in the future? - If you think your company is a type B company, is this perhaps a reminder that this could be a gap?
Will this crisis accelerate S&OP - or Integrated Business Planning - IBP?
As stated in the introduction to this article: As long as most things repeat themselves, perhaps in variations on the same theme, you may be able to do reasonably well. But even in such a situation, a type B company should consider changing. But what if things do not go as planned, that is, we do not quite know if an event will strike (and that does not necessarily have to be the result of a pandemic): What then? For example, it may be that we do not quite know if we will win a tender, do not quite know how a particular market is developing, signs that extreme commodity prices are developing.
In that case, adaptive forecasting models may no longer suffice, although they are ever so good. Then we need to be able to combine long-term budgeting and scenario development so that we can test the outcome of different scenarios and thus further increase our preparedness. And we need a more refined use of our data in dimensions such as product, location and customer hierarchies. And our forecasting models must be able to be manipulated up and down these hierarchies. And we need attributes that can be used across the hierarchies. Then our adaptability and precision increase radically.
Only a small selection of companies in the type-A group are capable of this today. They posess the capacity and competence needed. And that means that planning can involve more disciplines in the company, be much more precise - and above all - quick! And the consequences can be seen in many dimensions of the company's business - almost immediately.
You can probably imagine that two seemingly similar companies operating in the same industry, one being a far advanced Type A company and the other being a typical Type B company, have far different challenges in dealing with a seemingly similar situation.
The theme in this article is handling logistics in times of crises. Such sudden events happen from time to time - this is not the last time! Crisis management starts really long before the crisis occurs, where the aim is to build up a competence base and degree of digitization that will be used with full force when the crisis hits.
Now your company was put to the test. Maybe some learnings to bring into your next strategy discussion?