How do you prepare a supply chain for disaster?

Apr 27, 2020

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COVID-19 has been particularly disruptive for many supply chains. Chicago Booth’s Nicole DeHoratius explains that while supply-chain-management professionals do plan for, and have experience with, disaster scenarios, most such events are local or regional rather than global. For some supply chains, one solution has been to prevail upon the government to permit an unusual level of cooperation to help make sure supplies are getting where they’re most needed.

Video Transcript

Visibility within the supply chain is something that supply-chain-management professionals often identify as one of their biggest obstacles to performance improvement—the fact that they might be able to see one tier down the line, like who’s supplying to them, but they have no visibility as to the suppliers of their suppliers. So the lack of that visibility impacts their ability to plan, and also impacts their ability to mitigate risk in these types of situations when we have a disruption.

Supply chains actually prepare, and they have contingency planning. They do all sorts of risk-mitigation techniques, but typically when there’s a disruption, that disruption is local or regionalized. Think about wildfires, hurricanes, the Japanese earthquake and the tsunami. We had Maersk, a cyberattack on Maersk, which shut down parts of the supply chain. 

These are all disruptive events, but the difference in this event is that it’s global. It’s happening at all places at all times, and it’s impacting both supply and demand. So, that’s what’s made this incredibly challenging for supply-chain-management professionals to mitigate. I don’t think many companies prepared or thought about a universal, basically a coupled, correlated disruption across the globe. Most of them have in place regional activities so that they can pre-position inventory in the face of a hurricane.

Walmart. Home Depot. H-E-B has been doing this for years. H-E-B is a regional grocery chain. These companies know how to deal with regional disruptions. And many of them have advanced warning indicators, so they’re basically scanning the marketplace for any disruption that might occur, and some of them, H-E-B included, had early warnings that something was going on in China, and they started to actually increase their inventory levels in their grocery system in anticipation of a disruption.

So, it really depends on the sophistication of their risk-mitigation techniques, and I think what we will see is a more formalized approach to risk mitigation when it comes to thinking about what’s next for supply-chain management.

One of the things that I find really impressive with what the supply-chain-management professionals are doing is recognizing that there is a lack of visibility in the system as to where inventory is, who has the capabilities to produce particular things, particular items that are needed. And so what some supply chains have done, and I’ll take the medical supply chain in particular, the medical distributors like Medline, Owens & Minor, Henry Schein, they have all decided to collaborate, asked for permission to collaborate from the government, so that they could share information about where inventory was, where inventory was needed, so that you can best get the right product to the right place at the right time.

Absent this collaboration, they don’t have enough information to make good decisions. We think about the supply chain as, we want to have an omniscient person that makes the decisions on behalf of a supply chain, and that person will take the view of the centralized supply chain. Once you have all these entities and they’re working not in coordination with each other, you won’t have the optimal supply-chain solution.

So, when you have these companies saying to the government, "We’re going to collaborate for the purposes of this pandemic. Afterwards, we’ll stop, but we’re going to collaborate so that we can make sure that our resources are effectively allocated within the channel,” that’s a wonderful thing to see.