How healthy are supply chains following the advent of COVID-19?

May 01, 2020

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COVID-19 has thrown up huge challenges for various supply chains. Chicago Booth’s Nicole DeHoratius says that many suppliers have responded by reducing complexity to ramp up capacity.

Video Transcript

Many of these supply chains are fairly robust, and they have—as long as the workers are well and they’re able to run their factories—they’ve been incredibly smart about how they’re running their factories.

For example, let’s just take consumer goods and some beverage, food and beverage. They might have in the past made 100 different variants of a particular product. Well they’ve now said, “OK, I’m not going to make 100 different variants, because for each variant I have set-up time. I’m going to only make one or two.”

So, we might have less choice as a result of them focusing on one or two units in order to maximize their capacity and cut down on the set-up costs that happen when you set up between different products. When you’re running a manufacturing plant, if you have a lot of variety, you have to set up for each of those different variants. That’s wasted time, that’s time where you’re not producing a good. 

So, many of these companies have said, “OK, I know that we used to make 100 different variants of paper towels. I’m now going to make only two different pack sizes, and as a consequence I actually can produce more, I can increase my capacity.”

All the things that we learn about in ops and we discuss in ops about reducing operational complexity—such as reducing product variety, increasing our run time—all of those types of things have been taking place as a result of the stress on the supply chain. 

The signs are that the supply chain is doing quite well. The need for transportation, the need for warehousing, all of these numbers have gone up. We have this logistics performance index, which over the last five years has been declining, and it now just actually went up because of the need for all of these things.

So, I can’t promise that there’s not going to be bankruptcies and some elimination of supply chain links in the chain, but I actually think that we’re in a robust enough setting where we’re needed enough that these types of things will keep going.