How will COVID-19 change the supply chain?

May 06, 2020

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The coronavirus pandemic will have lasting implications for global supply chains. Chicago Booth’s Nicole DeHoratius expects to see changes in demand, movement toward automation, and a new appreciation for responsiveness.

Video Transcript

The most important element of this disruptive event, and this pandemic, will be how we rethink the trade-offs between cost and responsiveness.

When we teach about supply chains, we basically talk about how many of the companies look for the cost-effective solution. They’re chasing the lowest per-unit cost of the good. That sends them over to Asia or low labor costs for their manufacturing. They also send their goods via ship, which can take weeks to get back to the US

These are all focused on building a supply chain that’s extremely cheap in order to produce goods that are sold for low prices. What we challenge our students to do is to think about the flip side. What’s the value of being responsive?

Right now we’re living in a time where we see very clearly the value of being responsive. And by being responsive, I mean shortening the lead time. We see Airbridge, for example, FedEx working in conjunction with the government, air-freighting goods from factories in Asia to the US to cut the lead time down from weeks to several days, to get masks here, gloves, PPE. 

It’s very easy to identify the costs of a supply chain because I have data on the labor. I have data on the raw material. What’s really hard to estimate is the value of responsiveness. So we teach our students how to value that responsiveness. How do you estimate this? How do you estimate the cost of being understocked or the cost of having extra inventory? And those are metrics that are often more noisy than the cost metrics.

There are a lot more assumptions that go into the value of being responsive than need to go into the cost side of the equation. We tend to over-emphasize cost at the expense of responsiveness. That’s what we’ve seen in today’s supply chain. Part of the problem that we have now is that we don’t have an agile, resilient supply chain for some of the goods where we ought to have had them in place.

I think supply chain managers will think differently about how they value agility, whether or not they’re willing to pay a little bit more to have a contract with a vendor that might be able to go online quickly if need be.

My expertise is in the retail space, and I think we’re going to see some additional adoption of robotics way sooner than we might have otherwise. If you go into a distribution center in Europe and in some parts of Asia, most of them have extensive robotics and automation in their distribution centers. We don’t have that in the US, though this pandemic has actually caused us to think differently about that, and we see some speedy rollouts of automation within the retail space. Walmart, for instance, is rolling out a robot that can actually count items and help with replenishment. We see other companies having automation within their fulfillment centers to help pick and pack goods to the end consumer. So I would imagine that those types of investments will happen in the supply chain more rapidly than we might have seen otherwise.

We’ve seen this really big spike in consumer goods, and we’ve seen this depletion in demand for durable goods and industrial products. The result for that has been pretty large in the apparel industries. We see a lot of displacement of workers in the apparel and fashion industry in Bangladesh and in Cambodia. That will be a concern moving forward. 

That’s some of the supply chain issues that I see on a global basis that are not just specific to us. But as our spending goes down for things that we don’t really need, maybe a new jacket or a new pair of shoes, we see displacement of workers. I think the textile orders were down by 35 percent. Imports were at a five-year low.

So these all have implications for the long-run supply chain, and then also in those industries, how quickly they can ramp up again.