How COVID-19 is Shifting Supply Chains
Blue Yonder is committed to helping its customers face the unexpected. To provide insights into the COVID-19 coronavirus pandemic and its impact on supply chains around the world, we are delivering a blog series to help anyone looking for support and advice. Our experts, who have spent years in the supply chain industry, share their insights.
The world is suddenly turned upside down with empty store shelves. Consumers can’t find toilet paper, hand sanitizer or their favorite pasta anywhere. They wonder: ‘What are we going to do?’ ‘Is this the new normal?’ and ‘How long will this last?’
From the outside, it does seem like things are beyond control. Food/grocery retailers are seeing unprecedented demand for many items, most notably paper, and sanitizing products, canned goods, and products with a longer shelf life. But what are we seeing? If we step back and look at it from the inside, i.e., the overall supply chain, things begin to make more sense. After all, are people using more toilet paper, or eating three times as much food than they normally do? It’s not about the shortage, it’s about how quickly retailers can stock shelves when masses of people clear them out far quicker than average.
What we are seeing is a few understandable shifts, if we look at them individually, in the normal framework of a supply chain. Here’s how it works:
Safety Stock – The first shift is in the point of safety stock, meaning wherein the supply chain we are accounting for uncertainty. Consider a supply chain for toilet paper that runs from a manufacturer to a distributor to a grocery store to the consumer. The manufacturer has always forecasted how much product they need to produce to satisfy orders from the distributor (it might be more direct to store, but for this example let’s assume they go through a distributor). Then, the distributor forecasts what they need to satisfy the retailer, and the retailer forecasts what the consumer will want and when they want it. Each of these nodes in the chain keeps a little bit of safety stock to account for the uncertainty of demand (that their customer might want more in the short term than is expected) and for the uncertainty of supply (that the link in the chain above them can’t get them what they expect).
While we usually don’t account for consumers thinking about the uncertainty of demand and supply, they do in some way — even if they don’t realize it. For example, I might keep an extra 6-pack of beer in my refrigerator just in case a friend stops by. I’m accounting for the uncertainty of demand. I usually don’t account for the uncertainly of supply because I can almost always get the beer I want from my local store.
A big part of what we’re seeing now is consumers reacting to what they now perceive as a big uncertainty of supply. They are afraid that they won’t be able to get toilet paper in the future, and they perceive that their required level of customer service (the percentage of time they have the product when they need it) is very high. They don’t want to run out of that product, so they’ve decided to stock it themselves. This isn’t due to an increase in real demand, or usage of the product, this is due to safety stock moving down the supply chain.
While a retailer or distributor will pour over calculations to figure out just how much safety stock they need, an individual consumer only thinks, “I need more of this.” Consumers don’t consider that a six month’s supply is way more than they need, mostly because it doesn’t cost that much to stock it in their basement. But, if you multiply this by millions of consumers, the effect is significant on the supply chain.
Consumer demand for toilet paper will eventually drop, and when the products come back in stock, there will be an added impact of a decrease in the uncertainty of supply, which will further impact the reduction in customer demand that is sure to happen.
Retailers must now figure out when will consumers decide they have enough safety stock to satisfy their uncertainty, and when is this going to result in a steep drop in sales? Consumers won’t continue to make purchases at the same rate they’re buying now, especially if they have nowhere to put it and they aren’t using what they’re buying. Eventually, store shelves will be full again, even with toilet paper. That’s the real forecasting challenge at this moment: When does the supply chain back up?
Changes in Channels – Other products that will increase over the long term are related to a switch in the delivery channel. For example, we are seeing a change in where people are eating. As a result, restaurant sales are down and will remain down for some time. Thus, the total amount of broccoli consumed in the U.S. might not change, but the channels it flows through will. Distributors that satisfy restaurants will see a decrease in demand for as long as restaurants remain closed, but farms and manufacturers might only see a shift in sales from restaurant packaging to consumer packaging and even “recipe” delivery services such as Blue Apron and Hello Fresh. Likewise, sales in toilet paper might switch from the single-ply that is used in schools and businesses to the two-ply that consumers typically buy. Manufacturers must plan for this.
Some of the decreases for restaurants will be lessened by an increase in take-out business, but it’s unlikely to make up for most of it. There could be a long-term increase in the number of customers that use this kind of service as they are forced to explore more buying options.
Also, college students who have returned home due to colleges and universities closing down will no longer be eating on or near campus but at home. They may have been buying most of their food and grocery products close to campus but now they (or their parents) will be buying that same product at a different location. It will be much easier to project the decline in demand near college campuses than it will be to project the increase in other locations.
Real Demand – There are some products (such as hand sanitizer and soap) where usage is increasing, but those products are probably in the minority. Demand for these products will increase for a longer period, possibly much longer if personal habits change.
If you can start by thinking about the type of behavioral change that is the underlying cause of the new sales pattern impacting your supply chain, you’ll be a little closer to anticipating what will happen next and what you need to do to get your business back in order.
To learn more about how Blue Yonder can help during a crisis visit these resources:
Blue Yonder’s ‘Achieve predictability in unpredictable times’ page
Blue Yonder’s COVID-19 Response page