Are lean supply chains with low inventories no longer valid?
Smith: It has been a long time coming, but we are now seeing the ramifications of a lean supply chain and utilizing your capacity to its fullest. Manufacturers are now trying to ramp up, but they are not able to do that as quickly as they would like.
We are at the beginning stages what’s next and what’s coming. Organizations have to start rethinking how they deliver the value they offer. If you are a cost-focused organization or time-based, you do need to be lean. But if you compete on a different dimension, maybe lean is not the answer.
Too many organizations haven’t done an effective job at understanding that maybe their models shouldn’t be lean. One of the core tenets is you have to have predictable, stable demand. For example, there’s been a push for lean healthcare for some time, but that should not be their goal. They need to control costs, but the goal is provision of care. if demand spikes up, you’ve got to have some sort of system that accounts for that.
How is the pandemic forcing consumers to change purchasing behavior?
Huhmann: Consumers are changing their behaviors. There is a shift in the kinds of things that consumers are demanding and part of that is causing supply chain disruptions. People who are home all day need different things, like groceries or more toilet paper. They are wearing different clothes and using less gasoline. People are also hoarding items that they perceive as becoming scarce. They are shopping less frequently but buying more when they do go out. There is also huge extra capacity in some supply chains. For example, there are fewer institutional buyers for food, such as colleges and restaurants.
Why are the shelves empty?
Shockley: Retailers have a dedicated amount of shelf space for items like meat. There’s a minimum level, where they initiate new orders and there’s a maximum level that they order up to. Today demand is happening so fast that they are hitting the minimums, but product is running out before new product comes in. It takes time for the supply chain to catch up.
Smith: Given the fact that supply chains have been lengthened over time, it’s going to take time. We’ve gone global to get economies of scale and better pricing on things and that’s created a delay.
What strategies can retailers or manufacturers use to deal with these types of disruptions?
Smith: The big question we will need to answer going forward is ‘What do we need to get over this?’ Maybe that is developing multiple supply bases and having dual sources – perhaps one that is longer and delivers economies of scale, but another that is local to fill immediate demands. We have to look at technologies and different ways of doing things. For example, with regard to personal protective equipment, we may have companies with 3D printers that introduce more flexible machinery to build face masks. That could lead to different innovations in certain equipment types. We also might innovate new ways to disinfect or recycle and reuse equipment. What was once linear could become cyclical.
Huhmann: More companies may sell online to consumers because demand is there, and they have no other way to get their product to market. Consumers are also looking to retailers that can supply everything they need in one trip; so, there is more demand for retailers like Walmart, Target, Costco, Sam’s Club and big grocery stores.
Smith: Expect short-term fixes, like rationing. Grocery stores are also going to have to start thinking about how they can recondition their space to be able to accommodate new demands, such as greater demand for frozen foods. It’s all about getting everything to where it’s needed and being responsible in how it’s distributed and allotted.
Do you expect any long-term impacts to consumer purchasing behavior?
Huhmann: For a few years, after the crisis, people will be worried something similar will come back. Consumers who have experienced empty shelves and rationing situations will be more likely to stockpile their basements with a two- to six-month supply of toilet paper and canned goods.
Smith: From manufacturing perspective, this could be a good time to be in the deep freeze business. Home freezers could become more popular. Big box stores could also stand to benefit if people revert back to buying in bulk.
Huhmann: Recent Nielsen data suggests that consumers are willing to pay more for products with better quality, performance or hygienic aspects. But they are less interested in products with organic, sustainable or social responsibility claims. We probably aren’t going to have a cure for a year or two, so ‘untouched by human hands’ will be a big deal for a lot of consumers.
Can we expect that people will panic buy and hoard meat and poultry as they did toilet paper?
Smith: Absolutely yes. Smithfield has closed, and Tyson is warning us to a significant change in their supply chain and our supply chain as a whole. You are going to start seeing the scarcities that potentially come from this.
There are still meat, vegetables and farming products, but production will slow. Where there used to be side-by-side workers in plants, they now will be spacing workers to help them be safer. Putting in new protocols and processes may slow production. So, the meat, fruits and vegetables will be there, but it may be in smaller quantities or different packaging.
I see a possible reshaping of a lot of supply chains. Consumers may do more geographic shopping. Some people may live in a more fruit and vegetable type area versus a meat area. I think we will see a lot of more localized supply chains operating in a circle instead of long supply chains that span multiple countries and continents.
If supply chains shorten and fewer companies practice lean inventories, will consumers be willing to pay more?
Huhmann: Prices will likely go up. Changes like increasing the amount of safety stock, shortening the supply chain, adding new machinery or creating greater space to keep workers or consumers farther apart will all increase costs. But this is the toughest time to increase costs because there is a lot of economic uncertainty. Producers don’t necessarily want to invest in new equipment and may have cash flow issues. Consumers also have cash flow issues due to massive unemployment or reduced paychecks. They will be very price sensitive at a time when prices are rising.
Transparency in the supply chain is also becoming important to consumers. They want to know where the product is coming from and who is touching it along the way. So, demand for local goods will increase. If they know it comes from their area, they will be more likely to frequent your place of business. Also, if you can tell a story about where your product has come from and what the supply chain looks like for consumers, they will be interested in that.
Smith: For a long time, the goal was to have a robust supply chain but with that you need visibility. It’s expensive to do and to verify. Companies that have already opened the door to their supply chain for human rights or environmental claims will be ahead of the curve. Visibility has been something we’ve preached in academia for some time. Certain companies are really good at it and it’s an important factor.
Will companies switch from focusing on shareholders and start considering all stakeholders?
Huhmann: A lot of corporations are already concerned with all of their stakeholders – employees, consumers, shareholders and suppliers. In fact, a large national organization of CEOs recently talked about the importance of benefitting all of the stakeholders. On the other hand, capitalism is not going to go away; so, companies will do whatever it takes to be most cost effective, whether it’s long or short supply chain, bigger or smaller safety stock, and in-store or online product sales. The market will adapt once the situation stabilizes.
Smith: I think we will see a lot of divisions in industries. Not everyone will be operating on the same plane. Some will be very focused on the ‘not touched by human hands,’ some will be cost focused, some will be availability focused. We might see industry cuts that are different than we’ve seen in the past. There is room for everyone to compete in a different way. They need to find their competition niche and focus on that.
Shockley: I think you are going to see the medical/surgical supplies industry change rapidly over the next year or two. That was formerly a wholesaler/distribution-based model.
Smith: How individual doctor’s offices and hospitals function and control inventory and distribution will change. You are going to see innovations in healthcare in the coming years, especially in healthcare PPE and necessary devices like ventilators.
What can consumers do to help small and large businesses during this time?
Huhmann: Small, local businesses are especially hurting. If you are able, frequent them or buy gift cards for future purchases. Support the local businesses that are operating in your community. For example, landscapers are still doing business. When you support the local economy, it filters through to other businesses and their employees to keep the whole economic system going.
It’s also helpful to not have psychological reactions to scarcity issues. If a retailer is selling out of a product but you have plenty, don’t buy more.
Do you have any advice for businesses to prevent these problems from happening in the future?
Smith: Companies can start to reshape how they deliver value, to build redundancies in certain areas or investigate where their vulnerabilities are. They need to look beyond cost and delivery terms and consider the probabilities of disruptions.
Shockley: Learning from 2008 financial crisis, one of the solutions put forward by the Federal Reserve Bank was the idea of stress testing large institutions. Companies that are critical to the supply chain could possibly be subject to some sort of stress test.
Huhmann: A survey of chief marketing officers showed that 56 percent are cutting their advertising spending over the next year. Advertisers can capture a larger share of voice by being one of the few voices out there competing for consumers’ attention. Consider what you can say to build your brand and reassure your customers, even if you can’t sell them anything. Sales people are working extra hard right now, trying to find ways to supply retailers and other members in their channels where there are disruptions and shortages. Customers will remember how companies and sales people performed during this crisis. Those who go above and beyond will be remembered and rewarded by their customers. It’s a time to think about your marketing and what you can do now to set yourself up for greater success in the future.