Mar 4, 2020
An Inventory planner’s dilemma post Coronavirus.
As of March 4th, 2020, the Coronavirus has spread to 80 countries, killing more than 3200 and infecting over 90 000, mostly in China. Besides all the tragic loss to human lives, companies are taking strain as we see with the recent statement from Apple, effectively saying that although factories in China were re-opening, the i-phone production was slower than expected and the shortage in supply will affect their worldwide revenues. From an inventory planning perspective, there is very little that can be done in terms of what has already transpired, but there are most certainly things that should be factored into your future planning, to avoid a ripple effect that could affect your business for years to come.
Most industries are feeling the impact, but the more prevalent ones are within the hospitality and transport sectors. Large European companies have started to ban or restrict business travel for hundreds of thousands of employees as the coronavirus outbreak continues to accelerate. Recreational flights are also being canceled as people do not want to risk traveling, thus having a significant impact on tourism. Airlines such as British Airways and United Airlines have canceled flights into China, and retail stores like McDonald’s, Starbucks, and IKEA are shutting down in certain areas.
For companies, two significant issues form the basis of this tragedy from a business perspective.
While the Chinese New Year only commenced on January 25th, companies started to wind down about two weeks prior. They were closed for the festivities, most only re-opening after a month. Then it takes another few weeks for manufacturers to ramp up to being fully productive. As it stands, Chinese New Year causes global supply issues each year; however, companies are used to this disruption and can plan accordingly. When an unexpected event such as the Coronavirus occurs, this adds a whole new level of chaos to the mix. Besides the people that were infected and couldn’t work, other factory workers that were away visiting families over CNY could not return to work as airlines started to cancel flights. This all culminated in significant disruptions in production, which in turn had a ripple effect down the chain from manufacturing, logistics, distribution, and retail.
China is the 2nd largest economy and the most extensive online purchasing population in the world, and they are not spending money at the moment. Besides not wanting to venture out to retail shops, the e-commerce orders are also impacted. E-commerce companies have issues around deliveries. Companies like Alibaba, who rely on 3rd party deliveries are more impacted than companies like Amazon since they have direct control over their logistics network and can plan better. Despite the issue around transportation, the actual physical products are not available for order.
As an Inventory planner, there are some actions you can take now, for example, sourcing alternate suppliers. But that is not the only action you need to take. You need to understand what happens to your planning parameters going forward to ensure that the fall out doesn’t affect your inventory planning for years to come.
Your sales are impacted and are lower than usual, and your orders aren’t coming through from your suppliers as expected. This has a direct impact on your future forecasts, and you will need to make manual changes to strip out anomalies, or you will be way off on your ordering.
A few things to consider:
- If you have a non-seasonal forecast, this has probably dropped the forecast level below normal levels already.
- If you have a seasonal product, this will impact you next year this time when we hopefully no longer have an impact from the Corona outbreak.
- The fact that your forecasts for this period’s sales are way off will impact the forecast risk and sales variability you see in the data. That, in turn, will likely increase the safety stock required, and that, in turn, will trigger bigger orders that will take longer to arrive than planned.
- Ask yourself, is the demand you would have supplied really lost or simply delayed?
- Lost sales will cause lower demand, but delayed sales will cause a spike going forward that will further compound all the calculations and impact what is being discussed here.
No matter which way you look at it, your forecasts and risks are going to be impacted. You need to get ahead of the data cleanup and make your refinements now, or the impact will continue way into next year.
Your current situation and things to look out for
Delayed orders from suppliers and lost sales will have an impact on your safety stock as it will cause your demand and supply risks to increase. This has most likely already resulted in some inventory planners building in additional buffers to protect themselves as it is unknown how long the effect of the virus will be. Additionally, you may want to find alternate suppliers outside affected countries to prevent stocking out entirely and leaving your customers without products. Bear in mind that using alternative suppliers brings its own set of challenges – their demand is probably spiking as they deal with these unusual patterns. As the virus continues to escalate, so does your supply risk.
Monitor your lead times to make sure that they are corrected once regular supply resumes. Cap the impact of supply risk so that these anomalies don’t have an even more prolonged effect on buffers and orders when things start to normalize. Remember to revert to the preferred vendor you had if that is still the best choice.
The majority of your customers understand the challenges with supply, especially when it comes to these exceptional circumstances. However, ensure that you are in constant dialogue with them as to when orders are expected and be honest and transparent with this information. By keeping them in the loop, you will maintain credibility and reliability, and they will most likely remain loyal.