In recent weeks, the news media has been flooded with reports on the growing spread of the novel Coronavirus (COVID-19) across the globe. This highly contagious disease has shut down travel to and from China and several other regions of the world as governments implement aggressive measures to control the spread of the virus. At the time of this writing, there are nearly 130,000 documented cases of COVID-19 infection, and over 5000 people have died.
Global stock markets have seen major indexes drop sharply in the past few weeks as investors seek safe shelter for their funds in advance of difficult conditions. It’s quite clear that the virus will have a significant impact on businesses and society all around the world.
COVID-19: The latest evidence of the painfully obvious
The Coronavirus and its related impacts are clear evidence that we are living in a Volatile, Unpredictable, Complex, and Ambiguous (VUCA) world. The term VUCA describes a chaotic range of dynamics in today’s world that make supply chain planning and execution extremely difficult. Severe examples of VUCA conditions, such as the Coronavirus, can also teach us something about the way we run our supply chains. That is, if we’re willing to listen.
For example, the substantial impact the Coronavirus is having on global supply chains is exposing the downside risk of the heavy reliance on Asia as a source of supply by companies in North America and Europe. Asia has frequently been the source of virus outbreaks (e.g., SARS) over the past 40-50 years. As we are now seeing, these events often result in supply disruptions with the knock-on effect of impacting the ability of companies to fill orders on a timely basis. In addition, these companies experience lengthy recovery times due to the longer re-supply lead times from Asia to North America and Europe than any local supply would be.
Turn back the calendar by three or four months, and I’m confident few (if any) companies were forecasting the outbreak of a virus with the scale of impact COVID-19 is having on their supply chains today. Events like this are very difficult to predict but are emblematic of the VUCA conditions seen in supply chains around the world.
The key to survival in VUCA conditions
So, what can we learn from this? By definition, VUCA conditions will always be difficult to predict and therefore, will seldom yield to conventional forecast-driven planning methods. This means that for companies to succeed, they need to be positioned to respond quickly to changing or unexpected conditions.
The implication of this is that heavy reliance on long replenishment lead times from offshore providers must be reduced to the greatest degree possible. By optimizing to local suppliers, companies will have much greater flexibility to quickly adjust to the ever-changing conditions in the markets they serve. Smart businesses will see that a single-minded focus on cost per unit must take a back seat to responsiveness if the company is to succeed in VUCA conditions.
The Demand Driven Adaptive Enterprise Model put forth by the Demand Driven Institute provides a clear path forward for companies who’ve come to the realization that the conventional planning methods of the past simply aren’t well suited for today’s conditions. The Demand Driven MRP methodology is designed to pace materials and production to actual consumption in the market. This provides a far more accurate signal as the starting point with resulting benefits in order fill rates, inventory levels, and operating performance.
In a follow-on post, I’ll provide an illustration on how lead times impact expected average inventory. I’ll also provide some thoughts on how companies can evaluate the cost benefit of offshore suppliers with the resulting impact of higher inventory levels and increased freight costs.
It’s time for senior leadership to take notice of the message the current conditions are sending and start moving towards the Demand Driven Adaptive Enterprise Model.
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