Mar 23, 2020
An Inventory planner’s dilemma post-COVID-19
As of the 23rd March 2020, the COVID-19 virus has spread to 192 countries, killing more than 15 000 and infecting over 345 000. Besides the immense and tragic loss to lives, our economy is taking strain, with establishments closing down by the thousands to avoid the further spread of the virus. Most industries are feeling the effect on their revenues, but the industries bearing the brunt seems to be the transport and hospitality industries. Companies across the globe are banning or heavily restricting business travel for their employees, airlines have either canceled routes themselves or passengers have decided not to incur the risk of travel. This has a knock-on effect on restaurants, hotels, conference venues – the list goes on. Factories in China may be gearing back to business, but they still have tens of millions of migrants stuck in quarantines or their hometowns and, as a result, are not operating at full capacity. This could take months to rectify.
As an inventory planner, there is little that can be done in terms of what has already happened. Going forward however there are certain things that should be factored into your future planning, to avoid a ripple effect that could affect your business for years to come.
There are 2 two significant issues that form the basis of this tragedy from a business perspective.
Although the Chinese New Year only starts on the 25th of January, companies begin to wind down two weeks prior. They close for the festivities, and only typically re-open after a month. It then takes another few weeks for manufacturers to ramp up to being fully productive. Chinese New Year causes global supply issues every year; however, companies are used to this disruption and can plan accordingly. Add to this disruption the unexpected COVID-19 virus and you have a whole new level of chaos. Besides the people that were infected and couldn’t work, other factory workers that were away visiting families over CNY have not been able to return to work as airlines started to cancel flights. This has culminated in significant disruptions in production, which in turn has a ripple effect across the supply chain.
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. A lot of other countries like Italy, for example, have closed pubs, restaurants, shops, and gyms, leaving only the service-related shops open. Online orders are also impacted as they are experiencing issues around deliveries and /or no stock.
As an Inventory planner, you may have already tried to source from 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 so that the fall out doesn’t affect your inventory planning for years to come.
Currently, your sales are lower than usual, and your orders aren’t coming through from your suppliers. 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 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.
Whichever way you look at it, your forecasts and risks are going to be impacted. 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 all have an impact on your safety stock as this causes 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 of the affected countries to prevent stocking out entirely and leaving your customers without products. This may be extremely difficult, considering how many countries have already been affected. Take into consideration that using alternative suppliers brings its own challenges – their demand is probably spiking as they deal with these unusual patterns, and as the virus continues to escalate, so will your supply risk.
Monitor your lead times to make sure that they are corrected when regular supply resumes. Cap the impact of supply risk so that these anomalies don’t have an even more prolonged effect on safety stock and orders when things start to normalize. Revert to the preferred vendor you had if that is still the best choice.
Customers understand the challenges with supply, especially when it comes to these exceptional circumstances. However, make sure that you are in constant communication with them as to when their orders are expected and be honest and open with this information. Keeping them in the loop will maintain your credibility and reliability, and they will most likely remain loyal.