Dry goods: how to manage the supply chain in the era of uncertainty?

The following article is from Business Review (id:shangyepinglun)



Author: Wang Liang, Chen fuming





Since February this year, the COVID-19, which has been intermittent for two years, has suddenly launched a massive counterattack in China, causing Shenzhen, Changchun, Jilin, Shanghai and other places to fall into a severe situation of global silence. Factory closures, shop closures, home office work, supply disruptions... The production and operation of enterprises and the daily lives of people have been greatly affected.





Under the crisis, enterprise resilience, supply chain management and other topics have once again become the focus of attention. On May 8, at an online Salon "supply chain challenges and responses in the context of epidemic prevention and control" hosted by the International Institute of supply chain and operations management, Dr. Wang Liang, a researcher at the China Europe Zhenkun supply chain and service innovation center of China Europe International Business School, made a keynote speech.





In his speech, he mentioned that in order to deal with external crises such as the COVID-19, which will cause supply chain risks, enterprises should establish 3R supply chain, and summarized the capability model of 3R supply chain.





After this activity, the journal had an in-depth exchange with Dr. Wang Liang. Dr. Wang Liang shared his views on the challenges brought by the epidemic to the supply chain, the connotation and value of 3R supply chain, and the implementation practice of 3R supply chain.



The COVID-19, which broke out two years ago, has not yet subsided. From your observation and research, what are the main challenges faced by enterprises in the supply chain under the epidemic prevention and control, and what are the specific performance?





Wang Liang: supply chain is naturally a cross regional and cross enterprise organization, and it is a flow process of information flow, business flow, logistics and capital flow. The key to epidemic prevention and control is to "calm down" and block the spread of the virus through necessary flow restriction. There is indeed an inherent contradiction between movement and silence.





Let me talk about the specific challenges I have observed from three aspects: demand, supply and supply-demand transmission.





On the demand side, taking the current round of Shanghai epidemic as an example, we can see that the consumer demand in the sealed off area has changed dramatically in the short term, with the demand for clothing, cosmetics, household appliances, automobiles and other commodities plummeting, and the demand for necessities of life soaring. Moreover, due to the interruption of offline channels, demand surged online, making the online order volume once reach the level of double 11 and 6.18.





The consequence is that for clothing, which is highly seasonal and has a long stock period, the goods prepared in advance cannot be sold, resulting in heavy losses for manufacturers, distributors and retailers; For daily necessities such as food and beverage, manufacturers, distributors and retailers have to fight a big promotion battle without preparing enough goods in advance. The challenge is also huge.





On the supply side, we can see that both production and logistics links are affected by interruptions to varying degrees. Typical "breakpoints" include factory closure, warehouse closure at all levels, isolation of employees and drivers, etc.





During this round of the worst epidemic in Shanghai, I once communicated with the management of an e-commerce platform and learned that they were sealed up at more than 90% of distribution stations at all levels in Shanghai. In this case, even if there is goods, or the goods can be transferred from other places to Shanghai by means of hanging, it is difficult to deliver the goods to consumers.





For the upstream supply chain, the challenge may be greater. During the epidemic prevention and control period, the transportation capacity of guaranteed supply is given priority to daily necessities. Therefore, even if the starting conditions are reached through closed-loop management of employees, many factories are also faced with the difficulty of "raw materials cannot come in and products cannot go out".





Another challenge derived from this is the problem of losing orders. We can see that during the epidemic prevention period in Shanghai, some overseas customers of Shanghai suppliers transferred orders to suppliers in other countries and regions. The reason behind this is that the delivery reliability of Shanghai suppliers cannot be guaranteed in the short term.





In addition, I also want to emphasize the famous bullwhip effect in the supply chain. The so-called bullwhip effect refers to the gradual distortion in the process of demand transmission from downstream to upstream. Compared with the single point problem in the above supply chain, the bullwhip effect is more difficult to observe directly, but its impact on the supply chain is more far-reaching.





For example, when the availability and timeliness of online shopping become uncertain, consumers who are sealed at home will tend to place excessive orders. If an order is out of stock or delayed in delivery, they will cancel the order and ask for a refund.





When a large number of consumers carry out such abnormal operations at the same time, the interference to upstream manufacturers' stock may be great, and the resulting excess inventory will face a long-term and high-cost digestion process.





The essence of supply chain management is to achieve an accurate match between supply and demand. To sum up, the drastic changes at the demand side, the interruption at the supply side and the distortion in the transmission of demand signals to the supply side have jointly created the challenges of epidemic prevention and control to the supply chain.





In your opinion, in addition to the objective factor of the epidemic, what are the other reasons for these challenges?





Wang Liang: I think external shocks such as the epidemic, the trade war and the conflict between Russia and Ukraine have only played a role in exposing problems. The real reason for the problem lies in our biased and insufficient understanding of supply chain management, and the supply chain infrastructure needs to be improved.





Let me tell you a story ten years ago. In the 2011 earthquake in Japan, a factory in Komeito HAMA, Japan, shut down, which directly limited the production of Chrysler's cars of up to ten colors.





The reason is that the paint of these ten colors needs to use the Xirallic metal pigment exclusively supplied by German Merck company, which can only be produced by the affected factory. After the accident, Merck opened its second Xirallic pigment production line in Germany, and Chrysler also reduced its reliance on Xirallic pigments in color matching design.





The reason behind the story is very simple: when managing the supply chain, we must consider risk factors, not just cost and efficiency. In every link of product design, procurement, production, sales and logistics, we should balance cost, efficiency and risk, and have corresponding standby capacity and emergency plan.





When talking about the improvement and optimization of the supply chain, many companies we met before the epidemic still talked about cost reduction and efficiency increase, and rarely mentioned risk management.





Of course, taking into account risks means the increase of some costs. For example, although the multi warehouse strategy can disperse risks, it requires more stock and safety stock, which is certainly not as cost-effective as the one warehouse distribution across the country.





This leads to another question: can we reduce some unnecessary costs in the supply chain and use the saved costs to control risks? In my opinion, this is an issue that enterprises must consider when optimizing the supply chain in the future, and with the improvement of the country's supply chain infrastructure, this is entirely possible.





Take logistics for example. In recent years, our country has continuously introduced measures to promote the integration of resources in the logistics industry. From the establishment of China logistics group last year to the construction of the national unified market this year, we are creating conditions for the improvement of logistics infrastructure.





If the logistics costs between different regions and different transportation modes can be significantly reduced in the future, enterprises in the supply chain will have more resources to manage risks.





In the future, there will be more and more uncertain factors such as the epidemic. In your previous salon, you mentioned the 3R supply chain theory and believed that enterprises must prepare for such uncertainties. Can you introduce the source of 3R supply chain theory?





Wang Liang: strictly speaking, 3R supply chain is not a mature theory. It is an overall description of the supply chain capability requirements of enterprises in a highly uncertain environment.





This idea was first called 2R supply chain, that is, responsive and resilient supply chain. It was put forward by Professor Zhao Xiande and I of China Europe International Business School during the epidemic in 2020. The motivation is to call on academia and industry to pay more attention to supply chain management in emergency situations.





Later, Professor Zhao Xiande and Professor Hau L. Lee of Stanford University made a special issue of epidemic and supply chain response for the Journal of operation and management, and added a third r when naming the special issue, which initially meant restoration, and later updated to regenerative.





How should we understand 3R supply chain? What elements and capability models does it include?





Wang Liang: from the specific definition, rapid response means that when an emergency occurs, the supply chain can quickly and accurately respond to changes in customer and market demand;





Resilience means that when an emergency occurs, the supply chain can achieve the overall continuity of operation, and can recover quickly even if there is an interruption;





Renewability means that when an emergency occurs, the supply chain can reconfigure available resources (including potential resource pools), design and deliver new products and services to meet the new needs when and after the emergency occurs.





We can understand the 3R supply chain from the following logic: the first R is for what the supply chain should do when the demand is highly uncertain; The second R is about what the supply chain should do when the supply is highly uncertain. By doing these two R's well, we can do a good job of supply and demand matching in a highly uncertain environment. The third r focuses on the future.





Both rapid response and resilience emphasize the matching of supply and demand of existing products and services, while renewability emphasizes the reconfiguration of resources and capabilities in the supply chain network to make new products and services to meet new needs.





For example, at the beginning of the epidemic in 2020, there was a large new demand for epidemic prevention materials such as masks and temperature measuring equipment. This obviously requires stronger supply chain management capabilities.





My view is that not all enterprises can achieve the third R, which is more like the expectations of Professor Zhao Xiande and Professor Li Xiaoliang for the core enterprises of China's supply chain.





For enterprises, it is not enough to know what to do, but more importantly, how to do it. Therefore, we try to propose a 3+2 capability model to support 3R supply chain.

The three capabilities of the first layer are speed, agility and redundancy.





With the same insight into demand changes or the same emergency plan, if an enterprise's supply chain speed is faster than others, it can transmit the demand signal or emergency plan to all links of the supply chain in a more timely manner to avoid delaying the opportunity.





At the same time, the procurement, production and delivery of enterprises also need to be agile. In the face of rapid changes in the number and / or category of demand, suppliers, factories and logistics service providers can keep up with these changes and deliver by adjusting their own operations.





To achieve this, in addition to speed and agility, enterprises also need to reserve some spare resources and capabilities for key materials and suppliers at key supply chain nodes.





I want to emphasize that the reserve capacity itself is not contradictory to the lean that many enterprises have been pursuing in recent years. The essence of lean is not zero inventory on the surface, but to ensure the continuous flow of value. If we don't increase safety stock on the premise of perceived risk, it is actually a violation of lean thinking.





The two capabilities of the second level are visibility and collaboration of supply chain, which are the basis for enterprises to realize the first level of capabilities.





When an emergency occurs, the supply chain with a higher degree of visualization has clearer supply and demand signals and real-time bottlenecks in the chain, and the speed and agility of emergency disposal are also faster and higher.





I would like to add that visualization is not only to do a good job in digital connection and the corresponding large digital screen, but also to guide the decision-making of enterprises in real time based on the analysis of internal, supply chain and external data.





The quality of supply chain collaboration directly determines the size of the supply chain resources and capacity pool available to enterprises. The three capabilities of the first layer all depend on this.





In the face of emergencies, the supply chain with higher collaborative efficiency between upstream and downstream and between ecological partners will have faster response speed, higher agility, and stronger ability to temporarily transfer and combine resources.





Under the guidance of this theory, what should enterprises do? Please illustrate with enterprise cases.





Wang Liang: 3R supply chain and its 3+2 capability model are more a kind of thinking than a standard practice. Enterprises can choose feasible practices according to their own conditions.





For the majority of small and medium-sized enterprises, my suggestion is not to be afraid of difficulties. I think that building a 3R supply chain requires a lot of investment, and I don't have that strength.





Let me give an example of a Sino European alumni enterprise. Baozheng supply chain is a small and medium-sized enterprise mainly engaged in imported food B2B logistics services. When the epidemic in Shanghai rose in mid March, the boss was keenly aware of the possible risks based on the comparison with the epidemic data trends of other countries and regions, and immediately formulated a simple emergency plan and implemented it in place quickly.





First, divide the personnel into commandos and reserve teams. The commandos will not go home for the time being, but stay at the company and front-line sites, depending on the development of the epidemic; In addition to the company's vehicles, employees are encouraged to park their private vans at the company as a standby transportation capacity. As a result, the company still has valuable manpower and vehicles available during the global silent management in Shanghai, which reflects the value of speed and standby capacity.





Secondly, the company quickly adjusted its business model, temporarily converting 2B business to 2C business in Shanghai, providing multi-point distribution of guaranteed supplies for the government and communities, reflecting the value of Agility for operational continuity.





Moreover, the company actively communicated with the customs, completed unaccompanied, online inspection and customs clearance through video connection, electronic signature and other means, and dispatched vehicles through GPS and other tools to support the switching from 2B single point to 2C multi-point distribution, reflecting the value of visualization.





Finally, the company actively communicates with the government and suppliers. On the one hand, it strives for more passes, and on the other hand, it temporarily mobilizes vehicles to suppliers to support supply guarantee, which reflects the value of synergy.





From this simple example, it can be seen that a small and medium-sized enterprise can also establish its own 3R supply chain capability to deal with emergencies without significantly increasing investment.





For core enterprises in the supply chain, 3R supply chain may need more accumulation of supply chain and business model innovation, as well as the ability to mobilize more ecosystem resources.





We have done tracking research on Haier for more than ten years. In the past 40 years, Haier has experienced the transformation from mass manufacturing, mass customization, and then service-oriented manufacturing.





In the main business of household appliances, Haier first carried out modular transformation of the main links of the supply chain, such as design, procurement and manufacturing. It changed hundreds of parts of a household appliance into dozens of main modules. 70% - 90% of the subsequent product development can directly call modules. At the same time, it changed the production line into a modular production line, and helped excellent parts suppliers upgrade to module suppliers with long-term strategic cooperation.





On this basis, Haier opened menu customization to users, and made pull production in CTO (configuration according to order) mode. At the same time, it developed ririshun network to strengthen downstream delivery and service capabilities.



These innovative practices, on the one hand, enable Haier to quickly and cheaply adjust the product model and quantity when the customer and market demand change, on the other hand, enable strategic suppliers to do their best to help Haier maintain the continuity of operation, and realize rapid response and resilient supply chain during the epidemic.





In addition to the main business of household appliances, Haier has also created the CAOS industrial Internet platform, which uses digital technology to replicate its supply chain management capabilities to more than a dozen different industries. While helping enterprises in these industries transform and upgrade, it has also established a cross industry resource pool covering multiple links of the supply chain.





Haier used its CTO thinking to allocate resources in these resource pools across industries, and helped many ecological partners quickly develop and produce various mobile shelters, mobile temperature measurement and disinfection channels and other products that Haier and its ecological partners had never been involved in during the epidemic in 2020, realizing a renewable supply chain.





Although the practices of small and medium-sized enterprises and core enterprises are different, they also have similarities.





First, enterprises should strive to gain insight into the changes of the external environment through qualitative and quantitative means.





Second, the enterprise management team must pay attention to risks, have certain risk management knowledge, formulate formal emergency plans for the supply chain, and act in time when early warning signals appear.





Third, the application of digital technology and the collaboration between upstream and downstream of the supply chain are the necessary foundation. When investing and evaluating these capabilities, we should also take their contribution to risk control as a measurement index, rather than just looking at cost and efficiency.





We were very impressed with the agile, adaptable, and aligned supply chain a few years ago. Will the main idea of the supply chain shift from 3a to 3R in the future?





Wang Liang: 3A supply chain was proposed by Professor Li Xiaoliang. In the process of our exchange of 3R supply chain, I think 3R supply chain is not a substitute for 3A supply chain, but used to express what the supply chain should do under the extreme situation of "emergency".





If you go deep into the 3+2 capability model behind 3R, you will find that some of these capabilities come down in one continuous line with 3A supply chain.





For example, agility is an a (agility) in the 3A supply chain, and an important basis for collaboration is another a (alignment) in the 3A supply chain.





Some small differences lie in the fact that the capacity model of 3R adds the special requirements of "standby capacity" in the extreme case, as well as the consideration of the technical dimension of "visualization".





Interviewer: chenfuming, research director of Zhizhuan Business Research Institute.





Source / Business Review (id:shangyepinglun)



Author / Wang Liang, Chen fuming