A recent piece in the WSJ focusing on the shortages we are experience in the paper towel market – click here. A great piece describing all the components that it takes to get a roll of Bounty to your local store shelf. Well worth the read. But this isn’t about getting your paper towels, it is about the underlying message from the piece – supply chains need to rethink how we view safety stock.
We have discussed this here before, Covid has turned our supply chains upside down. Shortages befell our supply chains across the board. As consumers we saw this when we made our trip to the grocery store – no toilet paper, no cleaning products, no milk etc etc. Bare shelves and forced limitations on what we could buy, became the norm. Supply chain professionals were not surprised, a perfect storm. Unexpected spike in demand, no safety stock and a leaned out supply chain that could not react. So what does this mean long term?
- We must rethink safety stock. The WSJ piece had a great quote – “There is appetite for more safety stock going forward,” said Kellogg CEO Steve Cahillane. “That is something that everybody is talking about.” Yes! We have to rethink how we view safety stock. The entire lean philosophy, which has many positive virtues, has some repercussions. Notably what we are witnessing now. And the lack of safety stock isn’t simply in what we are suffering as consumers, it has also slowed down other parts of the supply chain as materials are in short supply. Think automotive, pharmaceuticals, health and beauty. But this change will only occur when supply chains and companies’ balance sheets are not over scrutinized for the amount of working capital they have on their books.
- Flexible capacity has to be infused into the supply chain. Supply chains need manufacturing capacity, that can flex faster and more effectively. Granted this is easier said than done. There is a lot of talk about making supply chains more “resilient.” This starts with the ability to spin up more manufacturing, add greater fulfillment to meet the rise and fall of demand. For example, I was speaking with Philips earlier this summer. They provided a great example of this ability to flex manufacturing. Running a factory out of eastern Pennsylvania that made CPAP machines. The demand for the sleep apnea device had dried up, doctors were not meeting patients and therefore could not prescribe the device, so Philips rapidly switched this facility to making low cost ventilators. Supply chains need to take this lesson and think about how they can become more agile.
- Speaking of manufacturing…fulfillment needs to be flexible as well. Fulfillment capacity must also be capable of flexing up and down. We are already reading headlines of surge pricing for last mile transportation for the remainder of 2020. Carriers have been pushed to their limit due to the explosion of e-commerce as well as spikes in replenishment needs from retailers. Supply chains are going to have to look at their fulfillment assets, and plan for increased access to regionalized resources to ensure being able to deliver product in a timely and cost effective way. It is not simply the logistic assets but also the warehousing assets. Supply chains will have to strategize about having access to more nodes – warehouses, micro fulfillment centers, dark stores to name a few. As demands fluctuate, there will need to be inventory (aka safety stock) strategically placed within the network. Readily accessible when demand calls for it. Not simply finished goods either, but the components necessary to keep production flowing.
Safety stock, working capital and excess capacity should not longer be viewed as 4 letter words. I hope that we rethink how we measure supply chains and how we value businesses. There has to be some happy medium when it comes to leaning out supply chains and having more “fat” in the supply chain. How this evolves coming out of Covid 19 is worth keeping an eye on. But viewing safety stock as an evil part of supply chain has to stop.
The Thinking Frog 