COVID-19 changed the dynamic of supply chains around the world, leading companies to learn the benefit of digital investments in maintaining their business structure and supply chain resilience during an emergency.
The pandemic gave new meaning to risk management and elevated the importance of how a company can respond to unplanned events. On a macro level, manufacturers worldwide are now faced with new pressures resulting from materials shortages, inconsistent demand and worker unavailability. By digitizing their supply chains, businesses can gain advanced insight into how technology can improve their processes, enabling them to react to any unplanned event as efficiently and resiliently as possible. The method of transforming a company’s supply chain from a traditional, linear operation to a digital, interconnected ecosystem differs from industry to industry. For example, industrial manufacturers are looking towards intelligent factory technologies to integrate decisions made on the shop floor of warehouses with the entire supply chain through artificial intelligence (AI). At the same time, consumer-facing companies invest in big data analytics for better demand forecasting. In both cases, implementing new technology allows for better visibility into the supply chain from start to finish – well before procurement and even after shipment.
Small and medium-sized businesses may have thought implementing technology and software into their supply chain process was unnecessary before the pandemic. And even now, many of these businesses may think it is not a worthwhile project to undertake from a financial perspective. Traditionally, advanced technology functionality has been reserved for larger companies while smaller companies lag. Implementing advanced analytics, cloud technology and process automation to reduce manual and laborious processes are all feasible, affordable and ever-more necessary to give companies a competitive advantage and ensure supply chain resilience.
A well-known term in supply chain circles, the bullwhip effect is showing its face amidst the economic fallout from the lockdowns, highlighting the importance of investing in a digital supply chain. It occurs when demand drops at the consumer level, specifically as it gets closer to the source. Typically, a delay of passing on information or transportation of goods occurs from this, increasing order volatility. When the bullwhip effect takes place, companies are faced with difficult decisions on moving forward because of the uncertainty of experiencing either inefficient production or excessive inventory.
The apparel industry is most affected by the bullwhip effect due to the pandemic because of nonessential retail shutting down for quite some time. Companies had to decide whether they were going to complete orders currently in production while delaying upcoming orders or refuse any incoming apparel; all while abandoning future orders to prepare for the backlog of them in addition to a flood of new ones after lockdowns eased.
The danger of the bullwhip effect in all industries, not just apparel, is ending up with excess inventory once consumer demand decreases. The consumer-packaged-goods (CPG) sector will experience this as hype-fueled consumer demand begins to decrease after consumers reduce their pandemic stocking up behavior (i.e. for toilet paper or disinfectant wipes). From a supply chain perspective, the extra inventory created to meet this panicked demand will increase even after the market slows down because of the bullwhip effect. It will result in CPG supply chains, as an example, holding on to excess inventory. This will result in a loss in profits as companies sit on larger quantities of stock with increased supply price pressure and reduced revenue opportunities in the marketplace.
To date, there have been plenty of lessons learned from the business side of the pandemic. Businesses of all types, but manufacturers especially, must consider different insights as they plan for demand in this crisis and beyond. The four types of demand we see due to the pandemic are:
- Expanding consumption
- Unchanged consumption
- Shifting consumption while at home
- Short-term declining consumption
Growing consumption occurs mainly with CPG; items like disinfectants and vitamins with high inventory turn and continue because of fears of shortage and health. Unchanged consumption occurs when there is an initial jump in demand. Still, consumption does not increase, meaning there will be supply overages after the crisis. Shifting consumption results from different lifestyles caused by an increase in working from home. E-commerce has seen a significant jump because of these shifting consumption patterns. Declining consumption results from consumers who say “not now” to luxury goods instead of buying essentials. This hurts short-term demand for the goods consumers pass on, but this demand should return to normal after the crisis.
The tricky part is deciding which demand niche a business falls into and then conjuring up a plan for the short and long term. Luckily, Enterprise Resource Planning (ERP) software contains multiple functions that can seamlessly manage supply and demand for businesses.
ERP Solutions for Supply Chain Resilience
The question for business owners coming out of this pandemic is, “How does my company better prepare for the next large fluctuations in consumer activity?” It is essential to optimize inventory levels, reduce delivery times and improve customer relationships. These can be achieved by implementing an ERP system with digital capabilities, allowing businesses to attain synchronized planning, intelligent supply and a connected customer. Synchronized planning allows manufacturers to look downstream at the inputs being used by suppliers while also looking upstream at materials available for manufacturing simultaneously. As a result, decision-makers can analyze a problem, formulate a solution and conclude in real-time. Intelligent supply allows for virtual “control towers” to be implemented, which gives businesses the ability to keep tabs on the supply chain across different branches, regions and countries. This results in utilizing an aggregate demand plan that can be implemented across the company instead of manually creating demand plans for each division.
Finally, a digital supply chain ERP allows for a connected customer via tools that drive touchless or low touch ordering, omnichannel and other digital customer experience approaches. Being more in tune with customers through customer scorecards, surveys and dashboards will better understand consumer buying behavior and improve manufacturers’ journeys to seamless demand planning.
Many ERP systems have these capabilities and can be fully integrated into business processes. For example, one of many functionalities include demand planning, which helps businesses achieve proper inventory management. The three primary functions of NetSuite’s Demand Planning Function include:
Demand Plan: Flexibility in Forecasting
Allows manufacturers to use both historical and future forecast data to determine seasonal fluctuations on a per-location basis, allowing companies to accurately predict demand throughout the year. This function utilizes linear regression, moving average, seasonal average and sales forecasting to help manufacturers understand what is on the planning horizon.
Supply Plan: Streamlined Replenishment
Provides recommended purchase or work orders based on parameters like re-order point and lead time. The supply plan also allows businesses to choose which items calculate ordering requirements automatically, while the system accounts for outstanding quantities in non-posting transactions giving an accurate representation of existing inventory.
Gross Requirement Inquiry: Modeling Inventory Levels
Gives manufacturers the ability to model how expected sales and purchase orders will affect future inventory levels, helping to reduce the adverse outcomes of the bullwhip effect.
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Withum is well-suited to provide all the services manufacturers need to transition towards a digital supply chain.