Published On May 28, 2020The COVID-19 pandemic has exposed the fact that efficiency isn’t always such a good thing, at least when it comes to supply chains. Learn more.
The COVID-19 pandemic has exposed the fact that efficiency isn’t always such a good thing, at least when it comes to supply chains.
Businesses that have spent years pursuing the goal of “just-in-time” inventory management learned the hard way in the first weeks of the crisis that operating on razor thin timelines can become a problem when supply chains suddenly dry up.
Aided by computer-driven models and sophisticated supply chain management software, these companies have learned how to manage their inventories with pinpoint precision. For example, the U.S. grocery industry’s average annualized inventory turnover ratio – which is the volume of sales divided by inventory at a given point in time – hit 20.11 in the first quarter of 2020, according to CSI Market, up from 15.35 just two years ago. That means grocers were selling out their entire stores 20 times each year.
But those efficiencies became a liability when consumers were scrambling for paper products and hand sanitizer in March. Supply chain problems created shortages of personal protective equipment, medicine and cleaning supplies that hampered responders’ ability to cope with the crisis. Heavy industries like auto manufacturing were also choked by border closures and flight limitations.
The quest for efficiency has caused many companies to lose full visibility into their supply chains. The Harvard Business Review reported that the world’s largest 1,000 companies or their suppliers had more than 12,000 facilities in Covid-19 quarantine areas, facilities that became effectively useless during lockdowns. And even though many restrictions didn’t apply to shipments of goods, the people needed to process those goods were quarantined or held up at the borders.
The situation is already prompting many experts to say that businesses need to fundamentally reevaluate their approach toward supply chain management, starting with building more backups such as secondary and tertiary suppliers into their workflows. They also need to do a better job of anticipating crises. Computer models work well as long as things are operating normally, but there was no way to predict the ripple effects of a global pandemic. Human judgment will likely become more important in the future, said Joel Beal, co-founder of the consumer goods analytics company Alloy, in an article in the Verge.
“Companies have to rely more on good demand planners and forecasting people, who will say, ‘Do I believe this?’ rather than believing these models will be able to capture everything that’s going on,” he said.
Many experts predict that businesses will deemphasize just-in-time management for the foreseeable future and focus instead on resiliency, beating up their inventories in anticipation of future disruptions. The trade-offs – lower margins and higher prices to customers – will need to be balanced against the priority of keeping businesses running in the event of a resurgence in the virus or other catastrophes like hurricanes and earthquakes.
That can create other challenges, however. Businesses that have drawn down storage space they no longer need because of supply chain efficiencies may find they don’t have the capacity to accommodate larger inventories needed for preparedness. That fact was dramatized recently when oil prices temporarily fell below zero because producers ran out of places to store their product. An imbalance of inventory and storage space can be an especially difficult problem in the case of high-value or sensitive materials, which require additional protection.
Iron Mountain’s Secure Business Storage services can be a buffer during the adjustment period. Iron Mountain can take receipt of stock from suppliers, arrange for inventory pickups and deliveries and store excess goods in a secure off-site location until needed. That gives businesses one less thing to worry about during a time of uncertainty.