What’s next for just-in-time?

The Financial Times has an interesting set of articles on how the ongoing pandemic impacts supply chains (Trade Secrets: Supply Chain Disruption). These hit on things like toilet paper, firms pivoting to new markets or switching from a business-to-business focus to serving retail customers. The one I want to highlight deals with how any fragility exposed by the pandemic will impact supply chain strategy going forward (Be wary of scapegoating ‘just-in-time’ supply chains, May 27) that links to a post that Gady wrote a few weeks ago.

Here is the gist of the article:

A lot of intellectual momentum is building behind the idea that the Covid-19 pandemic has revealed the foolishness of corporate executives in extending their supply chains without properly assessing the risks. Companies have been thinking of “just-in-time” when they need to be thinking about “just-in-case”. …

The reality is complex, and — a crucial point — differs with each industry. Some, like the car industry, have such sophisticated supply chains involving thousands of different components, some manufactured to extremely low tolerance, that diversifying into different suppliers is totally impractical through effort and cost. Sure, you will have a more resilient supply chain, but you’ll also go bust before the next pandemic arrives.

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Call centers and Covid

There are some things that simply cannot be solved with an online FAQ. And if you have a question that needs to be answered or a technical problem that needs to be resolved, that likely means you need to call into a call center. Demand at many call centers should be relatively unaffected — or even boosted — by the ongoing pandemic. The call volume at an ISP’s tech support has to go up as more people are working from home and every hiccup in their connection becomes clear to them.

Unfortunately, call centers are not great places to be during a pandemic. Management has an incentive to pack agents like sardines. Business Insider had an article about a South Korean call center which had a significant Covid-19 outbreak and whether you got sick was really determined by where you sat. That seems to suggest that call center agents should just be allowed to work from home. As Vox explains, many firms have tried that (One nation, on hold, May 13).

Many call centers have scrambled to send thousands of customer service representatives to work from home for the first time, a process fraught with logistical and technical hurdles. Others have continued to tell employees to come into the office — which they can do, since call centers have been designated as an essential service — but at reduced numbers. A growing number have seen workers get sick with Covid-19.

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Shipping from stores in a pandemic

We have had a number of posts over the years on retailers filling ecommerce from brick-and-mortar stores (see, for example, here and here). From the perspective of inventory management, treating what’s in the stores and whatever is in a fulfillment center as one giant pool of inventory makes a lot of sense. In theory, there is no reason to turn down a web order just because the fulfillment center is stocked out if the needed item is sitting at some mall. The reality, of course, is more complex since picking and packing at a store is going to be more costly than doing the same work at a dedicated facility. Additionally, there is the question of how taking items to fulfill online orders impacts in-store customer behavior.

Now add to those concerns how shipping items from random locations impacts the logistics provider who has to collect and schlepp those packages. Apparently, FedEx has had enough and is working to rein in retailers shipping from stores (FedEx, Strained by Coronavirus, Caps How Much Retailers Can Ship From Stores, Wall Street Journal, May 14).

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Where is the [fill in the blank]?

The supply disruptions affecting some seemingly basic products have been fairly sustained. While it is now easier than it was at the start of the lockdown to fine, say, toilet paper and tissues. Other items continue to be hard to come by. Articles are regularly appearing offering one explanation or another for why [fill in the blank] still isn’t on the shelf.

Take, for example, disinfectant wipes. These are basically on every list of how to be safe during the pandemic. That led to a burst of buying in February and March and the likes of Clorox and Lysol are still trying to catch up. One consideration here is that in contrast to items like toilet paper wipes were not in every pantry before the crisis hit and they also aren’t that easy to make (Why Clorox Wipes Are Still So Hard to Find, Wall Street Journal, May 7).

Disinfectant wipes can’t be made as readily as hand sanitizer. The process combines fabric wipes with the cleaning solution, and the Environmental Protection Agency has in place criteria for cleaners to be considered effective for use against SARS-CoV-2, the virus that causes Covid-19.

And unlike toilet paper, which is ubiquitous in homes and businesses, only about half of American households stocked disinfectant wipes before the pandemic, Clorox’s Mr. Jacobsen said. That led to an even more dramatic demand spike as current wipe users consumed a much higher volume while new buyers sought them out.

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How the air cargo market has adjusted to the pandemic

The ongoing pandemic has created a host of problems for a host of industries and supply chains. Logistics providers have had to scramble as demand for some goods has dried up while demand for other items has surged. On top of that, passenger airlines — which play a large role in international air freight — have been hard hit. How is all that playing out? Check out this video:

 

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Shifting risk in supply chains

It’s been a long time since I’ve written anything on supply chain contracts but a story in the Wall Street Journal caught my eye (Retailers Canceling Apparel Orders Amid Coronavirus Torments Clothes Makers, May 5). Basically it outlines how a shift in the standard contract between retailers and their Asian suppliers has come back to really bite the suppliers.

For reference, think of a retailer or brand in the west who outsources production either directly with a factory or through an agent. The factory incurs the upfront cost of sourcing materials and hiring labor in anticipation of being paid once the goods are delivered. But what happens if the market shifts between the order’s placement and delivery? Like, say, there is a pandemic and no one in North America is buying new jeans.

That’s where the shift in contracting comes in.

Letters of credit, a once-common backstop guaranteeing payment through banks, have faded away in the past decade. Under that payment system, the buyer’s bank committed to pay the supplier once the goods were shipped, ensuring factories were paid without delay or last-minute haggling.

Even in cases of force majeure—when retailers say they can’t pay owing to circumstances beyond their control—banks would generally still be obligated to pay suppliers if the goods had shipped, said Sonja Chapman, a professor of international trade at the Fashion Institute of Technology and longtime apparel-industry executive.

Retailers have moved away from letters of credit, opting instead for an open-account system—essentially an honor system—where factories trust retailers to pay after shipment. Factory owners in Bangladesh said they accepted the shift because they worried that if they didn’t go along, a competitor from India or Latin America would. They also are reluctant to speak up or take legal action because they don’t want to alienate buyers.

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Why are planes flying?

The Wall Street Journal runs a weekly column called The Middle Seat on travel and the travel industry. This week’s column (Why Empty Planes Keep Flying Through the Pandemic, May 6) tries to answer a really interesting question: Why are airlines flying planes even if they are mostly empty?

First, some eye-popping numbers from the article. US Airlines have idled about 75% of their capacity. That sounds like a lot but not when you realize that passenger traffic is down 90%. Supposedly 99% of American flights are less than 20% full.

So why fly? One answer is a sense of obligation. There may be only a handful of passengers on the flight but they are all either healthcare workers or dealing with family emergencies. That is, these are people who need to be traveling who will be had to placate or accommodate if a flight is cancelled.

Another answer is a legal obligation. The aid the government has supplied so far is contingent airlines still serving all of their destinations. An airline does not have to still run three flights a day to Podunk Regional Airport but they still have to go to Podunk.

The more interesting reasons, of course, are operational.

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The coronavirus and lines

The ongoing coronavirus crisis has changed many aspects of American life. According to the Washington Post is also has forced many people — particularly those in poor areas — into lines (Day-to-day, line-to-line, April 26). Here is their description of life in the Bronx:

[A] line of 32 people stretched out from the front door of the bank where the computers were still down and Halls was still sitting in his folding chair, watching his neighborhood come to life.

Across the street, a line was forming at the pharmacy. A few doors down, the line was growing at the credit union. Around the corner, people were lining up for the bus, for the lottery, for the check-cashers and the two hawkers at folding tables spread with $5 masks, $10 Advil and $20 cough syrup. Two months into the coronavirus pandemic, this is what life was becoming in one of the poorest and hardest-hit neighborhoods in America. A life of lines.

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What happens when each level of a supply chain self-optimizes or where are all the N95 masks?

One of the recurring themes of the current crisis is the persistent lack of protective medical equipment — both masks and gowns. Part of the reason is that there has been unprecedented spike in demand. As the graph below shows, the US lacks the capacity to keep up with current demand.

But “not enough capacity” can’t really be the whole explanation for the current shortage. Capacity is a limit on what can be done in one period. As long as capacity exceeded demand in some periods (i.e., back in the before times), providers could have built up inventory. Inventory might not have met the pandemic demand spike but it could have at least tempered the shortfall.

So why did the supply chain for masks fail?

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Pooling ICU capacity

A basic principle in operations is that it is beneficial to pool capacity when facing variability. A corollary is that a little flexibility goes a long way. So how does that play out with Covid-19 patients?

The story here comes from France (ICUs on Rails: How France Coped With a Surge of Coronavirus Patients, WSJ, Apr 25). Like the US, the outbreak in France has not been equally spread across the country. Some areas were overwhelmed while others had empty ICU beds. France’s response was not to build temporary field hospitals but to shift patients where capacity was available — even if that meant sending them out of the country.

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