Issues in supply chain management—from farmers having to throw out their milk and produce to shoppers finding empty shelves where toilet paper and hand sanitizer had been—have become part of the national discussion about the coronavirus pandemic. Prashanth Bharadwaj, dean’s associate in the Eberly College of Business and Information Technology and a professor in the Department of Management, answered questions about what he described as the pandemic’s “whiplash” effect on the supply chain.
How would you explain supply chain management?
Supply chain management is the process of getting a product from the raw material stage to the finished product. Today, most supply chains have become global in nature. Take the example of a Japanese DVD player ordered by Best Buy in Minnesota. The assembly may happen in China, but the chips may come from Taiwan. The machines, tools, and raw materials may come from Germany, the United States, and Brazil. So, behind the retailers, which you and I as consumers see, are the wholesalers and distribution centers, and behind that are the manufacturers and their several tiers of suppliers. From a common pencil to a complex aircraft, the basic idea of supply chain management is coordinating all the entities in such a way that the consumer gets the right product at the right time at the right place at the right cost.
Describe how the coronavirus pandemic has affected supply chain management.
Supply chain managers talk about the bullwhip effect. [With his hands, he indicates waves that grow as they move away from the whip’s handle.] What they mean is the variability that retailers see is smaller than the variability at a distributor, and it keeps getting larger as you go upstream in the supply chain, which are manufacturers and suppliers.
Today, we are experiencing a whiplash effect: variations in demand at breakneck speed for products ranging from toilet paper to food products to bicycles to personal protective equipment. If you look at the example of farmers, they are suffering, because everybody’s food habits have changed. People have stopped going to restaurants as frequently as before. What we cook at home is different from what we eat in a restaurant. The classic example I was reading about is this onion farmer. Even though people are cooking more at home, they’re not using as many onions as some restaurants that bought huge quantities to make onion rings. This farmer now has all of this onion inventory and no place to store it. Similar stories are reported in all kinds of industries.
How do the effects of this pandemic compare with the effects of past pandemics or disasters?
I remember very well SARS [severe acute respiratory syndrome] in 2002 and 2003. It had some impact, but nothing like this. When the tsunami happened in Japan in 2011, it shook the global automobile supply chain. But this pandemic is all of those multiplied by 100. That is mainly because it started in China, and China is the global manufacturer of everything, and the US is the biggest consumer of everything, and these two countries have been badly affected, in addition to many other countries.
The Second World War obviously had a significant impact on supply chains, but we were not as interdependent as we are today. No product is made in one country today; everything is made in multiple countries, and China is the hub of manufacturing activities.
I was talking to one of my alumni in California whose company was making lotions. They never made hand sanitizers, but they are doing it now. But they couldn’t find anywhere in the US a single big supplier of containers for the hand sanitizer. They had to get them from China, which delayed their ability to go to market.
Even though other pandemics may have killed more people, consumerism was nowhere near the current level, so the impact this pandemic is having on supply chains is significantly more.
How can we better prepare for this kind of event in the future?
Number one, when we are talking about certain vital products, like ventilators and personal protective equipment, we need to be better prepared. We cannot rely on traditional supply chain models, which advocate inventory reduction and cost containment. FEMA [Federal Emergency Management Agency] and other organizations must be more thoughtful about what they carry in their inventory. Their supply chains have to be much more proactive.
Second, Congress and the Administration must work together on a better industrial policy for manufacturing essential products locally, either using the current laws or coming up with new laws. We need to be more agile than what we were in this pandemic, especially with products that protect human lives.
The third thing is that companies in general need to have better risk-mitigating strategies. However, for consumer products, it is almost impossible and it is not cost effective to plan for a pandemic.
Think of carrying inventory of a typical consumer product, like hand sanitizer, to protect against a pandemic, which may not hit for another 50 years or may hit again next year—we don’t know. It can happen again, obviously, but it won’t happen at regular intervals. Consequently, typical supply chains cannot plan for a pandemic, but they can make structural changes to minimize the risk.
You’ve brought up a reliance on international suppliers. Is that a problem?
I have always said that big, consuming economies, like the United States, cannot succeed in the long run if most of the products we consume are not made here. You cannot be a global political power unless you are a global economic power, and you cannot be a global economic power unless you are a global manufacturing power.
I’m a big believer in globalization. We need countries to work with each other, because that is what has prevented a third world war, really. Every economy is interdependent, and that is a good thing, but too much dependence is not. In the US, we are also completely losing the required technical and engineering skills for manufacturing, which can be dangerous.
There is no way we can make everything in the United States. For example, if you want to make an iPhone completely in the US, experts have reckoned it might cost 25 times more. But, people have to start thinking creatively about making at least some things closer to where they’re being consumed.
Some of the major companies in the US and in other countries will have to think of supply chains which are not as widely dispersed around the world, because in cases like this pandemic, it is difficult to react.
As an effect of this crisis, there will certainly be winners and losers among countries and regions in terms of business relocations.
When do you think the supply chain might recover?
Unlike the financial crisis of 2008, the foundations of the economy had been sound before this pandemic. Many of my industry colleagues expect a U-shaped recovery [a sharp decline followed by stagnation and then a healthy recovery]. If social distancing is properly understood, testing is ramped up, and people can go back to work, within a few months we should slowly get back to some level of normalcy. Many businesses in the service sector will have a difficult time opening, surviving, and recovering—that part is going to be a challenge.
Consumer confidence and spending will be shaken. But, barring a significant relapse once the world is fully open for business, supply chains would be just a month or two behind in returning to normalcy. That is my optimistic prediction.
Bharadwaj shared supply-chain insights from IUP alumni, members of Eberly College’s Business Advisory Council, and his industry contacts:
“The client I work for has been hit hard by this pandemic. They rely completely on brick-and-mortar retail. I am currently the inventory manager at my site, so continuing to have inbound coming in and no outbound has posed tremendous problems.”
“I have personally had to be a project lead and come up with a solution that could increase our capacity as a distribution center by at least 10 percent. We managed to increase it by 12.3 percent in only three weeks.”
Cole McSwaney ’18, DHL Supply Chain
“Shortly after the start of the pandemic, shopper panic drove sales and orders through the roof. . . . Staffing became an issue for many facilities in our network. But, on the plus side, we saw an opportunity to provide employment to many people who were out of work as a result of state and federal restrictions that impacted smaller business.”
Jason Gustafson, Walmart Distribution Center
“As an industry, pharmacy is permitted to remain open to dispense life-saving drugs. However, as a result of demand and social distancing, lead times have been adjusted, and quantities of certain medications have been limited (especially the drugs mentioned on media outlets). Medical supplies such as masks and gloves are also challenging to keep in stock. Operationally, we are still able to serve our customer base as a result of careful planning and solid relationships with our vendors.”
Janelle Kellar Revo ’98, M’13, Diamond Pharmacy
“FedEx, as well as other transportation companies, have been essential during this event for many nations’ supply chains, ensuring products continue to move to where they are needed most. The biggest impact that FedEx has seen is a shift of our package profile from commercial to residential. While overall package volume has been strong, residential packages are not as profitable as commercial packages.”
Dan Shoemaker ’86, FedEx
“With COVID, we are scaling production for critical items (i.e., vents). The best supply chain partners must be responsive and have an innovative approach to help you get to market fast, and for us, that means no compromise in volume or quality. One supplier developed a way to get high-quality injection molded parts in days. The rapid capabilities at scale made the difference in getting this ventilator to market in a few weeks as opposed to months.”
Tom Wagner, Philips Respironics