The Future of Supply Chain After the COVID-19 Pandemic

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Jason Schenker, Chairman, The Futurist Institute.

Paper product and fresh food shortages in the United States resulting from the COVID-19 pandemic came as a surprise to many people. But as a result of this dynamic, many people have also come to recognize the importance of the U.S. supply chain, the global supply chain, supply chain and material handling industries, and the challenges of the last mile.

The COVID-19 pandemic experience was jostling for many Americans, and there are significant changes to supply chain that I expect we will likely see in the post-pandemic period.

First, the vulnerability of U.S. and global supply chains have been revealed. I believe that it should now be clear to many that disruptions in the supply chain can occur anywhere in the global economy and that the negative impacts of supply chain disruptions can be exacerbated when inventories are thin. In truth, it should now be clear that the long-term trends of simultaneously spreading out supply chains while maintaining low inventories can be a recipe for disaster.

Second, medical supplies and medical devices that had long been taken for granted as easily accessible have been revealed to be sometimes difficult to obtain. Hearing from medical professionals looking to reuse previously single-use personal protection equipment (PPE) or medical devices is scary. In the future, the medical supply chain is likely to be recognized as more critical. And policies are likely to be enacted to reduce medical supply chain risks.

Third, the supply chain of the U.S. economy is something that almost everyone now more clearly understands. The words “supply chain” were barely uttered in business schools in the 1990s and early 2000s. But now, supply chain needs to be a top-of-mind topic for every executive, every politician, every leader, and every consumer.

Where our goods come from, how they get to us, and when they get to us are critical issues that people can no longer ignore. And it may be somewhat of a near-term challenge to instill great confidence in a supply chain that is spread very thin — and spread globally.

The Bullwhip Effect

When the supply chain suffers a shock of demand, this pulls supply forward; thin inventories and supplies throughout the entire supply chain can be pulled forward to the source of end consumption rapidly. The impact on the supply side is a rush to produce more. But it still takes time for those goods to move through the supply chain.

But as more supplies are dispatched to meet the surge in demand, you are likely to end up with a lumpy supply chain, with significantly more supply bunched up at points in the supply chain — or you may fund a glut of supply ends up at the final point of consumption at a future point in time.

Simply put, sometimes the supply chain just can’t go any faster. And when it speeds up, you may end up with bunched-up excess supply at points in the chain or at the traditional point of final consumption. This result is what supply chain practitioners call a bullwhip effect. And it’s called a bullwhip effect because a bullwhip is a long whip that with just a tiny flick of your wrist can create a big and loud crack at the end of it.

Of course, the risk of a bullwhip effect isn’t a sufficient reason to abandon the attempt to push supply chains forward in times of crisis — especially when it comes to critical items that have been disrupted, like fresh foods, paper products, toilet paper, medical equipment, and personal protection equipment (PPE), including gloves and masks.

Part of the problem wasn’t just a surge in demand. Some of it was tight supply. In other words, inventories were low.

The reason?

Many firms have been able to increase their profitability by lowering their inventories over time, but this strategy has now been revealed to be a sometimes risky one.

Changes in Medical and PPE Supply Chains

It is very difficult to have both a thin supply chain and very large distances across your supply chain. In fact, very thin inventories plus a very long supply chain can be a recipe for disaster during times of disaster, which is exactly what we have seen as a result of the COVID-19 pandemic.

As a result of this experience, we are likely to see a future shift of policies and strategies to favor more robust inventories spread across supply chains. This could include some regulatory incentives and/or mandates related to the manufacture, storage, and inventory of medical and PPE supplies in the future.

It is also quite conceivable that there could be a regulatory or policy attempt to completely reshape the entire supply chains for medical equipment and PPE, so that more goods are produced within the United States or the USMCA/NAFTA region. Shortening the distances of supply chains can help counteract the risk that accompanies supply chain inventories that have been spread thin. And global supply chain risks are inherently greater than domestic supply chain risks because of the distance, number of parties, and regulations involved.

Risks to Restaurants

People may also reevaluate the stability of food supply chains in the future. This presents some risks to the hospitality industry, restaurant businesses, tourism, and other industries. Food has traditionally been distributed through two main channels: a commercial channel that feeds into restaurants and other places to eat, as well as a consumer channel to supermarkets.

As a result of the changes and regulations, including “shelter in place” mandates and quarantines, people are now consuming more of their food from supermarkets at home.

The longer the COVID-19 pandemic lasts, the more difficult it will be for restaurants and other non-markets that sell food. After all, if this disruption persists for a protracted period of time, the food supply chain is likely to become adaptive, such that fresh foods no longer feed into commercial channels. In short, these commercial foods could be redirected to supermarkets, which would actually create even greater problems for restoring business to restaurants and other places to eat.

This presents a near-term risk of change in food supply chains. And while this change may help solve some supermarket food supply chain issues and shortages of fresh food products, like eggs, milk, cheese, meats, vegetables, fruits, and other perishables, it could create corporate problems for restaurants that wish to reopen. After all, if supply chains shift on a more sustained basis, and the source of end demand changes, this could make it almost impossible for restaurants to open again. After all, they might then have trouble securing fresh food, toilet paper, dishwashing solution, cleaning supplies, and other paper products.

The Importance of Supply Chain for Stability

Stability of the economy depends very much on goods and services getting to where they are needed. And a disruption of those goods presents not just risks to the economy but actual risks to people and potentially to national security.

Fortunately, in the United States, we are net exporters of food. But other countries are not so lucky. And food disruptions in other countries could become more dire.

When talking about people and how they live, Berthold Brecht, the playwright of The Threepenny Opera, wrote the line “Erst kommst das fressen, dann kommt die Moral.” It translates roughly to “First comes the feeding, then come the morals.” In other words, if people do not have access to food, this could destabilize an entire economy.

As the COVID-19 situation was evolving, I was doing some Department of Defense work, and multiple discussions I had revolved around the hope that the supply chain for food and other basic goods was as secure as people had claimed. So far, that seems to have been the case, which is quite fortunate.

However, if our supply chain were not to have been so secure either for food or basic goods, we could have seen the entire stability of the country fall apart. This could have presented a significant stabilization risk at the national level — and it may yet still. But so far, it has not.

Not far behind food are medical devices, medical equipment, and PPE. As I mentioned above, I expect that we may likely see shifting regulatory or financial incentives applied to medical supply chains in the future. These, too, are essential items. And the critical impact of a shortage in these goods is unlikely to go unnoticed by national security professionals.

Awareness of Supply Chains

One final big impact of the recent COVID-19 pandemic is that people are likely to be more aware of supply chains. And they may be less likely to run down their own “at-home” inventories of food, paper products, cleaning products, and other goods. In other words, people might keep more things at their house.

There’s an old nursery rhyme about Mother Hubbard and her cupboard. As you may recall, her cupboard was bare.

Because people have been able to get goods with relative ease for some time, people did not worry about what was in their cupboard. After all, you don’t mind if you have a bare cupboard if you can get whatever food you need to your house in under 20 minutes.

But in the COVID-19 pandemic situation, people found supply chains disrupted while their cupboards were also bare. This problem became exacerbated by the risk that people might need to stay in their homes for extended periods. People had to restock their cupboards rapidly because they had low in-home inventories and they expected a rise in demand as alternative sources of food (e.g., restaurants) became less viable. This is what contributed to the bullwhip effect for food and paper products.

Because people have been able to get goods with relative ease for some time, people did not worry about what was in their cupboard. After all, you don’t mind if you have a bare cupboard if you can get whatever food you need to your house in under 20 minutes.

But in the COVID-19 pandemic situation, people found supply chains disrupted while their cupboards were also bare. This problem became exacerbated by the risk that people might need to stay in their homes for extended periods. People had to restock their cupboards rapidly because they had low in-home inventories and they expected a rise in demand as alternative sources of food (e.g., restaurants) became less viable. This is what contributed to the bullwhip effect for food and paper products.

The food supply chain as well as the supply chain for paper products demand was shifted from being consumed at home and away to solely being consumed at home. And there were no reserve foodstuffs; there was no back of house.

Mother Hubbard’s cupboard was bare everywhere, and people had to react quickly.

At the same time, the consumption of paper products and food shifted from a mix of commercial and residential consumption to almost exclusively residential consumption. In the future, we will want more secure supply chains. But it remains to be seen if people will prevent their cupboards from going bare again after the COVID-19 pandemic passes.

Expectations Summary

The expectations I’ve shared here seem to be reasonable futurist expectations. After all, we have now revealed a few problems because of the COVID-19 pandemic. But we do know that the fundamental drivers of change are likely to be impacted by basic fundamentals:

  •  People always want to have access to food.
  •  People want to always feel secure in their access to medical care.
  • Society only functions if people have access to that food and that medical care and they feel secure in it.

This is why I believe we could see additional financial incentives or regulatory incentives from the government that shore up the supply chain in the future.

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