‘Grocery Stores are Perhaps the Most Resilient Supply Chains in the U.S.,’ Baylor Expert Says
In this Q&A, Baylor professor of operations and supply chain management shares how future of U.S. supply chains could be impacted by COVID-19
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By Cameron Barbier, senior marketing specialist, Baylor Marketing and Brand Strategy
WACO, Texas (March 30, 2020) – The initial spread of the novel coronavirus (COVID-19) has created unprecedented situations for many Americans, causing significant disruptions to ordinarily consistent daily routines. These disruptions have led to widespread fear of a dynamic future and can be seen most tangibly on the empty shelves of grocery stores across the nation.
There is no doubt that the novel coronavirus (COVID-19) is impacting supply chains in the U.S., but where that impact will cause the most disruption and how the end consumer will feel that impact has yet to be fully determined.
Baylor University’s Pedro Reyes, Ph.D., is an associate professor of operations and supply chain management in the Hankamer School of Business, founder and former director of the Center of Excellence in Supply Chain Management. His dissertation and early research focused on grocery supply chains, replenishment systems and the use of RFID technology.
In this Q&A, he provided some insight into how the virus might impact our supply chains differently than the natural disasters we’re more familiar with, where it would hurt more and where it would hurt less. He also shares how companies might build more resilient supply chains in the future.
Q: Can you speak to the adjustments that grocery chains have made to absorb some of the impact of the pandemic?
The reaction from many grocery chains – H-E-B, Walmart and Brookshire Brothers – have been good reactions. By limiting the hours of operations and the number of items an individual can purchase, it gives their people time to restock the shelves. The grocery stores are perhaps the most resilient supply chains in the United States.
HEB is one of the most resilient supply chains in Texas. They own their own distribution centers. Their distribution centers are strategically located throughout the state. The issue is not that there is not enough inventory, because there's plenty of inventory. The issue is they just can't replenish it quickly enough in comparison to people buying in panic. So that's where the disconnect is right now. The idea we're going to run out of toilet paper is nonsense, for example.
Q: How does a pandemic like COVID-19 impact supply chains differently than other natural disasters Texans are more familiar with, such as hurricanes or tornados?
There are similarities and there are differences, of course. Hurricanes are very predictable now, compared to years ago. You know about when it’s going to hit and have an idea of where it could hit. People can plan ahead and prepare. Bottled water, in a hurricane or tornado situation, is definitely a must because the potentially damaged infrastructure may actually mess up the water supply.
In recent hurricanes, people were a little bit more prepared in buying the items ahead of time and, because we knew it was coming, the distribution centers could stock up in advance, ahead of the shock.
This current situation, with the novel coronavirus, nobody really saw that coming. I've actually made comparisons to the crisis that circled around 9/11 back then because that was a major disruption to the supply chain similar to this. Today we're much more prepared to handle a shock such as this.
This virus couldn't be predicted to the same extent. The aftermath, the shock, of these panic buys is creating a different kind of what we refer to as a “bullwhip effect” in a supply chain, and it's creating a different perspective on things. We have, at our hands, the ability to predict some of the potential outcomes of this, but I don't think that the scenarios included panic buying to this extent.
Q: Do you expect certain industries to handle this situation better than others?
The companies that are more vertically integrated are going to do better than those that are more horizontally integrated. The more you outsource, the more control you give up. If you don't have control, you don't have the flexibility to react in times like this. I tell my students that not all inventories are created equal and not all suppliers are created equal.
High-tech industries are probably going to suffer the most because they outsource all over the world. They’re likely going to be the ones that are going to take a little longer to recover. When the supply gets stalled, production gets stalled. To what extent, we don't know yet.
Q: What are some potential outcomes of President Trump using the Defense Protection Act?
If the private sector supply chain cannot keep up with demand, then I can see the president call for and use the Defense Production Act (DPA). This would then force an expanded production of these goods that are short of supply, such as medical equipment and medical supplies. Health care workers need supplies and equipment to perform their jobs, and without it, they could be put into a situation where they have to decide which patient gets the needed resources.
By not implementing the DPA, the United States could continue to get behind the demand curve and the crisis could worsen. While ramping up production and adding capacity cannot happen overnight, at least it would be a positive step toward a steady state. My personal fear is that a possible “next step” that falls under the DPA would be a form of “protectionism,” meaning that our government will be protecting our interests by not allowing exports of commodities to other countries when the U.S. has a known shortage. Hence, in a time of crisis such as this one, the DPA is a means to get the supply chain for medical equipment and supplies back in a balance (or steady state).
Q: What steps can be taken to design supply chains that are more resistant to pandemics and other natural disasters?
Some of my current research has to do with the different types of replenishment systems by comparison, in terms of designing more resilient supply chains. Supply chain designs have moved almost entirely to the “just in time” model and we've reduced waste because of it, but we've also reduced safety stocks along the way. We've taken away the shock absorbers. It is my opinion that they've gone too far to the right with those efficiencies. They took away some of the buffers – buffers not necessarily in terms of inventory, buffers also in terms of capacity.
Products like toilet paper, canned beans, canned corns, stuff that just is not really going to go away, these are products that are in the mature part of the product lifecycle. These products can have a higher degree of shock absorber if we plan for it. I'm actually working on a math model, a predictive model, that could consider events like this in the future, it could trigger a flag that would say, "OK, we need to start taking a closer look at this emerging concern.”
I'm not suggesting that everybody all of a sudden have this huge safety stock. But do they have the slack, a capacity cushion big enough that if it warrants, they can ramp up and start producing more? That is a more resilient supply chain design concept that could be applicable at least to mature products.
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