SUPPLY-CHAIN RECOVERY IN CORONAVIRUS TIMES-PLAN FOR NOW AND THE FUTURE - MCKINSEY
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Operations Practice
Supply-chain recovery in
coronavirus times—plan
for now and the future
Actions taken now to mitigate impacts on supply chains from
coronavirus can also build resilience against future shocks.
by Knut Alicke, Xavier Azcue, and Edward Barriball
© Westend61/Getty Images
March 2020Even as the immediate toll on human health What to do today
from the spread of coronavirus (SARS-CoV-2), In the current landscape, we see that a complete
which causes the COVID-19 disease, mounts, the short-term response means tackling six sets of
economic effects of the crisis—and the livelihoods issues that require quick action across the end-to-
at stake—are coming into sharp focus. Businesses end supply chain (Exhibit 1). These actions should be
must respond on multiple fronts at once: at the same taken in parallel with steps to support the workforce
time that they work to protect their workers’ safety, and comply with the latest policy requirements:
they must also safeguard their operational viability,
now increasingly under strain from a historic supply- 1. Create transparency on multitier supply chains,
chain shock. establishing a list of critical components,
determining the origin of supply, and identifying
Many businesses are able to mobilize rapidly and set alternative sources.
GES 2020
up crisis-management mechanisms, ideally in the
COVID
form of aSupply-chain
nerve center. The typical focus is naturally 2. Estimate available inventory along the value
Exhibit 1 ofHow
short term. 4 can supply-chain leaders also chain—including spare parts and after-sales
prepare for the medium and long terms—and build the stock—for use as a bridge to keep production
resilience that will see them through the other side? running and enable delivery to customers.
Exhibit 1
There are multiple immediate, end-to-end supply-chain actions to consider in
response to COVID-19.
Supply-chain actions
Create transparency on multitier Optimize production and Assess realistic final-customer
supply chain distribution capacity demand
Determine critical components Assess impact on operations and Work with sales and operations
and determine origin of supply available resource capacity (mainly planning to get demand signal to
Assess interruption risk and identify workforce) determine required supply
likely tier-2 and onward risk Ensure employee safety and clearly Leverage direct-to-consumer
Look to alternative sources if communicate with employees channels of communication
suppliers are in severely affected Conduct scenario planning and Use market insights/external
regions assess impact on operations, based databases to estimate for
on available capacity customer’s customers
Optimize limited production,
according to human-health impact,
margin, and opportunity cost/
penalty
Tier-2 supplier Tier-1 supplier Plant Distribution center Customer Customer’s
customer
Estimate available inventory Identify and secure logistics Manage cash and net working
Estimate inventory along the value capacity capital
chain, including spare parts/ Estimate available logistics capacity Run supply-chain stress tests vs major
remanufactured stock Accelerate customs clearance suppliers’ balance sheets to
Use after-sales stock as bridge to Change mode of transport and understand when supply issues will
keep production running prebook air/rail capacity, given start to stress financial or liquidity
current exposure issues
Collaborate with all parties to
leverage freight capacity jointly
2 Supply-chain recovery in coronavirus times—plan for now and the future3. Assess realistic final-customer demand lead times and inventory levels as an early-warning
and respond to (or, where possible, contain) system for interruption and establish a recovery
shortage-buying behavior of customers. plan for critical suppliers by commodity.
4. Optimize production and distribution capacity In situations in which tier-one suppliers do not
to ensure employee safety, such as by supplying have visibility into their own supply chains or are
personal protective equipment (PPE) and not forthcoming with data on them, companies can
engaging with communication teams to share form a hypothesis on this risk by triangulating from
infection-risk levels and work-from-home a range of information sources, including facility
options. These steps will enable leaders to exposure by industry and parts category, shipment
understand current and projected capacity impacts, and export levels across countries and
levels in both workforce and materials. regions. Business-data providers have databases
that can be purchased and used to perform this
5. Identify and secure logistics capacity, estimating triangulation. Advanced-analytics approaches
capacity and accelerating, where possible, and network mapping can be used to cull useful
and being flexible on transportation mode, information from these databases rapidly and
when required. highlight the most critical lower-tier suppliers.
6. Manage cash and net working capital by running Combining these hypotheses with the knowledge
stress tests to understand where supply-chain of where components are traditionally sourced
issues will start to cause a financial impact. will create a supplier-risk assessment, which
can shape discussions with tier-one suppliers.
In the following sections, we explore each of these This can be supplemented with the described
six sets of issues. outside-in analysis, using various data sources, to
identify possible tier-two and onward suppliers in
Create transparency affected regions.
Creating a transparent view of a multitier supply
chain begins with determining the critical For risks that could stop or significantly slow
components for your operations. Working with production lines—or significantly increase cost of
operations and production teams to review your bills operations—businesses can identify alternative
of materials (BOMs) and catalog components will suppliers, where possible, in terms of qualifications
identify the ones that are sourced from high-risk outside severely affected regions. Companies will
areas and lack ready substitutes. A risk index for need to recognize that differences in local policy
each BOM commodity, based on uniqueness and (for example, changing travel restrictions and
location of suppliers, will help identify those parts at government guidance on distancing requirements)
highest risk. can have a major impact on the need for (and
availability of) other options. If alternative suppliers
Once the critical components have been identified, are unavailable, businesses can work closely with
companies can then assess the risk of interruption affected tier-one organizations to address the
from tier-two and onward suppliers. This stage of risk collaboratively. Understanding the specific
planning should include asking direct questions of exposure across the multitier supply chain should
tier-one organizations about who and where their allow for a faster restart after the crisis.
suppliers are and creating information-sharing
agreements to determine any disruption being faced Estimate available inventory
in tier-two and beyond organizations. Manufacturers Most businesses would be surprised by how much
should engage with all of their suppliers, across all inventory sits in their value chains and should
tiers, to form a series of joint agreements to monitor estimate how much of it, including spare parts and
Supply-chain recovery in coronavirus times—plan for now and the future 3remanufactured stock, is available. Additionally, — finished goods held in warehouses and blocked
after-sales stock should be used as a bridge to keep inventory held for sales, quality control,
production running (Exhibit 2). and testing
This exercise should be completed during the — spare-parts inventory that could be repurposed
supply-chain-transparency exercise previously for new-product production, bearing in mind the
GES 2020
described. Estimating all inventory along the value trade-off of reducing existing customer support
Supply-chain COVID
chain aids capacity planning during a ramp-up versus maintaining new-product sales
Exhibit 2 of 4 categories to consider include
period. Specific
the following: — parts with lower-grade ratings or quality issues,
which should be assessed to determine whether
Exhibit 2
Built-in inventory in the supply chain will delay the full impact of halted
production.
Expected stockout for companies in EU/US with suppliers Low-range High-range
in China, by industry, illustrative estimate estimate
Automotive Pharmaceuticals Consumer Retail (mass) Retail (fashion) High tech Semiconductors
Mar 2020
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
Jan 2021
Inventory, days of stock (including supply in transit)
Automotive Pharmaceuticals Consumer Retail (mass) Retail (fashion) High tech Semiconductors
2nd-tier 30–40 35–70 20–30 N/A N/A 40–60 N/A
supplier (China) (China) (China) (China)
1st-tier 7–17 120–140 60–90 60–90 15–35 55–70 70–110
supplier (EU/US) (EU/US) (China) (China) (China) (China) (China)
Assembly/ 2–12 55–100 10–17 10–17 15–29 19–45 60–90
packaging (EU/US) (EU/US) (EU/US) (EU/US) (EU/US) (China) (Philippines)
RDCs1 N/A 80–90 14 15–17 15–23 N/A N/A
(EU/US) (EU/US) (EU/US) (EU/US)
Market 0–30 N/A N/A 7 21–28 24–40 20–30
buffer (EU/US) (EU/US) (EU/US) (EU/US)
Total 40–70 230–320 60–90 70–100 70–110 40–100 130–200
inventory
days2
1
Regional distribution centers.
2
Figures for total inventory buffer and expected stockout are calculated assuming production stop at latest link based in China.
4 Supply-chain recovery in coronavirus times—plan for now and the futurethe rework effort would be justified to solve — Use advanced statistical forecasting tools to
quality issues or whether remanufacture with generate a realistic forecast for base demand.
used stock could address supply issues
— Integrate market intelligence into product-
— parts in transit should be evaluated to see what specific demand-forecasting models.
steps can be taken to accelerate their arrival—
particularly those in customs or quarantine — Ensure dynamic monitoring of forecasts in order
to react quickly to inaccuracies.
— supply currently with customers or dealers
should be considered to see if stock could be With many end customers engaging in shortage
bought back or transparency could be created buying to ensure that they can claim a higher
for cross-delivery fraction of whatever is in short supply, businesses
can reasonably question whether the demand
Assess realistic final-customer demand signals they are receiving from their immediate
A crisis may increase or decrease demand for customers, both short and medium term, are
particular products, making the estimation of realistic realistic and reflect underlying uncertainties in
final-customer demand harder and more important. the forecast. Making orders smaller and more
Businesses should question whether demand signals frequent and adding flexibility to contract terms
they are receiving from their immediate customers, can improve outcomes both for suppliers and their
both short and medium term, are realistic and customers by smoothing the peaks and valleys
reflect underlying uncertainties in the forecast. The that raise cost and waste. A triaging process that
demand-planning team, using its industry experience prioritizes customers by strategic importance,
and available analytical tools, should be able to find margin, and revenue will also help in safeguarding
a reliable demand signal to determine necessary the continuity of commercial relationships.
supply—the result of which should be discussed and
agreed upon in the integrated sales- and operations- Optimize production and distribution capacity
planning (S&OP) process. Armed with a demand forecast, the S&OP
process should next optimize production and
Additionally, direct-to-consumer communication distribution capacity. Scenario analysis can be
channels, market insights, and internal and external used to test different capacity and production
databases can provide invaluable information in scenarios to understand their financial and
assessing the current state of demand among your operational implications.
customers’ customers. When data sources are
limited, open communication with direct customers Optimizing production begins with ensuring
can fill in at least some gaps. With these factors in employee safety. This includes sourcing and
mind, forecasting demand requires a strict process engaging with crisis-communication teams to
to navigate uncertain and ever-evolving conditions communicate clearly with employees about
successfully. To prepare for such instances infection-risk concerns and options for remote and
effectively, organizations should take the home working.
following actions:
The next step is to conduct scenario planning to
— Develop a demand-forecast strategy, which project the financial and operational implications
includes defining the granularity and time of a prolonged shutdown, assessing impact based
horizon for the forecast to make risk-informed on available capacity (including inventory already
decisions in the S&OP process. in the system). To plan on how to use available
Supply-chain recovery in coronavirus times—plan for now and the future 5capacity, the S&OP process should determine As the finance function works on accounts
which products offer the highest strategic value, payable and receivable, supply-chain leaders can
considering the importance to health and human focus on freeing up cash locked in other parts
safety and the earnings potential, both today of the value chain. Reducing finished-goods
and during the future recovery. The analysis will inventory, with thoughtful, ambitious targets
draw on a cross-functional team that includes supported by strong governance, can contribute
marketing and sales, operations, and strategy substantial savings. Likewise, improved logistics,
staff, including individuals who can tailor updated such as through smarter fleet management,
macroeconomic forecasts to the expected can allow companies to defer significant
impact on the business. Where possible, a digital, capital costs at no impact on customer service.
end-to-end S&OP platform can better match Pressure testing each supplier’s purchase
production and supply-chain planning with the order and minimizing or eliminating purchases
expected demand in a variety of circumstances. of nonessential supplies can yield immediate
cash infusions. Supply-chain leaders should
Identify and secure logistics capacity analyze the root causes of suppliers’ nonessential
In a time of crisis, understanding current and purchases, mitigating them through adherence
future logistics capacity by mode—and their to consumption-based stock and manufacturing
associated trade-offs—will be even more models and through negotiations of supplier
essential than usual, as will prioritizing logistics contracts to seek more favorable terms.
needs in required capacity and time sensitivity
of product delivery. Consequently, even as
companies look to ramp up production and Building resilience for the future
make up time in their value chains, they should Once the immediate risks to a supply chain have
prebook logistics capacity to minimize exposure been identified, leaders must then design a
to potential cost increases. Collaborating with resilient supply chain for the future. This begins
partners can be an effective strategy to with establishing a supply-chain-risk function
gain priority and increase capacity on more tasked with assessing risk, continually updating
favorable terms. risk-impact estimates and remediation strategies,
and overseeing risk governance. Processes and
To improve contingency planning under rapidly tools created during the crisis-management
evolving circumstances, real-time visibility will period should be codified into formal
depend not only on tracking the on-time status of documentation, and the nerve center should
freight in transit but also on monitoring broader become a permanent fixture to monitor supply-
changes, such as airport congestion and border chain vulnerabilities continuously and reliably.
closings. Maintaining a nimble approach to Over time, stronger supplier collaboration can
logistics management will be imperative in likewise reinforce an entire supplier ecosystem
rapidly adapting to any situational or for greater resilience.
environmental changes.
During this process, digitizing supply-chain
Manage cash and net working capital management improves the speed, accuracy,
As the crisis takes its course, constrained and flexibility of supply-risk management. By
supply chains, slow sales, and reduced margins building and reinforcing a single source of truth,
will combine to add even more pressure on a digitized supply chain strengthens capabilities
earnings and liquidity. Businesses have a habit in anticipating risk, achieving greater visibility
of projecting optimism; now they will need a and coordination across the supply chain, and
strong dose of realism so that they can free up managing issues that arise from growing product
cash. Companies will need all available internal complexity. For example, Exhibit 3 shows how a
forecasting capabilities to stress test their capital digitally enabled clustering of potential suppliers
requirements on weekly and monthly bases. shows the capabilities they have in common.
6 Supply-chain recovery in coronavirus times—plan for now and the futureExhibit 3 of 4
Exhibit 3
Cluster maps reveal alternative sourcing Estimating a medtech company’s degree of
options for all the materials affected. connectiveness helped it expand its supplier
base by 600 percent, while an industrial-tools
Cluster map, durable speaker suppliers,
maker identified request-for-qualifications-ready
illustrative (n = 87 suppliers)
suppliers for highly complex parts that it had been
Company Common capabilities previously unable to source.
Finally, when coming out of the crisis, companies
and governments should take a complete look at
their supply-chain vulnerabilities and the shocks
that could expose them much as the coronavirus
has. Exhibit 4 describes the major sources of
vulnerability. The detailed responses can reveal
major opportunities—for example, using scenario
analyses to review the structural resilience of
Cluster characteristics, % critical logistics nodes, routes, and transportation
modes can reveal weakness even when individual
Automotive Multimedia speaker Marine
speakers systems audio components, such as important airports or rail
GES 2020
27 25 25 14 9 hubs, may appear resilient.
Supply-chain COVID
Professional Mobile-phone
Exhibit 4 of 3audio equipment speakers
Exhibit 4
Supply-chain vulnerability occurs across five dimensions.
Drivers of potential vulnerability
Typical focus Full-picture focus
Planning and Transportation Financial Product Organizational
supplier network and logistics resiliency complexity maturity
• How predictable is • How resilient is the • How much financial • Are components • How proactive vs
demand planning? physical-flow and flexibility does the in the products reactive is the
logistics network? company have for substitutable? organization in
• How complex or increased supply- identifying and
concentrated is the chain cost or • How flexible is mitigating supply-
supply network, sustained the design if chain disruptions?
and how resilient is disruption? components are
it to disruption? no longer available?
• How exposed is the • How vulnerable
network to tariffs is the product to
and other trade regulatory
disruptions? changes?
Supply-chain recovery in coronavirus times—plan for now and the future 7Organizations should build financial models that Triaging the human issues facing companies and
size the impact of various shock scenarios and governments today and addressing them must be
decide how much “insurance” to buy through the number-one priority, especially for goods that
the mitigation of specific gaps, such as by are critical to maintain health and safety during the
establishing dual supply sources or relocating crisis. As the coronavirus pandemic subsides, the
production. The analytical underpinnings of this tasks will center on improving and strengthening
risk analysis are well understood in other domains, supply-chain capabilities to prepare for the
such as the financial sector—now is the time to inevitable next shock. By acting intentionally today
apply them to supply chains. and over the next several months, companies and
governments can emerge from this crisis better
prepared for the next one.
Knut Alicke is a partner in McKinsey’s Stuttgart office, Xavier Azcue is a consultant in the New Jersey office, and Edward
Barriball is a partner in the Washington, DC office.
The authors wish to thank Viktor Bengtsson, Chris Chung, Curt Mueller, Hilary Nguyen, Ed Paranjpe, Anna Strigel, and Faaez
Zafar for their contributions to this article.
Designed by Global Editorial Services
Copyright © 2020 McKinsey & Company. All rights reserved.
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