23 Mar 2020 The hidden COVID-19 Supply Chain Problem
99% of consumers never question how goods get to the stores. As long as they’re there when they need them, why think about it? But today, the goods are not on the shelves and we’re running out of the most basic of goods. You can’t get much more basic than toilet paper.
Whatever the underlying cause, the threat of actual shortages, panic buying or a bit of both, the problem is not just about production capacity to meet a spike in demand. Any manufacturer would be hard pressed to respond quickly to the unprecedented increase in demand we are seeing now as a result of the Covid-19 but there are other issues too and we need to look at the fundamentals of the way we run our economies if we are going to fix our broken supply chains.
And neither is the problem just about toilet paper. Life-saving medical equipment is in short supply for largely the same reasons. Fixing our supply chain problems is literally a matter of life and death.
Supply chain management is taken for granted by consumers. We can go to the supermarket and select one of dozens of types of fresh pasta or bread and as far as basics are concerned, we’ve become used to knowing that they will always be there.
Consumer goods suppliers can cope with variations in demand. They do this seasonally anyway and, within limits, they can do it very effectively. But outside of what we would call normal limits, if demand suddenly tripled for example, suppliers will struggle to respond quickly – they can’t simply open two more factories and staff them up with a trained team. It takes time.
And what about the suppliers own supply chain? Toilet paper is made from wood pulp. To respond to a surge in demand, more trees need to be felled. The pulp needs to be manufactured and shipped across land, across borders, seas and oceans – and every other manufacturer is desperately trying to buy as much pulp as it can simultaneously. It is easy to see the scale of the task of responding to exceptional surges in consumer demand.
But it would be wrong to think that these types of real-world constraints are the only issues we need to tackle to address the problem of shortages on the shelves. There are some man-made obstacles that need to be overcome too. Running in parallel to the physical supply chain is the financial supply chain and oddly, fixing financial supply chain issues can be the most difficult to fix despite the fact that we impose them on ourselves.
Typically, retailers pay their suppliers a few months after they supply goods. That might seem extreme but 120 day payment terms is not uncommon in the retail sector. The fact is a supplier has to wait 4 months to be paid for goods they supply – and that’s after they’ve paid for all of their costs of manufacture, delivery and overheads. If demand suddenly triples, they don’t just need to buy more stock and employ more people, they might have to increase their overdraft by three times. It can be financially crippling. Imagine starting a new job and being told that you need to work for 4 weeks without pay. Now imagine you have to work 4 months without pay. That’s what it’s like to be a supplier to retail. It isn’t just painful for the supplier, it creates empty shelves.
Why do retailers pay late? Ask them and they’ll tell you they are acting in the interests of consumers. “Hammering down” on prices to save customers money. They don’t explain how much they do hammer suppliers – and it’s not just on prices. Their explanation is bullshit. They pay late because it is in the interests of their executives and shareholders. Holding on to cash by paying bills late increases the value of a business – the share price goes up. The accountants that run big business are directly targeted and incentivised on optimising what they call DPO – in layman’s terms, how late they can get away with paying their bills.
In normal times the negotiation about paying suppliers as late as you can and collecting cash from customers as quickly as you can is just a normal part of day to day business management – but we’re not in normal times and when these artificial business constraints that our economic structure imposes on us create shortages, it time to call out the bullshit – because it isn’t just retailers and it isn’t just toilet paper – it’s ventilators and drugs and personal protection equipment that we need desperately.
Governments globally are doing some remarkable things on a grand scale to mitigate some of the economic fallout of the Covid-19 emergency but as well as supporting business they need to make sure that businesses are stepping up too and that they are supporting their trading partners and supply chains. Financial support should only be extended to businesses that extend support to their supply chain partners and prompt, if not immediate payment, needs to become a standard way of operating in all industries.
There are some things – like the forces of nature- that we can’t control but we have no excuses for failing to manage the things we are in control of like the financial supply chain.