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Here’s How to Shockproof Your Supply Chain Now, McKinsey Says

Right now, crisis management is the name of the game for apparel companies while the pandemic tears up their carefully written scripts and forces furloughs at fashion stalwarts like H&M and Nordstrom, while brands ranging from Zara to Primark reneg billions of dollars of factory orders.

But while weathering the virulent COVID-19 storm has virtually every fashion enterprise at DEFCON 1, companies that make the mistake of failing to plan for the next phases of eventual recovery are missing out on an opportunity to build their most powerful weapon: a shockproof supply chain.

As the coronavirus outbreak lays waste to the global economy, the fashion retail sector is rightly safeguarding employees and making tough decisions to keep their businesses on life support through unprecedented disruption. But as the dust settles and the new normal takes hold, companies need to focus on getting their supply chains in tip-top shape once the crisis is firmly in their rearview mirror.

A new report from McKinsey & Co. sheds lights on the steps companies can take to review and ready their supply networks. McKinsey partners Knut Alicke and Edward Barriball, along with consultant Xavier Azcue, identify six issues business can address in parallel so they’re adhering to governmental requirements while supporting employees when the economy returns to health.

The trio recommends assessing realistic final-customer demand; optimizing production and distribution capacity; estimating available inventory; creating transparency; identifying and securing logistics capacity; and managing cash and net working capital.

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By undertaking this analysis, apparel companies can not only fine-tune operations ahead of the inevitable market recovery but also gauge risks in designing a resilient, future-ready supply chain.

Assessing realistic final-customer demand

In fashion, customer demand has plummeted in startling lows. Consumers, understandably, are funneling their dollars toward pandemic snacks and toilet paper—everything they need to survive interminable work-from-home days and streaming-TV quarantine nights.

But even though fashion has fallen out of favor for the moment, demand will all but inevitably return and retailers must be ready to pounce on shoppers’ purse-strings. McKinsey suggests fashion demand-planning teams leverage their know-how and analytical assets to figure out what serves as a reliable demand signal and use that to extrapolate reasonable supply forecasts. They should rope in sales and operations planning leads, too, McKinsey added.

“Additionally, direct-to-consumer communications channels, market insights, and internal and external databases can provide invaluable information in assessing the current state of demand among your customers’ customers,” McKinsey said.

Companies, it recommended, should integrate market intelligence into product-specific demand-forecasting models and leverage dynamic forecast monitoring to react quickly to inaccuracies.

“Making orders smaller and more frequent and adding flexibility to contract terms can improve outcomes both for suppliers and their customers by smoothing the peaks and valleys that raise cost and waste. A triaging process that prioritizes customers by strategic importance, margin and revenue will also help in safeguarding the continuing of commercial relationships,” McKinsey said.

Optimizing production and distribution capacity

Armed with data backing up their demand forecasts, companies can draw on that information to optimize production and distribution capacity.

This is the time to test out different capacity and production scenarios and get a sense of financial and operational implications, like what’s at stake when production is facing a prolonged shutdown. And companies should also look at which products offer the highest strategic value, especially when measured against health and human safety and earnings potential, not just during both routine operations but also amid lengthy production outages.

Estimating available inventory

Many businesses would probably be surprised to learn just how much inventory they have in their value chains and must to get a handle on their stock position, including any inputs that are available, the McKinsey trio said. After-sales stock should be used as a bridge to keep production running, they added. And having built-in inventory in the supply chain will help companies delay the full impact of halted production should there be another crisis down the road.

McKinsey suggests that companies undertake their inventory analysis while they’re evaluating supply-chain transparency. Estimating all inventory along the value chain, it added, facilitates capacity planning during a ramp-up period.

The range of areas to analyze is broad, according to McKinsey. They include: reviewing finished goods in warehouses and blocked inventory held for sales, quality control and testing; identifying spare inputs inventory that could be repurposed for new-product production; and reviewing lower-quality items to gauge if they should be reworked or whether they can be remanufactured with used stock for addressing supply issues.

McKinsey say companies should also check what components or raw goods are in transit and whether some should be accelerated. Businesses should review supply sent to customers or dealers and determine if the stock can be brought back or be created for cross-delivery.

Creating transparency

Enabling visibility and transparency or hypothesizing where inputs or raw components may be sourced from helps to create a supplier-risk assessment and foster discussions with tier-one suppliers in advance of any unexpected delays or shutdowns.

Transparency in multi-tier supply chains means working with operations and production teams to identify what is sourced from high-risk areas that lack ready substitutes, as well as assessing the risk of interruption from tier-two and other-tier suppliers. It also means asking each tier firm who their suppliers are and where they’re located, creating information-sharing agreements with the goal of monitoring lead times and inventory levels as an “early-warning system for interruption,” the McKinsey experts said. That kind of a set-up will help establish a recovery plan for critical suppliers by commodity.

Where facilities, particularly tier-one suppliers, choose not to provide supply chain visibility, companies can use analytics and other information sources to estimate critical information.

Identifying and securing logistics capacity

While companies should maintain a nimble approach to logistics management, getting a handle on current and future logistics capacity by the transportation-mode trifecta of air, land or sea could become even more important as firms prioritize needs based on capacity and time sensitivity.

Securing logistics capacity could involve pre-booking to minimize exposure to potential cost increases. And to improve contingency planning, “real-time visibility will depend not only on tracking the on-time status of freight in transit but also on monitoring broader changes, such as airport congestion and border closings,” McKinsey said.

Managing cash and net working capital

By working through each of McKinsey’s six steps, companies can get a grip on their operational reality and figure out where they can free up cash as needed.

Finance experts can look at accounts payable and receivable, and identify where they unlock cash that’s tied up in other parts of the value chain. That could mean reducing finished-goods inventory or improving logistics through smarter fleet management.

“Companies will need all available internal forecasting capabilities to stress test their capital requirements on weekly and monthly bases [while] pressure testing each supplier’s purchase order and minimizing or eliminating purchases of nonessential supplies can yield immediate cash infusions,” the McKinsey group said.