It's obvious that the COVID-19 coronavirus has created unprecedented supply chain disruption. But what may not be widely known is where the breakdowns occurred and how it happened. Can you speak to that for us?
I can, and I will give you this condition, that we are ERP people, and there are folks that are supply chain scientists and engineers and folks that go out and really, you know, have degrees on supply chain management optimization. We don't. But what we do have is a lot of different kinds of clients, and in working with different companies and seeing some key trends, I think that's really what I wanted to share with you all today.
So if you look at the current scene, and if you go for the Center for Disease Control website, they have a map of all the countries that have reported COVID-19 viruses, it appears to be about every single country in the world, except for just literally a handful. From my own research, there really hasn't been anything in recent times, certainly modern times, where you had everybody impacted by a disease. And, of course, there's health concerns that people have been working through in terms of their employees and themselves: customers and vendors and making sure that folks are okay and taken care of.
But the interesting part is the concern. If you look at it, the concerns for health are what's really impacted the supply chains of every single industry of those insurance companies and organizations, nonprofits and government entities. And lots of folks that we've talked to have a lot of concern. You have a lot of cases in that happening.
So now, of course, government is reacting and responding in the way that they feel is most appropriate again, we're not going to get into the specifics on that. But ultimately, we have a lot of people that have been working from home. For us as knowledge workers, we can continue, we can keep moving forward, thankfully, with the internet and our laptops. Our jobs and our processes are based very much remotely.
But the issue where we see the breakdown amongst most of the businesses that we work with is on personnel that work on site and can only work on site, and not just in terms of supply chain within organizations that are stopped.
And certainly, if you look at the airlines as an example, demand is just shrunk there. The demand went away. Demand has shrunk because people are out there — not demand for services, but then the supply also has been impacted. So we have this impact on both sides of the supply chain, where that's not good. It's actually extremely detrimental.
And the other thing that's happened — and we've been a part of many of these projects with our clients — is supply chain optimization. When you hear supply chain optimization, that usually means less inventory with things like Just-In-Time, and certainly Kanban, and a lot of drop ship, consignment inventory, a lot of these kind of newer technologies — and some not so new anymore.
But these theories on how to optimize supply chain meant having a lot less inventory. And not just for you, but also for the vendor, and the vendor’s vendor, and downstream. So we have this impact that occurred where demand goes down, supply is low. And interestingly, I think we've all seen this, and certainly can all think of one product in particular where people are freaking out a little bit: demand for certain household paper products went up and the supply was low. All of the inventory got sucked through the supply chain much faster than everybody thought it would, and then there’s a gap.
Thankfully, a lot of people weren't impacted health wise by COVID-19. And I do know some people that have been impacted, but for those that weren't, with themselves or family and their friends, the biggest impact was the fear of going into the grocery store and realizing, oh my gosh, there's no meat, there's no toilet paper. So you saw a lot of demand go way up. And you also saw it go way down, with the demand for some luxury brands going way down.
So you have these huge fluctuations on the demand side as well as the supply side. And no demand for some of these products. But in most cases you have a pretty big increase from the demand side that just shook all of the supply lose.
As we see states opening back up, we're going to see this kind of gap. It's like a big void. I can think of several oil and gas examples for drillers: if you think about a hose where you're just shooting water out, the water just goes. That's what we were doing. But air has gotten in the hose and so you turn the hose on, air comes out. That's what we're dealing with. And probably will be for several months, depending on how fast things open.
So it's been a mess. And it's been hard for everybody that we've talked to, and I think we're going to see that the impacts are not just going to be short term in terms of “catching up,” but these are lessons that people will never forget. I think all of us as professionals will never forget what's happened here.
And so how we plan and how we forecast into the future, I think is going to be different. We'll talk more about that here on the ERP side.
Can you go in depth on how analytics and forecasting can help predict a supply chain disruption?
I think this one was impossible to see, although I think we all are now paying much more attention to viruses in foreign countries, and our own.
But when we talk about analytics and forecasting, they are based upon models, and models mean prediction. Which is a bit of a fancy way of saying estimating correctly, and certainly not guessing. Because we have certain facts, but we don't know what the future is going to entail, so forecasting and analytics tools are things that are extremely valuable. And there's probably even some folks on the call that have been doing their supply chain plans and they didn't include COVID-19 so we definitely recognize that.
But there is another side of this: MRP, Material Requirements Planning, which has been around for many, many decades now — you know, I've never met an MRP person or a planner that took the plan right out of an ERP. They never said “Okay this is what we need to go buy, go! You don't even need me.” You just don't put the purchase orders into the system and go. That's not how it works. I was just on a call this morning with a food processor and they're talking about that. It never works that way.
So, while you may have forecasting tools and planning tools, there always is the need for the human element to take a look at that and make sure that it makes sense. But what I will tell you is, in working with several clients even right now, how can they make their forecasts and their demand plans, and even their analytics, much more accurate to look into the future.
So, knowing what we've been through with COVID-19 — what really is a safety stock number? If we look at some basic planning for supply chain planning and inventory planning, specifically, what's that safety stock number? I will tell you that most of the folks that we’re working with, they're increasing those numbers. And maybe a little bit later. I'll talk about the impact of COVID-19 on just cash. That's what's going to be really, really interesting if you ask me. And then into ERP and supply chain, because now we're going to have more inventory. Who wouldn't? We're buying masks, we’re buying different types of products, the PPE. We were just talking to a startup a couple days ago that's getting ready to adjusting e-commerce solutions around that.
So, the analytics and forecasting is always going to be important, but it really ultimately comes down to, an organization doing the right plan looking at the right safety stock levels, talking to vendors and ensuring that as they're looking forward, they're keeping an eye on the past, with an adjustment on this situation that has occurred.
So, as it applies to ERP and software tools, we're seeing clients that are really interested in the analytics, the forecasting and that planning that are pretty straightforward to do. Not the big, complex heuristic models, but how do we bring all this data together so the individual can look at it and make better decisions from it. I think it's always been that way, but man, that's super important today.
What would you say are the primary components of a supply chain that can be optimized with ERP?
Well, if you think about what an ERP is, we think about it as a conceptual framework because it's not just an app anymore. There's multiple apps, but they're in place to manage and automate business processes. You could look at Sourcing, Inventory, Production, Logistics — four aspects from a manufacturer standpoint. If it's a wholesale distributor, you can pull the production out, there's usually some value add that goes in there, some kind of services that are put on.
But if you start with sourcing, ERP is only as good as the data that you put into it. If we have really good raw material information, our parts list is accurate, boy is that a big one right now.
Just as an example, we had a client with multiple branches throughout the country, and each branch operated autonomously. But thankfully for them, before COVID-19 hit, they had rationalized their parts list down to what was real. So now they're able to see: these guys over here, this other location actually has some inventory that we need, the vendor’s saying I can't get to that for another six months now. “Oh, I think I'll get on the phone and do some horse trading to try to get some inventory from within the organization,” sourcing from other parts of the country, even the world.
Having a good, strong understanding of what you are sourcing — boy, this has really made it more important, I think, in COVID-19 to understand what are those raw materials. 80/20 rule, the Pareto analysis — 20% of the items that we bring in make up 80% of what we consume — you better nail down your sourcing strategy on those 20%.
And then ERP can help you keep track of different vendors that can sell you the same part, same part number, you have the ability to track parts in systems that way, as well as looking at terms and conditions from vendors.
If you look at inventory itself, having really good accurate inventory balances — frankly, when the economy is good, it's not as important, and I'm sure there are production planners on the call that are cringing as I say that, I apologize. It's always vital, always do your cycle counting. I mean, you've got a year-end audit that you're going to have to substantiate your inventory balance against, especially if you have covenants.
But having the right inventory number now is not just vital, it's a must-have. It's just part of playing the game. If you don't have accurate inventory, you can literally be destroyed in a matter of a week or two, because demand is still fluctuating and people are trying to figure out how to buy stuff right now. Companies are getting back online.
So, you have to know what's in your inventory, and if you get anything from this — this is a really key area for everybody. Maximize the inventory data that you have and make it as accurate as possible.
And then I think on the logistics side, it’s the same kind of thing. We look at UPS, FedEx, these guys are running around, Amazon's running around. But even from a B2B perspective, a lot of the third-party logistics providers, the wholesale distributors that are outsourcing distribution. Now, these guys are really vital. So, we have inventory that's in somebody else's shop that's getting ready to be sent out. Maximizing scheduling.
We were just talking to another business the other day that that schedules deliveries for appliances, and they're getting a lot more requests right now. People are in their house and they still have money, so they're buying appliances, they're replacing appliances and getting new ones. Well, these guys have to schedule and figure out, “how do we get our parts from our distribution centers and our warehouses out to customers when our carriers are busy with other people?”
Everything's just different. It all comes back to having a fundamental understanding in Sourcing, Inventory, Production and Logistics of what really is there, how much capacity do you have on logistics? How much trucking, how much space do you need to fill up a truck?
Having all that data really defined and understood in your system so those people can make a decision by punching a couple buttons and there it is, is super, super vital. And fortunately, ERP can provide that.
Are there any immediate actions that can be taken to recover from supply chain disruption that you can share with us.
The most important thing is getting employees back to battery certainly health wise, implementing the CDC guidelines.
A really key thing to do is to look across your entire supply chain and look for where you have the dependencies, where they're the biggest. For instance, with the meat industry, different meat packers and meat shops funnel demand to certain parts of the food industry. It could be wholesale, it could be restaurants, it could be other types of businesses. And when one of those meat packers and meat processors shuts down because they have to clean, the time it takes to actually clean a factory to this level can shut down production for weeks.
We have another client that relies on lightweight trucks and heavy-duty trucks, and they retrofit them for electric motors. Well, Ford was shut down for a month. So now we've got this big air bubble going through the supply chain, and their demand is still pretty high for electric vehicles. But now with the supplies really coming online, you have to look at, “okay, what's that vendor doing today?” And what's their plan over the short term to get back up to speed? So I think having those really frank conversations with the people and the organizations that you rely on the most is going to be more and more important.
Supply chain scientists and engineers can talk to more specific optimization, but something we're seeing a lot of value in, especially if your employees do still have some capacity right now, is data integrity. Now is the time to get your data cleaned up: get your item list nailed down, get the total number of your inventory accounts and get them accurate, the locations, down to the bin if that's where you need to go. Look how your information is pulling together and relying on these key master data items. It's something that is a big differentiator.
Another really key thing we're seeing with our customers is streamlining workflows. We had a customer that was looking at their purchasing process and how things work, and there were some manual steps which, as the purchase approvers are out of the office or even the people that are processing purchasing are out of the office, it's slowed down their ability to buy product. And yet their vendors are selling out quickly. So they streamline their procure to pay process, or P2P, which made a huge difference for them to be able to get an order and get it approved and get it over to their vendors quickly. So that streamlining workflows is a great thing to do.
Probably the only other thing I will mention here about recovery supply chain disruption is getting — we've talked about omni channel in the past — how do you create multiple channels where your customers can get information from you and place their orders?
Now, e-commerce right now is absolutely vital. And I don't think that's going to change in the future. We’re actually sitting on an analyst report that we're doing on Shopify being Canada's most valuable company all the sudden, which is amazing. That platform can drive so much revenue to an organization.
We have a client that relied on salespeople that would go to industrial parks and sell industrial parts to those customers and create great relationships. Not only are the customers not accepting visitors, but the salespeople are working from home. So what do they do, how do they change that. So accelerating plans to spin up ecommerce solutions right now is super important. We can do that relatively cost-effectively to just get some key things up on your site.
We have a provider in my house that all the sudden put up a website that I'd never seen before. That was like, wow, these guys just threw this up overnight, and it's really made a big difference.
So, there are immediate actions you can do. Don't be a victim — and I mean that. There are things that can happen with software.
Are you seeing any ERP trends for the future for dealing with supply chain disruption?
I think there's probably a couple things from a supply chain side that are going to drive into ERP. I think a lot of supply is going to move domestic for obvious reasons, as well as less obvious reasons. And I think that's going to increase the cost of goods sold. And that's going to increase prices that then will ultimately go to the consumer, but also decrease profit for the organizations in between, from the original supplier all the way through.
Fortunately, there's a lot of liquidity that's hit the market in the last couple months. All the money that was there was still there, and then all of a sudden, trillions of dollars pumped in. So I think that's going to help to absorb a little bit of the cost price differential that we're going to experience. I foresee a lot of supply, a lot of manufacturing moving. I think China is going to be impacted. Apple recently mentioned that they're looking at moving some of their production to India. We don't know how much that is, but we are beyond domestic-only supply chains. We all rely on one another, so we better make good decisions for everybody.
But I do see that there will be more supply moving domestic, and then a lot more emphasis on how much inventory — safety stocks going up — how much inventory are vendors holding on to and building back up the supply chain. Which is interesting because, again, inventory costs go up, but I think that'll be offset by the amount of cash that's been pumped into the industry.
Then you've got the ERP side of it. And this is a key point that I want you to know: there will only be cloud-based software going forward.
So, any vendor that is offering an on-prem solution only — they're not going to make it. Even if the idea is “we can put it up in a host and put it in your own data center, and remote desktop or Citrix into it.” The user experience and how those applications work is not the same as a pure cloud multi-tenant Software-as-a-Solution application. Nobody's buying on prem software and nobody's buying on prem software that was meant to run on prem. It's only going to be software that runs in the cloud. And that has major implications to some major vendors.
The other really great thing for our customers and our clients is that the prices of software are also going down. So as the demand has gone down over the last several months, I've talked to many software vendors and as demand is going down, they're willing to offset that with decreases in prices.
So, there are some great opportunities right now, and I don't think the price of software is going to come back up to where it was before. There are so many software companies, and it's such a competitive environment. Nine out of ten deals that we were looking at, nine of them said, “I gotta wait.” So, you had 90% of the market just go away overnight and then you have all these software vendors. It’s sort of like going to the grocery store and there’s a hundred different kinds of mustard. Maybe I only need three, but a hundred? So, I think we're going to see that smaller players in the software industry are going to go out of business. And a lot more room for negotiation.
I think the final point that I'd say is, as a consumer of enterprise software, you really have to be careful. You have to look at the financial backing that an organization has, how much money are they sitting on. They're not going to tell you that, but you can look at it if they’re private equity backed. How long have they been with the private equity company? Does a larger software company own them — that's actually a good thing. But does the larger software company have a more flagship product? Because if you're on a product that's on a smaller customer base than their flagship product, they're going to migrate you, just out of economics. So, pay attention to economics as it comes to ERP. We're always around to help you, throw some ideas at you.