Supply Chain 101

As the CoronaVirus runs across the world, everyone is suddenly being exposed to news story after news story that is talking about Supply Chains.

For an industry that usually doesn't get this much attention, this is great and terrible at the same time.

As someone who has spent 13 years of my life in the Supply Chain world, it is normal that your friends, family and other professionals don't really get what you do; or they understand your world in bits and pieces. This is completely normal, I don't profess to know all about financial markets, software development, sales or any other industry for that matter.

As we grow and develop in our professional lives, we each develop greater levels of expertise and understanding within our field, and we all do our part to contribute to society.

The challenge with this however, comes as we experience Black Swan type events ... suddenly there is all kinds of media coverage, conversation and opinions being shared and not always with all of the facts (or at the very least, facts that for the majority of people are out of context, so then can become misunderstood).

That's why I am writing this post today, to help broaden the general understanding of how Supply Chains work. My hope is that it will help the average person have a better context for all of the information that they are being exposed to throughout this outbreak.

This post will be high level and provide a general framework of Supply Chain Operations, and I will highlight how this relates to the current "out of stock" items that we are seeing through the grocery industry (as this is where the largest panic buying has set in - you are probably ok to not get that new shirt or gadget, but I am sure not seeing food on the shelves is more than uncomfortable for most).

With that, let's jump in.

Supply Chain 101

Right off the bat, let's get an official definition for "Supply Chain"

Supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer 1

In the context of food, this means:

• Sourcing your core ingredients (i.e. from the farm)
• Transporting those ingredients to a manufacturing/transformation facility
• Packaging the final product
• Warehousing (storing) the finished goods
• Delivering finished goods - either to a retailer or these days, direct to consumer

Once At a grocery store:

• Unloading the truck
• Opening shipping containers
• Merchandising the Shelf

Added to this complexity, is how finished goods get delivered to a retailer so that you, the consumer can buy it.

Some companies deliver direct to store (DSD), which means it's the manufacturer who brings those goods to each individual store.

The most common method however is through the grocery retailers own centralized warehousing and redistribution points. The important thing to keep in mind here then is to understand that when a Walmart truck delivering to a Walmart store for example, it has a wide array of products to replenish the grocery shelves all over the store.

Demand Planning

So how does all of that movement happen? How do you know what to bring to a store or central warehouse?

Demand planning is the process of forecasting the demand for a product or service so it can be produced and delivered more efficiently and to the satisfaction of customers. Demand planning is considered an essential step in supply chain planning 2

The movement of any product is all done through demand planning, in basic English, a series of checks and balances that are essentially a best guess.

That is not being critical or disrespectful to the process of demand planning, but since end consumers don't buy most items far in advance (giving a long enough lead time to make to order) planners use their expertise, market knowledge, systems and tools to get to their target levels.

Manufacturing

Once we know what the demand is, or what we are aiming to get into the market, we then have to make the product.

A difference here is that physical manufacturing has limits/max capacity, you literally can only do so much over a period of time. How long you can run the machines, how much you can make through the facility is different by product, processing requirements and by facility... but at the end of the day there is always a maximum.

This is an important distinction compared to say something like the Internet. When companies were laying down the fibre optic cables that run the world these days, they were able to put down wires that had so much more capacity than what was needed, as the costs were relatively same. The idea that most of the work was in putting in the pipe and getting it connected, the fact that it was a larger pipe vs a smaller pipe didn't make that much of a difference based on the growth.

Manufacturing is not like this. Modern production plants are filled with specialized machines that have been designed to perform exact functions. They are generally built to perform long production runs and can only do so much as they are process driven (if you have an extra 6 minutes, check out what it takes to make the erasers you buy at the dollar store!)

Warehousing

The last step of the manufacturing process will turn those ingredients into packaged and finished goods. For the most part, this means that they are basically ready to be sold to consumers (some items like food however can have mandatory hold periods to ensure quality and safety controls - so even if something is made, does not mean it's allowed to be sold yet).

Based on the facility, product may be stored right at the plant in their connected warehousing space or a product may need to be shipped out to an intermediary warehouse to facilitate delivery to the stores.

At this point, a lot of people think that this is the opportunity (or failure) if items go out of stock and aren't available to purchase. If all it takes to make sure that a product is on shelf is to fill up the warehouse, just have more inventory.

The challenge however is in the amount of product / choice that consumers have these days. Coming back to our grocery example, a typical supercentre type grocery store can carry between 15,000 and 40,000 unique skus (products), that is A LOT of warehouse space.


In addition, warehouse picking is an evolving space. While more and more technology and automation is being incorporated, there can be quite a bit of manual intervention required in order to successfully pick and ship products to stores or customers. Just like the manufacturing process, at some point you usually will hit a wall - whether people or robots, only X amount can move through a facility in a day.

Delivery

Once in the warehouse, we now need to get it to the stores (or possibly direct to home) so that consumers can buy.

Since the goal of this post was to address the understanding of panic buying and empty shelves in stores, I will focus here as direct to home last mile delivery is a whole other set of potential issues.

Everything that you see in a store gets there by a truck. This means that product is loaded and driven to specific stores and delivered one by one. There is no magical delivery fairy that can make every delivery happen at the same time.

Trucks are either loaded with product all for one store or there is product to service anywhere from 2 to 7 stores. There are literally thousands of grocery stores in developed countries, and in order to keep costs manageable, being efficient with the movement of product is paramount (especially in the food industry where margins are extremely low for the most part, most food is a commodity after all).

Depending on the city or region, deliveries may be able to happen 24 hours a day, or some might be restricted by city by-laws and are only able to operate for a period of a day.

The other major factor here is that heavy vehicle operators are bound by hours of service regulations, which means that someone is only allowed to drive for a specific number of hours a day (about 13 hours). While that is a long work day, you would probably be surprised how quickly you can use up all of those hours. Keep in mind, that includes any time in the truck which means that there has to be enough time for the driver to drive back to his hub to clock out (and also, it's pretty irresponsible to try to schedule a driver right to their maximum hours as there is always some unforeseen delay to the day to day activity).

Receiving at the Store

The final piece to seeing product on the shelf is store receiving. Each store has to have a truck back up to it, pallets of product are unloaded to loading docks, and are taken into store inventory.

Stores need to have available staff and opportunity then to restock shelves. With the types of sku counts for a grocer, this is not always the fastest process. While stores receive pallets, customers are typically buying individual units, this is a lot of unpacking and merchandising that goes on ... daily.

So why are shelves empty?

With the overview that you have above how how a Supply Chain works, I hope you have a better appreciation for all of the different steps involved to have your shopping experiences meet your expectations.

The reason why shelves are empty in grocery stores is simple - the rate of sale exceeded the movement of product through the Supply Chain.

Now that is a really simple way to put it, but with a tsunami of product that all of sudden had their baseline and trended sales altered and amplified, there is no way that the system would be able to keep up.

Yes you could plan for it, at the end of the day, you can plan for anything; but being able to properly plan for it would mean that you would have to KNOW in advance what was going to happen (and have a pretty good level of accuracy as well). While some out there might say that they did in fact know, hindsight is 20/20.

IMPORTANT NOTE - Please keep in mind that just because there is a LAG in the chain, it does not mean that product is unavailable

Product is moving, you will still be able to eat. It is not the zombie apocalypse.

How can you help?

• STOP panic buying & hoarding
• This activity only continues to create unpredictable rates of sale, you are helping the problem stay alive by doing this
• Buy less in general
• Like most people, we have a lot in our pantries, more than you will need over the course of a few days or a week. The average person needs between 1,500 and 2,000 calories a day - a 1KG tub of peanut butter has 5,880 calories (just think about that for a bit)
• Shop multiple stores if possible (at a normal rate)
• Different grocers have different supply chains, while you might need to run around a bit, you will find different items at each location.
• Don't buffer
• If something was out of stock, don't buy 2 or 3 the next time you are in the store "just in case". With everyone creating their own buffer inventory, stores are not getting an accurate picture of what people really need.

There's a whole other piece to this that is more from a store's side, and how your behaviour is impacting their ability to reorder correctly, because again, they are trying to order and plan to meet consumer sales; the more erratic consumer behaviour the harder it is for them to order.

Stores don't want to disappoint their customers, so they in turn create a lot of pressure on their suppliers to deliver.

Everyone benefits if we just slow down and let the system catch up.

Today is March 19, 2020, I was at a few stores this morning. While there are still gaps and missing product, it is already getting better and will continue as our shopping behaviour relaxes.

Please do your part so that no one is left missing something that they might actually NEED.