Coronavirus OP-ED

Covid-19 hasn’t just disrupted our lives, it has radically changed the entire supply chain

By Jan de Ruyter 7 April 2020

A customer hands over a five rand coin in the Sandton district of Johannesburg, South Africa, on Thursday, 22 June 2017. (Photo: Waldo Swiegers/Bloomberg via Getty Images)

Supply chains will take time to at first react to the Covid-19 crisis, then they will overreact before calmness and purpose will set in. Systems tend to rebalance themselves, eventually. For many years the concept of an agile, flexible supply chain was bandied about, now we will really see if they are.

So Covid-19 hit our shores. The government declared a state of emergency, none too soon, and our nation is in lockdown. As usual, there are those who accept and obey the rules while others are in denial (not necessarily out of choice) and continue as usual.

Our initial panic to buy toilet paper and baked beans moved on to where some of us have settled into a bored, holiday-like atmosphere, while for others, the struggle to survive continues daily. Yet we are all counting the hours until the 21 days are over in the hope that there will be a rainbow at the end of the lockdown period.

Nothing could be further from the truth: our economy is in tatters, Moody’s finally downgraded us to junk status and the rand has fallen to an all-time low. One of our top earners, tourism, has fallen flat on its face because of travel restrictions and fear of contagion. We entered this crisis totally on the wrong foot.

Our government continues to be bloated and civil servants remain hopelessly overpaid. Unemployment is rife, tax collection is way below target, but the unions are still demanding unrealistic wage increases. Our education system is grossly misaligned to market needs.

The essential services have been identified (God bless them!) and are working hard to keep our population healthy and fed. I trust they will be rewarded accordingly even if only by recognising the critical role they play in keeping our country running.

The one advantage of the lockdown is that it gives people time to think. Do I really need all these things? Is it OK to use half a cup of washing powder instead of a full one as recommended on the box? People will downscale and adopt a frugal style of living. Whether it is by force or choice is irrelevant. Substitution to cheaper products will take place. Items that offer little value will remain sitting on shelves and in warehouses, ultimately leading to liquidation and firehouse sales.

What is the effect on supply chains?

There was a massive demand for some items and no demand for others. Warehouses were emptied out. Our forecasts and therefore our ability to supply were hopelessly wrong. Some items will remain in our system for a long time to come, especially luxury goods. Companies relying on simple Min/Max methods are even worse off. We no longer need fashionable clothing, perfumes or the latest mobile phone. Our capacity to fulfil orders is limited, ships bringing in containers were refused entry into port, and planes were grounded. Suddenly we had to substitute computers with ventilators, medication and protective clothing.

Supply chains will take time to at first react, then they will overreact before calmness and purpose will set in. Systems tend to rebalance themselves, eventually. For many years the concept of an agile, flexible supply chain was bandied about, now we will really see if they are.

What needs to be done? There needs to be a focus on customer demand, not historical (or hysterical) sales. It will require a massive exchange of information, something most retailers have resisted for a long time.

Because most of the world’s manufacturing is done in China, there will be at least a six- to eight-week drain of inventory. Some shortages will occur, but this will expose the rocks in our systems and indicate where improvement opportunities are. Inventory levels must be slashed, supply methods improved, and massive savings can be achieved even though most of them will only be a once-off opportunity — it will free up much-needed capital. It will give us an opportunity to apply some critical thinking.

A drive around the Aerotropolis in Ekurhuleni exposes a large number of warehouses. What is the value add of these warehouses or is it to hide upstream efficiencies? Many of them are focused on luxury retail operations. Edcon has learnt the lesson, others will follow.

The recession will bring hardship to many existing businesses; many will lock their doors and simply walk away. It will bring about the reality of Economics Law 101: consumers have the right to spend their money where they want and in tough times, these choices will be made very acutely.

Unfortunately, small businesses will suffer the most. Many were scraping by before Covid-19, now they are in real trouble. Thankfully some individuals came forward to assist them.

Many sectors — for instance, insurance and finance — have made handsome profits from consumers, but how will they conduct business if there is simply no money to go round? Will landlords be able to charge rent as they did before or would they rather see the shops close and lose business forever? The message is simple: there will not be a bunch of eager businesses clamouring for retail space or to open accounts. The only option is to adjust your cost structure and be happy with less.

Where do we find the answers? I firmly believe that Japan after World War II provides ample lessons: they had nothing. Everything had to be imported. They were not in favour with the rest of the world, but they desperately needed revenue. So they started JIT (Just-in-Time). Why? Because they had no other option. Covid-19 wiped all excuses off the table. So now is the time to create a lean and flexible economy focused on customer demand. And that includes our government — there are simply too many things that add no value to SA Inc, just cost.

But what will happen once we are free to roam the streets?

The State of Disaster is not over by a long shot. But now it is no longer just a virus, it is our economy that is desperately ill and in ICU. We are in a real recession. The economy has already shrunk to dangerously low levels and will move into negative figures soon.

Desperate times call for desperate measures. No longer can politicians make empty promises to the masses. We are still eagerly waiting for the first cameo appearance of somebody (in)famous walking the plank in an orange overall; our National Prosecuting Authority is still falling around trying to find its feet. The concept of speed has not reached the NPA yet. Their current operational model does not work. Investigations have also not reached municipal levels yet.

If there is anything we need now, it is for the State of Disaster to continue, to fix our economy. Gone are the days of trying to be nice to all and sundry. Tough, unpopular decisions need to be taken even if it means the ANC loses the next election. The few reasonable voices in government need to become a chorus. Now is the time to put partisan party politics aside and put South Africa first as we can no longer afford a government that is incapable of fixing the economy. The UAE has implemented e-Government, greatly reducing the number of frontline workers. Most government business in the UAE can be conducted via the internet.

Many companies in the private sector are still comfortably cruising towards the cliff. Some companies will follow the route of liquidation. What is required is a change of course; something that will lead us away from the cliff.

Most of us have seen our investments crumble to record levels, shares have plummeted. Isn’t it time we all take our share of hardship? Can we still afford our government?

I foresee a remarkable softening in the terms and conditions of all companies. Rather than lose you as a customer, they will offer lesser, cheaper packages because we’ve found out that we don’t need all that much. Most of these companies fall in the contractual expenses category: banks, insurance companies, medical aid and mobile phone companies.

The question remains: how empty is the dam? How many rocks can be exposed before the boat permanently runs aground? If our unemployment rockets, consumer spending will decrease with the result of decreasing profits. The option of increasing your price simply doesn’t exist. Companies and government have to downscale. People will be retrenched, buildings will stand empty: there will be massive defaults on loans.

For the average consumer, there are few options: either cut cost or increase revenue — the last one being almost impossible. People will drive cheaper cars, live in smaller houses, cohabit, organise lift clubs, won’t spend money on luxury goods. But we expect the government to do the same. If Pravin Gordhan and Tito Mboweni can travel economy, so can everybody else. Business-class for civil servants will become obsolete, flashy functions will no longer take place, meetings will take place via email and teleconferencing. Entire departments and systems will have to be consolidated to eliminate duplication. Some functions must be eliminated as the reasons for their existence no longer apply.

People are already angry, service delivery is low. This will spill over into the streets.

But necessity is also the mother of invention. We now have an opportunity to critically rethink the way we do business. Office workers can work from home, home industries will flourish, home deliveries will increase, and people will become much more self-reliant.

Our falling rand creates many opportunities for import replacement. There need to be massive incentives to resurrect the manufacturing sector, which is the value creator in any economy. There is a lot of knowledge that can be used to exploit this opportunity, especially the younger generation. They are knowledgeable and passionate; they just need an opportunity and some encouragement. If we can build a satellite, many other things are possible.

Companies need to move from cost-based to value-based systems. Too many are caught in useless cost accounting exercises. These systems are not only useless, but they are also dangerous. For example, if they want to reduce the unit cost, the simple answer is to just produce more. The need is, therefore, to go to a value-based system based on customer perception.

They also need capable middle management. There is a distinct lack of strategy and implementation. Many middle managers follow the route of worker, supervisor, manager; which leaves them totally out of their depth. The Peter Principle is alive and well. Testimony to this is a large number of disciplinary hearings and grievance procedures that keep them busy.

The uneasy marriage between the ANC, Cosatu and SACP has to end. Time for divorce and the sooner it happens, the better because it is inevitable. Land reform, BBBEE, affirmative action have claimed their toll. People need to work together instead of using divisive policies. Singapore is a case in point: it is a multinational concoction of people from every nationality thinkable, yet they flourish because first of all, they are Singaporeans.

The government needs to realise that the IMF will impose unpopular measures to straighten our economy, but the Russians and Chinese methods will be much worse. DM

Jan de Ruyter is a freelance lecturer on supply chain management topics. He holds a National Higher Diploma in Operations Management and spent many years lecturing in the Middle East. He has a keen interest in systems theory, which enables him to gain insight into complex problems.

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