How are traditional supply chain models transforming as a result of COVID-19 disruption?

Since COVID-19’s spread as a pandemic, business vulnerabilities have been exposed tremendously especially with regards to their supply chain models, placing business-continuity at risk. Should businesses re-think and transform their supply chain models? The global outbreak has been causing businesses world-wide to experience supply chain disruptions, whether due to having raw materials stuck across borders, factories being locked down, or the spiking demand for certain products and declining demand for others, among other changes.

This interview with Sherwat Elwan, professor of operations management and director of the Executive Masters of Business Administration (EMBA) and Masters of Business Administration (MBA) programs at the American University of Cairo (AUC) School of Business, examines how businesses should respond in terms of supply-chain management to the COVID-19 crisis.

What are the repercussions of the situation?

The crisis has left businesses striving to sort out the effects of the shifts in customer demand, transportation restrictions, factory shutdowns, supplier shortages on their operations and supply chains.  Depending on the nature of the business, different companies are ending up with either shortages in their supply chains like in the case of health and safety items, or with a surplus of inventory like what we see in fashion and leisure.

The ripple effect can be seen across each of the players in the supply chain beginning from consumers to retailers, distributors, manufacturers and suppliers, each updating their definition of ‘essentials’.

In the short term, we see struggles related to the replenishment of critical and stocked-out items. Supply chain managers are involved daily in dealing with adjusting forecasts, capacity restrictions, production contamination concerns, renegotiating supplier contracts and managing logistical challenges.

Medium term challenges are likely to be related to restrictions in discretionary spending and the financial solvency of businesses. Businesses will have supply chain managers working on continuity plans, cash flow solutions, and altogether shifting to alternative suppliers.

We are yet to see the long-term effects related to the holding back on capital investments, expansion plans and sadly the loss of jobs for many employees.

How can businesses cope with such supply-chain shocks?

Management is about comparing alternatives. Therefore, if a business is facing shortages in, say, raw materials, the right way to go about it would be to consider their essentiality. Are there substitutes for those components? Are there alternative suppliers for them? Is the product altogether essential for consumers right now? These are the questions to be asked momentarily. I fundamentally anticipate two scenarios: The first is that the basic notion of substitution will emerge, and if not, then the second scenario is that innovation will spark to either develop alternatives for replacement components or create entirely new ways of production, leading to the surfacing of new business models.

Could the current supply chain disruption be a result of poor forecasting? Was there a way to anticipate this extraordinary situation?

I wouldn’t call it poor forecasting. The impact and magnitude of the disruption is unprecedented and it would have been hard to predict. That said, building resilience in supply chain networks has been a pressing matter for many years. Because of the many players that constitute a supply chain, it has been difficult to take collective action to build the necessary resilience in supply chain networks.

There has been an ongoing debate on who should bear the cost of traceability and sustainability in supply chain management as well as the role of large buyer firms in assessing and addressing vulnerabilities in their suppliers and sub-suppliers. I think this disruption will now encourage firms to dig deeper into knowing exactly where their products are coming from and to assess sub-tiers in their supply chains to identify weaknesses.

Will supply chain disruptions trickle down to the consumers? Many countries have already started witnessing price hikes. Are businesses facing price hikes by factories too?

There are mixed reactions. Some businesses are practicing social responsibility as we have seen with Waterway real estate developer cancelling rent payments for its commercial tenants to facilitate their staff’s salary payments, and Armani Group switching its production plants to manufacturing medical overalls for healthcare workers and more. However, it’s normal for the pure basics of supply and demand to come into play, particularly due to resource constraints and cash flow issues. It is understandable, of course, that not every business is able to react in a similar way and take the higher road. However, communicating transparently and openly is key; it’s very important that businesses communicate to their customers how they are dealing with the situation.

“This is also the time for innovation. I genuinely believe that supply chain gaps are the groundwork for new business models. It’s a good time for innovative business models to evolve, and how businesses will position themselves and adapt to this situation will create winners out of it,” says Sherwat Elwan, professor of operations management at the American University of Cairo (AUC) School of Business

To deal with shortages, consumers opting for local brands in replacement of imported ones could be an alternative. Manufacturers offering products that are largely globally sourced could consider viable local suppliers in face of the slowdown of global logistics and offshoring. Sourcing managers could identify the top strategic items on their bill of materials and renegotiate supplier contracts in prediction to expected shortages. I expect businesses with a wide variety of products to suffer less than specialized businesses as they aim to balance the over and under supply of their product categories and reshuffle their resources.

Many businesses suddenly had to make the transition from the traditional brick and mortar model to building an online presence. What can they do to sustain their business if they aren’t fully equipped?

The digital transformation of businesses and how they have been developing their digital strategies during the past years will have great impact on their ability to migrate to online models.  I think we will see a fast tracking of digital marketing and digital sales of fast-moving goods and other high demand products that were not mostly suited for online shopping. Customer-related factors like variety, speed of delivery, ease of payment and customer service will allow online businesses to compete as they respond to different customer needs.

Businesses have choices when it comes to forming their digital strategies and distribution channels. Options range between having your own online platform and managing your omni-channels, having your online website and outsourcing distribution, or showcasing your products through an intermediary like Amazon or Otlob. It all boils down to the businesses’ capabilities in terms of IT infrastructure and supply chain distribution networks.

Businesses need to factor in their product characteristics, operating costs and customer requirements as they adapt quickly to the situation. Local intermediary platforms like Souq, Jumia and Otlob could offer attractive packages to local businesses to join their platforms during these special times.

What would be your tips for the online businesses who are facing a higher demand than they can cater for, as well as those that are new to the e-commerce dynamics? 

If you are an online business, it’s important that you revisit your product/service offerings and your digital strategies considering the current market situation.

  1. Categorize your offerings according to product characteristics (its necessity to the customer, frequency of demand, value of product per unit, etc.)
  2. Select a range of offerings for online and in-store (you don’t have to offer all your products online).
  3. Dissect the information along each phase of the product journey from production to the retail experience to be able to re-assess customer needs and hence, direct your marketing and production efforts.
  4. Determine your channels and customer experience (home delivery, in store or pick-up points).
  5. Identify your partners and their roles in your distribution network (online retailers, package delivery, storage facilities).
  6. Consider multiple destination networks for fast moving items such as those that can be delivered directly to the end-user’s doorstep versus others that could still wait to be presented through resellers and retailers.
  7. Coordinate as much as possible between your multiple distribution channels.
  8. Restructure your business model to get the most out of the online experience (compete through customer responsiveness factors like speed and availability while focusing on efficiency as much as possible).

How do you view the scene for small startups that were just getting started? Do you believe they can still pull through? 

After any disruption, there will always be winners and losers. The nature of the start-up in terms of the ‘range’ of products and services offered and ‘how’ they are offered will dictate the future of these firms. Many Egyptian start-ups are heavily service-oriented, which sadly means that there may be more losers than winners. However, start-ups by definition are known to be more innovative and adaptive than larger firms. To survive the current crisis, businesses need to be completely open to new business models that change their regular way of doing business.

Going forward, what should businesses be working on with regard to supply chains to ensure business continuity given that the situation may last for longer than expected? In other words, what are the lessons learnt from this current phase?

For one, it has become very evident that not many businesses have exerted the sufficient effort to invest in supply chain understanding to avoid such disruptions. This is mainly due to the fact that different players in different stages are disconnected from each other. Now is the time to come together, map the players and stages in the supply chain, revisit essentiality in each stage, identify gaps and make adjustments.

This is also the time for innovation. I genuinely believe that supply chain gaps are the groundwork for new business models. It is a good time for innovative business models to evolve and how businesses will position themselves and adapt to this situation will create winners out of it.

Most importantly, businesses should have the right social attitude and never capitalize on the weak.

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