A global manufacturer shares its response to the crisis.
No doubt, the COVID-19 crisis has significantly disrupted all supply chains. As the dust settles from scrambling for short term solutions, it serves us to think about how we might mitigate these risks in the long term. In this article, I will aim to cover the experience of ELGi, a global air compressor manufacturer, with supply chain challenges. Specifically, I will share our perspective on the immediate impact, the short-term measures, and long-term risk mitigation.
Based in India, ELGi is a global compressed air company offering more than 400 products across about 100 countries. Compressed air is often termed as the fourth utility, a necessity for a range of industries from small auto body shops to complex pharmaceuticals manufacturing. ELGi’s supply chain is fairly complex in that we rely on more than 350 suppliers across 15 countries for more than 13,000 components. The complexity extends beyond our immediate suppliers, who in turn engage sub-contractors. As with most companies, our operations team’s goal is to strike a balance between maintaining sufficient inventory of finished products in key markets to serve customers, while minimizing the level of raw material and work in process inventory to maintain healthy working capital models. However, none of our planning would account for the disruption brought on by the crisis.
ELGi relies on suppliers in China for critical components such as coolers and motors for its air compressors. Luckily, ELGi avoided the initial COVID-19 disruption in late December and early January, as in anticipation of the supply slowdown from Chinese New Year in late January, ELGi had padded its inventory of products from China. This strategic purchase gave us security until mid-April, at which point Chinese suppliers were back online and ramping up supplies. That said, the disruption affected our supply chain in the following ways
1. Component/Raw Material Disruption – The Indian government declared a sweeping and highly restrictive, total lockdown overnight for three weeks ending at the close of April. Thus, many vendors despite having material, simply weren’t operating to fulfill ELGi’s orders.
2. Freight Disruption – Freight companies were handicapped by lack of clarity on routes, import guidelines, etc. and thus were not able to fulfill delivery commitments. In addition, companies increased rates on account of fewer companies offering freight solutions.
3. Contract Labor Shortage – Many small suppliers engage temporary, migrant workers from other parts of India for production. Fearing the lockdown in India, many workers opted to return to the safety of their hometowns, and thus leaving production shorthanded.
4. Payment Terms – As production opened up, smaller suppliers didn’t have the liquidity to procure material to restart production.
Our supply constraints had limited impact on our ability to fulfill customer orders for two reasons. First, our prevailing inventory philosophy prioritized minimizing lead times as opposed to outright inventory cost, which resulted in sufficient inventory even during temporary production shutdown. Second, demand also declined sharply, which reduced stress on our inventory levels. However, the crisis kickstarted a bevy of short-term measures and long-term planning.
First, to ensure safety, we instituted disinfection as part of our material handling protocols. We extended this guidance to suppliers as a requisite for working with ELGi. In anticipation of further shutdowns, we padded our inventory of critical components. We extended payment terms for both distributors and smaller suppliers to help reduce their cash flow pressures. We revised our production processes to account for social distancing measures and owing to lower capacity, focused on the most popular and critical products. Finally, we instituted flexibility measures in our freight operations, where depending on risks within certain routes, we considered air freight options to fulfill commitments.
The pandemic has kicked off long-term planning. Relative to the industry, ELGi has vertically integrated production processes for quality control. We are expanding our list of critical components and revisiting make-versus-buy decisions with more emphasis on accounting for unforeseen supply chain disruptions. For buy category parts, we plan to pursue multiple sources across regions to mitigate regional risks. For our workforce, we will invest in multi-skilling to ensure production during reduced manpower situations. Finally, we are revising our freight contracts to ensure we are price and service protected under all conditions along with having multiple ports of access.
In conclusion, the Covid-19 crisis has permanently challenged our supply chain assumptions, and we are instituting proactive measures to ensure business continuity while ensuring stakeholder safety.