Since February this year, the new crown epidemic, which has been intermittent for 2 years, has suddenly rebounded in the country, plunging Shenzhen, Changchun, Jilin and Shanghai into a severe situation of region-wide silence. Factory shutdowns, store closures, home offices, supply disruptions... both business operations and people's daily lives were greatly affected.

In an online salon on "Supply Chain Challenges and Responses in the Context of Epidemic Prevention and Control" organized by the International Society of Supply Chain and Operations Management (ISOCOM) on May 8, Dr. Wang Liang, a researcher of CEIBS - Zhenkunxing Center for Supply Chain and Service Innovation, gave a keynote speech. Dr. Wang gave a keynote speech.

In his speech, he mentioned that in order to deal with external crises such as the New Crown epidemic that can cause supply chain risks, companies should establish a 3R supply chain and summarized the 3R supply chain capability model.

After this event, this publication had an in-depth conversation with Dr. Wang Liang. Dr. Wang shared his insights on the challenges brought by the epidemic to the supply chain, the connotation and value of the 3R supply chain, and the implementation practice of the 3R supply chain.

The new crown epidemic that broke out 2 years ago has still not subsided. From your observation and research, what are the main challenges encountered by enterprises in the supply chain under the epidemic prevention and control, and what are the specific manifestations?

Wang Liang: Supply chain is naturally a cross-regional and cross-enterprise organizational form, a flow process of information flow, business flow, logistics and capital flow. One of the keys to epidemic prevention and control is to "quiet down" and stop the spread of virus through necessary flow restrictions. There is an inherent contradiction between movement and stillness.

I will discuss the specific challenges I have observed from three perspectives: demand, supply and supply-demand transmission.

On the demand side, taking the current round of the Shanghai epidemic as an example, we saw a dramatic change in consumer demand within the containment area in the short term, with demand for goods such as clothing, beauty, home appliances and cars plummeting and demand for necessities skyrocketing. Moreover, due to the disruption of offline channels, demand all poured online, making online orders once reach the level of Double 11 and 6-18.

The consequence is that for goods with strong seasonality and long preparation period such as clothing, the goods prepared in advance cannot be sold, making manufacturers, distributors and retailers suffer heavy losses; while for necessities such as food and beverage, manufacturers, distributors and retailers have to fight a big promotion-level battle without sufficient goods prepared in advance, and the challenge is also huge.

On the supply side, we see that both production and logistics are affected by different degrees of disruptions, with typical "breakpoints" including factory closures, warehouse closures at all levels, and isolation of employees from drivers.

During the worst of the epidemic in Shanghai, I spoke with the management of an e-commerce platform and learned that more than 90% of their distribution stations in Shanghai were sealed at all levels. In this case, even if the goods are available, or can be transferred from the field to Shanghai by dumping, it is still difficult to deliver the goods to consumers.

For the upstream supply chain, the challenge may be even greater. During the period of epidemic prevention and control, the supply capacity is given priority to essential goods, so many factories face the difficulty of "raw materials can't come in and products can't go out" even if they have closed-loop management of employees to achieve the working conditions.

Another challenge is the problem of lost orders. We saw that some overseas customers of Shanghai suppliers transferred their orders to suppliers in other countries and regions during the period of Shanghai's epidemic prevention, and the reason behind this was that the delivery reliability of Shanghai suppliers could not be guaranteed in the short term.

In addition, I would like to highlight the famous long-whip effect in the supply chain. The so-called long-whip effect refers to the cascading distortion in the transmission of demand from downstream to upstream. Compared with the single-point problem in the supply chain mentioned above, the long-whip effect is more difficult to observe directly, but has a more profound impact on the supply chain.

For example, when the availability and timeliness of online shopping becomes uncertain for a consumer who is sequestered at home, he will tend to over-order and cancel the order for a refund if an order is out of stock or delayed in delivery.

When a large number of consumers perform such abnormal operations at the same time, the disruption to upstream vendors' stocking may be great, and the resulting overstock will face a longer and more costly digestion process.

The essence of supply chain management is to achieve an accurate match between supply and demand, and in summary, the dramatic changes on the demand side, disruptions on the supply side and distortions in the transmission of demand signals to the supply side have combined to create challenges in the supply chain from epidemic prevention and control.

What do you think are the other reasons for these challenges, besides the objective factor of the epidemic?

Wang Liang: I think that external shocks like the epidemic, the trade war and the Russia-Ukraine conflict have only served to expose the problem. The real cause of the problem lies in our biased and insufficient understanding of supply chain management, as well as the supply chain infrastructure and other aspects still need to be improved.

Let me tell a story from ten years ago. In the 2011 earthquake in Japan, a factory in Komeihama, Japan, shut down production, which directly led to the restriction of the production of as many as ten colorways of Chrysler vehicles in the United States.

The reason was that all ten colorways required the use of Xirallic metallic pigments, which were exclusively supplied by Merck in Germany and which could only be produced at the affected plant. After the accident, Merck opened a second Xirallic pigment line in Germany, and Chrysler reduced its reliance on Xirallic pigments for its color schemes.

The reasoning behind the story is simple: when managing the supply chain, it is important to consider risk factors and not just cost and efficiency. In every step of product design, procurement, production, sales and logistics, there must be a good balance of cost, efficiency and risk, with appropriate backup capacity and contingency plans.

Many companies we contacted before the epidemic, when talking about supply chain improvement and optimization, still talked about cost reduction and efficiency, and rarely mentioned risk management.

Of course, taking risk into account means that certain costs are increased. For example, although the multi-site warehousing strategy can spread the risk, it requires multiple points of stocking and safety stock, which is certainly not as cost-effective as sending the whole country from one warehouse.

This leads to another question: Can we reduce some unnecessary costs in the supply chain and use the savings to control risks? In my opinion, this is a problem that enterprises must consider when optimizing the supply chain in the future, and with the improvement of the country's supply chain infrastructure and other aspects, it is entirely possible to achieve.

Let's take the logistics link. In recent years, our country has continued to introduce measures to promote the integration of resources in the logistics industry, from the establishment of the China Logistics Group last year to the construction of a unified national market this year, are creating conditions for the improvement of logistics infrastructure.

If logistics costs can be significantly reduced in the future when switching between different regions and different modes of transportation, companies in the supply chain will have more resources to manage risks.

In the future, there will be more and more uncertainties like epidemics. You mentioned the 3R supply chain theory in the previous salon that companies must be proactive to deal with such uncertainties. Can you introduce the origin of the 3R supply chain theory?

Wang Liang: 3R supply chain is not a mature theory strictly speaking, it is a general description of the supply chain capability requirements of enterprises in a highly uncertain environment.

The idea was initially called 2R Supply Chain, or Responsive and Resilient Supply Chain, and was proposed by Professor Zhao Xiande and me at CEIBS during the 2020 epidemic, with the motive of calling for academia and industry to pay more attention to supply chain management in emergency situations.

Later, Prof. Zhao and Prof. Hau L. Lee of Stanford University gave a special issue of the Journal of Operations Management on the epidemic and supply chain response, and added a third R to the name of the special issue, which at first stood for Restoration, but was later updated to Regenerative.

How should we understand the 3R supply chain? What elements and capability models does it include?

Wang Liang: From the specific definition, rapid response means that when an emergency occurs, the supply chain can quickly and accurately respond to changes in customer and market demand.

Resilience means that when an emergency occurs, the supply chain is able to achieve overall continuity of operation and recover quickly even if there is an interruption.

Reproducibility means that when an emergency occurs, the supply chain is able to reconfigure available resources (including potential resource pools) to design and deliver new products and services to meet new demand at the time of the emergency and after it ends.

We can understand the 3R supply chain from the following logic: the first R addresses what the supply chain should do when demand is highly uncertain; the second R addresses what the supply chain should do when supply is highly uncertain. If you do well in these two R's, you can match the supply and demand in a highly uncertain environment. The third R is focused on the future.

Both rapid response and resilience emphasize more on matching supply and demand for existing products and services, while reproducibility emphasizes on matching supply and demand by