All the major examples of supply chain disruptions over the previous 20 years – from the SARS epidemic to the Fukushima earthquake and tsunami – have led to the development of new levels of supply chain risk management. However, the lessons learned about the vulnerabilities in global supply chains from these events can’t easily be applied to the current COVID-19 pandemic. We’re only at the beginning but we’re already witnessing disruption on a scale never seen before. The old rules will no longer suffice. So, can organizations adapt to supply chain disruption from the Coronavirus outbreak?
The short answer to the question above is no one really knows. We’re all in uncharted territory. Perhaps the Fukushima earthquake is the most famous of recent supply chain disruptions. It exposed vulnerability in many supply chains that were reliant on companies in the region to supply parts. More than just direct suppliers, the supply chain disruption was caused by companies’ inability to see and prepare for the impact on second and third tier suppliers – which they often didn’t know they used – to maintain supply into the chain.
However, Fukushima, like most other global supply chain disruptions, was regionalized in its nature. The disruption happened in that region of Japan and agile business could look to source alternate supply elsewhere. The COVID-19 pandemic could almost be described as causing the first truly global supply chain disruption. As more and more of the world goes into lockdown and companies dramatically reduce production capacity or stop operations altogether, supply chain resilience is being tested in new ways.
Is the supply chain disruption definition changing?
A traditional view of supply chain disruption is defined as major breakdowns in the production or distribution of a supply chain, including events such as a fire, a machine breakdown, natural disasters, quality issues, and an unexpected surge in capacity. In the past, supply chain risk management has revolved around three aspects when dealing with supply chain disruption:
- Place buffer inventory at strategic points in the supply chain to maintain business continuity through supply chain disruptions.
- Develop a multi-tier, multi-supplier ecosystem that has elements in every geography to ensure that you can quickly swap supplier should disruption occur in one part of the supply chain.
- Monitor and map the entire global supply chain to fully understand the operations of your direct supplier but also their supplier and their supplier’s supplier. This allows you to build contingencies into your operations to overcome supply chain disruptions that could otherwise be completely invisible to you until it’s too late.
These strategies and good for localized disruptions but have the potential to fail with the entire world in lockdown. There is no company holding enough buffer stock should the effects of the Coronavirus last for over a year. It’s extremely challenging to source alternate supply when no region is anywhere near full capacity.
The definition above is very clearly focused on the supply side. We are talking about global supply chain disruption after all. However, as more organizations look to move towards a ‘demand-driven supply chain’ where operations are increasingly driven by customer demand signals, the definition begins to narrow.
The COVID-19 outbreak is, in some ways, emphasizing this point. With the Coronavirus supply chain impact is felt on both the supply and the demand side. Factories worldwide are slowing production or closing down temporarily on the supply side. This is mirrored by a drop in consumer demand. Estimates suggest a decline of 20% in US customer demand and any recovery will take time when many people have found themselves on near subsistence for several months.
Coronavirus and China. Supply chain disruption in action
In the last 20 years or so we’ve seen a significant trend to offshoring in China. It’s fair to say that most companies in other areas of the world rely on Chinese suppliers somewhere in their supply chain. The result of this, of course, is that the supply chain disruption caused by the virus originating in China would always be acutely felt.
The scale of that supply chain disruption has been massive. Fully 75% of US companies report supply chain disruptions due to the drop-off of Chinese production capacity and difficulties in the logistics process. Chinese manufacturers are reporting capacity at 50% and this is flowing into over 60% of US companies experiencing delays in receiving orders from China. In addition, almost half of all companies report delays in moving goods in China and loading them at the ports.
More than 44% of those companies affected admit that they didn’t have a plan in place to deal with supply chain disruption from China.
What are the costs of supply chain disruptions?
It’s not difficult to work out the costs of supply chain disruption. If you don’t receive the parts you need then production is delayed or halted and the entire supply chain slows. If you can’t supply product to market for whatever reason then you’re going to experience cancelled orders, lost revenue and growing customer dissatisfaction.
Putting a dollar value to this, figures from 2016 suggest that global supply chain disruption costs $56 billion a year with one in every three organizations reporting loses of over $1 million from recent supply chain disruptions. As the level of supply chain disruptions has increased since then, we can assume so have the costs.
How to adapt to supply chain disruptions during the Coronavirus pandemic
Many organizations are asking how you can avoid supply chain disruptions caused by the Coronavirus. Research suggests that you can’t. Dun & Bradstreet report that 938 of the Fortune 1000 companies have a Tier 1or Tier 2 supplier that has already been affected by the virus. Small businesses are now feeling the effect and most reports are suggesting that once the virus has been contained it will take business between three and six months to return to business as normal.
Organizations can’t avoid the effects of the COVID-19 pandemic. The Coronavirus impact of supply chains will be severe. Instead, you have to put in place robust strategies for mitigating supply chain disruption. All the traditional approaches to supply chain risk management still need to be deployed but it’s likely that the companies who best weather the storm of this outbreak will be the ones that think innovatively about how their production and supply chain operations work.
Reducing the risk of supply chain disruptions is only part of the task. During Coronavirus, supply chain managers will also need to be able to respond quickly to changing demand patterns. There are four areas where fleet footed organizations can – and in some cases are already – responding to Coronavirus supply chain disruption:
‘Reverse the curve’ sourcing
The trajectory of COVID-19 so far has been a steady spread from region to region. A pandemic that started in China and spread to neighboring countries then skipped continent to Europe. Within a few short weeks, Europe had become the hotspot for the virus. COVID-19 is developing so quickly that the US may well become the new epicentre only weeks after that. The curve for the virus is different in every region but a broad picture of development is appearing as Chinese companies begin to return to work. Agile supply chains should enable companies that have been looking for alternate suppliers to address the shortfall in Chinese capacity to again look to Chinese suppliers as they begin to ramp up production and supply chain disruptions hit other regions.
Matching your products to supply
We have to accept that regaining full global production capacity during and after the Coronavirus will not be a short process. It’s highly likely that supply chain shortages will exist for a long time afterwards. It’s also likely that some parts of the supply chain will be more affected than others. Rather than searching for alternate suppliers to deliver the parts or components you need, innovative organizations can look at their products to identify if they can be re-engineered to use the supplies that are available. For example, when a fire at a Philips Electronics semiconductor plant caused supply chain disruption for telecoms giants Nokia and Ericsson, their response was very different. While Ericsson waited for the supply to return, Nokia redesigned its chips and deployed the suppliers it had available to create the new chips. The result? Ericsson lost $400 million and was eventually bought by Sony.
Matching your products to demand
In a situation where demand will fall off and purchasing behaviors change, can you look at ways to address these changing demand profiles? Is it possible to re-tool your production lines and create new supply chains to develop new products that can meet immediate customer requirements? For example, LVMH, the French maker of Dior and Givenchy perfumes, has decided to repurpose its production lines to make hand sanitizers to cope with shortages in that country. While few companies are positioned to so directly meet the changing needs of Coronavirus supply chain disruption, demand signals may be changing and reducing but they are not stopping.
Implementing new business models
In industries such as automotive, we’re already witnessing shifts in business model towards Product as a Service (PaaS). The automotive industry has already seen changes in ownership models – such as ride and car sharing – and many companies are looking towards introducing a flexible, subscription model. In addition, manufacturers are examining how best to monetize their data to introduce new services such as predictive maintenance that allows for an extension in business models and revenue. In addition, supply chain disruptions caused by Coronavirus may well accelerate the process underway towards sustainable supply chain. Where resources and materials are scarce and likely to remain so for the foreseeable future, can organizations increase their focus on the profitable recycling and re-manufacture of components and products? This means being able to handle the supply chain disruptions in logistics – especially reverse logistics – that will allow you to replace the supply of new materials with more sustainable alternatives.
Managing disruption risks in the supply chain
There are a great number of elements to supply chain coordination and disruption planning. If you do take a supply chain dive then you’ll see four areas where modern supply chains are vulnerable to the disruptions caused by a global event such as COVID-19. These are:
Reduced inventory levels
The widespread adoption of practices such as just-in-time manufacturing have allowed companies to increase efficiency and lower the cost of their supply chain, but it has partially been achieved by reducing the amount of inventory flowing through the supply chain. Any major, global supply chain disruptions will also leave supply chains less resilient to sudden shocks and supply shortages.
Rigid supply chains
While we talk of supplier ecosystems, the majority of sourcing arrangements are based on price and delivery, this has led many organizations to have an overreliance of a number of single suppliers arrangements. Organizations may have a range of suppliers that are geographically dispersed but, in practice, the supply chains are still too rigid to make the switch between suppliers fast and seamless. When supply chain disruptions do occur, very few companies are actually capable of identifying and connecting with alternative suppliers – even within their existing suppliers.
Manual supply chain management
One of the major challenges for many supply chains is that most of their key processes remain heavily manual. The result is an inbuilt inertia that cripples the agility and flexibility of the organization. For example, addressing supply chain disruption through selecting alternate suppliers is only effective when you can on-board new suppliers and begin transacting business quickly. However, manual supply chains make seemingly simple tasks – such as changing or orders or tracking logistics – a lengthy, complex and error-prone process.
Lack of supply chain transparency
Even today, few businesses are aware of what’s happening across their supply chain beyond the first tier. In practical terms, this means they don’t know how their supply chain is actually functioning or where threats to production capacity exist. In addition, it means relying on Tier 1 suppliers to select the best Tier 2 and 3 suppliers to meet you needs. Without complete supply chain visibility, it may not be just your ability to respond to supply chain disruptions but also your company’s customer relationships should it be shown that some of your suppliers – that you may not know you’re using – are employing slave labor or acting in other unethical ways.
This first step to being able to respond and manage supply chain disruptions is to go digital. All the robust strategies for mitigating supply chain disruption that you put in place will not work effectively unless every partner in the chain is digitally connected.
The ability of all partners to access data and information is key to building a flexible supply chain. A central integration platform – such as OpenText™ Business Network – allows for complete supply chain visibility to know exactly what’s happening across a global supply chain. With hundreds of thousands of suppliers attached to the network, it becomes easy to not only source and connect with alternate suppliers anywhere in the world but to understand the capabilities of suppliers at different levels in the supply chain.
During the development of the coronavirus, supply chain impact can be identified, modelled and addressed through the application of AI-assisted analytics to a wide range of internal and external data sources to learn from previous periods of disruption and provide insight and recommendations to guide your actions as the pandemic unfolds.
Are you a CIO looking to ensure business continuity and minimize supply chain disruption? Read the Gartner Report. Learn how to overcome disruption with a resilient supply chain. Watch the LIVE webinar series.