- COVID-19 is expected to have a significant and long-lasting effect on global supply chains, which in turn will have a huge impact on the global economy, businesses and consumers alike.
- 94% of Fortune 1000 companies are already experiencing supply chain disruptions caused by COVID-19.
- There are 3 ways supply chain leaders can prepare for the post-COVID-19 economy.
The world has changed. COVID19 is perhaps the most significant event of our life times. Tens (if not hundreds) of thousands would have lost their lives in the next 12 months. The second order impact of this pandemic has still not been fully comprehended.
Have you read?
2008 was the financial crisis; 2020 is the Supply Chain crisis.
94% of the Fortune 1000 are seeing COVID19 supply chain disruptions - as per a Fortune report. 94%. "Supply Chain Disruption" has shown a significant increase in web search - an early indicator of what is in the minds of industry professionals.
Perhaps a stronger indicator of the size of the Supply Chain challenge is the sky rocketing interest that this topic has received in media. Supply Chains have become a news topic like never before with experts paying serious attention to how COVID19 will impact Supply Chains. This is a sign of times to come.
The current focus in on China. This is not surprising given that the virus originated there and given the share of China in Global Trade. As per a recent Economist article, China now accounts for 16% of global GDP. Its share of all exports in textiles and apparel is 40% of the global total. It generates 26% of the world’s furniture exports. It consumes 20% of all global mining imports. The world relies on Chinese factories because of the cost efficiencies they offer. Yet, there is a flip side to this cost optimization - supply chain vulnerability to disruptions. The shares of American firms with strong exposure to China have under-performed the s&p500 index by 5% since early January, when news of the outbreak first broke.
The Big Picture
Yet the bigger story is not China. It is Supply Chain Disruption. And it is not just global supply chains that are hit. In India, for example, the reverse migration of urban poor to rural areas has created a huge logistics challenge in last mile delivery services. The shutdown of factories is having a ripple effect on their suppliers - some of whom may collapse due to financial pressure & lack of liquidity.
The traditional metrics of cost, quality and delivery when developing supply chain strategies will no longer be enough. Going forward, Supply Chain leaders must consider the 3Rs: Resilience, Responsiveness, and Reconfigurability.
There is no doubt that organizations will still use price as an important factor when selecting suppliers. However, the parameters post COVID19 will be more multi-dimensional: they must include weighting other variables higher than before. What is the financial risk of a supplier? How quickly can a supplier ramp up/down capacity? What share of your business is critically dependent on one supplier?
COVID19 is not an exception. Recent history has shown that the world is becoming increasingly prone to to natural disasters, climates change & geopolitical tensions. All of which will require Supply Chains to proactively guard against disruptions and adapt to them. In a time of frequent disruptions, Supply Chains will be as much about revenue assurance as they would be about cost optimization.
Companies need to understand their supply chains more deeply and in more dimensions. COVID19 is likely to result in long-lasting transformations of supply chains to build resilience.
What can you do?
Across experts (see references at the end of this article), there is a growing consensus on how Supply Chains need to evolve.
1) Create transparency in multi-tier supply chains,
The first step towards achieving Supply Chain resilience & responsiveness is getting visibility into your supply chain. Do you know who your suppliers' suppliers are? Are they in a high COVID19 impacted region? Are they in a conflict prone zone? Are the logistics routes between them operational?
Organizations rarely have visibility into the operations & capacity beyond their first tier suppliers, if that. This lack of visibility translates to a higher risk & is the first bottleneck in achieving supply chain resilience. According to Allianz’s Business Risk Report of 2014, 51% of supply chain disruptions originate with Tier 2 and Tier 3 suppliers.
Understanding the risk & resilience of a supply chain requires information about total product revenues linked to specific supplier components, the degree to which key components are single sourced, and the geopolitical and environmental risks associated with where a supplier operates and the financial robustness of the suppliers. Fortunately, technologies like Blockchain & IoT have the potential to dramatically improve visibility across the end-to-end supply chain.
2) Estimate Inventory & Demand - upstream & downstream
Most organizations know exactly how much inventory they are holding. Very few know how much inventory is available in their upstream and downstream supply chain. How much inventory of spare parts & components is available with suppliers? With distributors? How much capacity is available to fulfill a sudden increase / decrease in consumer demand? Is this change in demand likely?
Traditional quantitative / statistical demand forecasting fails miserably in disruption scenarios since it takes as input past trends. But a disruption, by definition, is an abnormality - the past is not an indicator of what will happen after the disruption. Expecting things to continue as before where capacity planning is done internally and communicated to suppliers without a view of suppliers actual capacity can backfire. This approach could lead to issues when it comes to resilience and responsiveness during times of crisis.
Supply chain visibility that provides line of sight to capacity constraints into first-, second- and third-tier suppliers. By going further into supply chains, organizations can get a more complete profile of where components are coming from, whether existing inventory could be re-purposed for new-product production or whether re-manufacture with used stock could address supply issues. Such visibility is critical when evaluating the resilience of your supply chain and its ability to respond to disruptions.
The primary challenge in enabling this is one of the right incentives rather than technical. Organizations rarely want to share their private data with other organizations. A supplier has no incentive to reveal his true capacity or inventory to his customer. A retailer has no incentive to reveal the demand he is seeing with the manufacturer.
3) Identify and secure capacity
Supply Chain disruptions are the time to plan, identify & secure capacity for when the demand picks up. Of course, it is hard to know exactly when this will happen. However, where possible, long term contracts to secure capacity in the supply chain can benefit the manufacturer as well as the supplier.
For manufacturers, guaranteeing capacity is a way to ensure revenue from its customers when the demand picks up. For the supplier, this is guaranteed revenue which can help it secure loans and tide over financial liquidity.
In the current COVID19 situation, logistics contracts may specially benefit from such an approach. When manufacturers look to ramp up production and make up time in their supply chains, pre-booked logistics capacity will keep costs in control, and enable priority access to logistics.
The challenge of course is the risk-reward trade off of such strategies. What happens if demand does not pick up in time and booked capacity is not utilized? What if the supplier backtracks on the contract and does not deliver the promised capacity? Negotiated contracts must have clauses for such scenarios where risk and reward of both parties are balanced.
COVID19 is the black swan event of this century. It has seen unprecedented sharing of information and subsequent collaboration between nations in all continents from a health care perspective. There is a lesson here for Supply Chain professionals: deeper visibility & collaboration is critical to overcome Supply Chain disruptions.
Disruptions often become catalysts for change. Digital supply chains have been on the horizon for some time now with enabling technologies like Blockchain, IoT & AI. This is the right time for Supply Chain leaders to act; to leverage technology to transform their supply chains - not only to overcome the COVID19 disruption but also to prepare their Supply Chains for the future.