Over the past several decades, much of the world’s manufacturing production has been organized in international trade and what’s known as global value chains (GVCs). Everything from raw materials and intermediate goods has been shipped around the planet multiple times to be assembled in a different location. The final product is re-exported to the final consumer thousands of miles away in both developed and developing countries. For the majority of goods, China has been at the center of the GVC.
However, in late 2019 and early 2020, China was also at the center of today’s coronavirus pandemic. The Chinese government reacted by imposing extreme restrictions, curfews, and quarantines across the country since the end of January. It was inevitable that such restrictive measures would affect the economy and, by extension, supply chains and global trade.
Fast-forward several months, and different nations are starting to emerge from their own coronavirus lockdowns. However, they are doing so at different paces, making the entire global supply chain management a serious challenge. And even though China may be in a position to resume its deliveries, original equipment manufacturers (OEMs) and other tier companies within the supply chain are not in the same position. To do so, they will need a structured approach to their supply chain risk management going forward.
How to Manage Supply Chain Risks
Be it the coronavirus outbreak or something else, organizations need to have a comprehensive supply chain risk management system put in place. To do so, they need to look at the risks involved in terms of knowns and unknowns. To put it simply, known risks are those that can be identified and are possible to measure over time. Something like a supplier going bankrupt will lead to a disruption and is considered a known risk. The likelihood of something like this can be measured by assessing the supplier’s finances. The impact on your organization can also be quantified by considering the products and markets that the supplier’s bankruptcy would disrupt.
Unknown risks, on the other hand, are very difficult to anticipate. The current coronavirus pandemic falls in this category. Predicting when these types of events will happen is nearly impossible to do, even for the most risk-aware supply chain managers. The best way to handle risk and disruption caused by the coronavirus impact is by reducing their probability – if possible – and by increasing the company’s ability to respond to business interruption and disruption in supply of materials that ultimately impact production and distribution.
How to Manage Known Risks
There are several steps that need to be taken into consideration when managing known risks. These include the following:
- Identifying and documenting risks – The first line of defense is to map and assess the value chains of all your major products. This will include everything from suppliers to manufacturing hubs, warehousing, transports routes, etc. All the potential risks will be entered in a register and tracked on an ongoing basis. By the end, there shouldn’t be any gaps in your supply chain where no data exists.
- Building a supply chain risk management framework – Once identified, every potential risk should be scored and integrated into a supply chain risk management framework. Risks need to be scored based on the potential impact on the organization, the likelihood of the risk materializing, and the company’s preparedness to deal with it.
- Risk monitoring – With the framework established, consistent monitoring is crucial in identifying and/or predicting risks before they start affecting the organization. Today’s digital technology makes it possible to customize these monitoring systems based on every company’s unique needs. While some organizations may be tracking deviations in manufacturing lines to predict any potential quality issues, others may be more interested in tracking severe weather patterns that can disrupt the transportation of goods from one place to another. Whatever the case, having such an early warning system at one’s disposal will maximize the chances of mitigating their impact.
- Instituting governance and regular review – An effective board consisting of participants from every node of the value chain will periodically review the top risks posed to your supply chain and define the necessary mitigation actions. This will help improve the resilience and flexibility of your supply chain. In addition, the risk board will also make recommendations in terms of a potential supplier network reconfiguration, different ways of reducing lead times, working with suppliers on how to optimize their own operations, etc.
How to Manage Unknown Risks
By their very nature, unknown risks are difficult, if not impossible to predict, quantify, and incorporate into a risk management framework. The current coronavirus pandemic is a perfect example of such an unknown risk, but it is by no means the only one that can fall within this category. Unexpected volcanic eruptions, as was the case in Iceland in 2010, or a previously hidden cybersecurity vulnerability can also be considered as unknown risks. However, mitigating COVID-19 impacts can still be achieved by implementing the following company culture practices:
- Supply Chain Transparency – Every supply chain leader must clearly define and communicate the company’s risk tolerance. Usually, risk mitigation is associated with incremental costs. Therefore, it’s important to know which risks need to be mitigated and which can be carried by the organization. The company culture should allow for both internal and external risks to be openly shared by employees and partners alike.
- Employee Acknowledgment and Empowerment – Both management and employees need to feel empowered to pass on bad news and own up to their mistakes, as this will foster an environment where issues can be quickly dealt with. Similarly, they also need to feel empowered to perceive and react to any external changes quickly.
Mitigating the Impact of Coronavirus on Supply Chains
While the aforementioned practices will help an organization remain vigilant, they do not directly address the current issue of the COVID-19 pandemic. Doing so will require companies to start by re-engaging with their customers and suppliers at both ends of the supply chain.
Businesses affected by the coronavirus pandemic will want to re-engage with their customers as quickly as possible in order to get insight into their demand and forecast their requirements. Whoever anticipated the huge demand increase in toilet paper and face masks can attest to this fact. The same thing can also be said about home and gardening supplies. Doing so will not only help ensure that customer expectations are met but also the possibility of gaining a serious competitive advantage.
Once a company has determined its most significant customers, it should also consider the terms of their new relationship and any additional adaptations that need to be made. These may include:
- New pricing or payment terms – Your customers may have requested a discount or longer payment terms. Can you afford these price changes in order to maintain cash flow?
- New delivery obligations – There’s also a chance that longer lead times will need to be agreed upon for an interim period, particularly if a customer requires expedited delivery.
- Customer forecasts – Forecasting is critical in business planning, yet, this may not be as easily doable for businesses that are gradually returning to their full capacity. Therefore, it’s important to consider the consequences of these forecasts not being met.
- Any Force Majeure Provisions – If your organization has served force majeure notices on customers during this period, you will need to ensure that there is a process of restarting the supply contract and resolving any outstanding issues that have arisen in the meantime.
Besides the customers, businesses also need to re-engage with their suppliers to maintain an efficient supply chain and satisfy customer demand. After identifying every critical supplier, companies will also need to assess how each of them has been affected by the pandemic. There will be suppliers that are:
- Ready to deliver – Some suppliers may already be ready and willing to perform. They may be sourcing from areas that were impacted earlier in the pandemic or areas less affected. In these cases, you will need to manage their volumes carefully to ensure that the flow into the supply chain is kept at appropriate volumes.
- Still affected – Some suppliers, on the other hand, may not be ready to restart their operations just yet. And even when they do, there may be significant order backlogs that need to be prioritized. Having a good relationship and an open communication channel will work in your favor by putting you in front of the line. You may be able to work out a deal and pay faster in order to secure their available stocks, or you can arrange a collection of deliveries from a third party, instead of having the supplier deliver it.
- Overstocked – Then, there will be some suppliers that have ended up severely overstocked when the pandemic forced them to temporarily close their operation. If some of your suppliers are in this position, you can relieve them of some of their available inventory in exchange for a possible discount.
Proactive Planning Against the Coronavirus Pandemic
The damage caused by a supply chain breakdown as a result of a worldwide pandemic can be serious. As such, proactive planning is crucial in maintaining continuity and avoiding any production line failures, delayed deliveries, inefficiencies, and increased costs. There are several steps that businesses can employ so as to mitigate and even avoid the worst impacts of such a pandemic by employing an effective supply chain response plan.
Monitor the Early Warning Signs
While events such as the coronavirus pandemic fall well within the category of unknown risks, there are certain warning signs that can position your organization in a better position to manage the situation. As such, businesses should pay particularly close attention to the following red flags coming from their suppliers:
- Payment term changes – Sudden and unexpected requests for up-front payments, price rises, deposits, accelerated payments, or reduced retention can all indicate cash flow problems. The reasons behind these requests need to be identified as soon as possible.
- Nondeliveries – Supply chain partners that are not delivering on time can be an indication of a deeper problem. Like before, the cause for these nondeliveries needs to be identified ASAP.
- A lack of communication – Long silences, particularly after persistent attempts to establish contact, can indicate that your supplier is avoiding you or is focused on more pressing issues.
- High turnover rates – If your supplier has constant personnel or key contact changes, it can indicate internal difficulties or a demonstration that they are not prioritizing your account.
- Market intelligence – Rumors and gossip should always be treated with a healthy dose of skepticism, and information coming from authoritative sources should be prioritized. However, market intelligence can give you a real-time preview into the events happening with your supplier. This information may come from various sources, such as different contacts from your supplier, some of their clients, or even in press releases.
- Removal or reduction of insurance cover – Most businesses rely on credit insurance to protect against the risk of customer insolvency. If your supplier has lost the support of credit insurers, it’s often an indication of underlying financial issues.
Managing Your Supply Chain for Resilience
Aside from picking up relevant information on your suppliers, you will also need to make some changes of your own. Being proactive will also include these specific actions:
- Forming close relationships with suppliers – One effective strategy is to form deep relationships with your suppliers and other trading partners. By doing so, they will be more open with you about any potential problems and can even work with you on finding solutions to your common problems.
- Expanding the supplier network – Another solution is broadening your network of suppliers to have a viable alternative that can be implemented quickly. In both these cases, it’s important for the company to make sure that their decision is in line with its procurement strategy.
- Building a “buffer” stock – Having some redundancy inventory in the warehouse can provide some much-needed legroom in the case of a sudden and disruptive event. However, this strategy should only be considered as a temporary solution that also comes attached with some additional overhead costs and a reduction in operational quality.
- Focusing on flexibility – An even more cost-effective way of increasing a company’s supply chain resiliency is by focusing on flexibility. This can be achieved through a combination of standardized and concurrent processes, planning to postpone policies, and conditioning for disruptions.
The benefits of building a resilient organization in the face of a pandemic and other such disruptive events will far outweigh the costs of implementation. As unforeseen disruptions can create shortages and can even lead to bankruptcy, resilient businesses will not only be able to react to changing market demands but also get ahead of their competitors.
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