Covid-19 has disrupted life as we know it for people and businesses across the globe, the repercussions of which could be felt for some time. One major impact for many businesses is the massive disruption the coronavirus has caused to the global supply chain.
This isn’t the first time businesses have experienced disruption in their supply chains. Events such as the SARS epidemic in 2003, the volcanic eruption in Iceland in 2010 and the earthquake and tsunami in Japan in 2011 all impacted global supply chains. While some businesses took steps to manage supply chain risk after these tragic events, many others were unprepared for the massive disruption caused by Covid-19. When it came to the coronavirus pandemic, even domestic-only companies were impacted as suppliers of component parts and raw materials across the nation were forced to shut their doors.
As people and businesses start getting back to work and life begins to take on a semblance of normalcy, many businesses will take a long, hard look at their supply chains to determine ways they can reduce future risk.
Take a fresh look at your business
For the past several decades, companies have been laser focused on creating a lean operation to reduce costs and increase efficiency by centralizing production in low-cost regions of the world. This strategy has resulted in extremely complex supply chains that physically span the globe.
Companies have also focused on maximizing efficiency through a just-in-time inventory strategy. Inventory is expensive and wasteful; it can spoil or become obsolete, and producing it takes money and resources. Then, it just sits around taking up space rather than going out the door earning profit. Utilizing a just-in-time approach increases efficiency through the minimization of inventory through a timely and efficient logistics process.
These strategies work well when all the pieces are operating smoothly. As we’ve seen in the wake of the coronavirus, however, the system breaks down quickly as soon as just one of the pieces in the supply chain is disrupted. In the future, finance, operations, procurement and supply chain leaders need to look beyond mere expense-minimization strategies and consider the financial cost of a potential disruption in their business.
Have an actionable contingency plan
The global pandemic exposed serious flaws in many companies’ supply chains and reinforced the need to mitigate risk by putting a supply chain contingency plan in place. As manufacturers in China (and other parts of the world) began shuttering their factories, businesses back home suddenly realized they knew too little about their Tier 1 suppliers, much less suppliers further down the chain.
The first step in developing this plan is to complete a comprehensive analysis and thorough mapping of your supply chain. Such mapping, however, goes beyond merely identifying the company’s suppliers, it must also determine the physical locations of the suppliers’ plants and warehouses. Once these facility locations are identified, the company should use its bill of materials (a listing of the raw materials, sub-assemblies, components, parts, etc., used to manufacture a product) to identify which products might be affected by a shutdown at each supplier location.
With this information in hand, the company can then begin purposely building redundancies in its supply chain, which provides flexibility for pivoting manufacturing capabilities and logistics sourcing as needed. Such a plan provides better visibility into the structure of their supply chain, so that when a disruption occurs, they have the information they need at their fingertips instead of having to scramble—wasting valuable time and resources. By developing a contingency plan, your company will know exactly which suppliers, sites, parts and products are at risk, which puts them in a good position to quickly secure constrained inventory and capacity at alternate sites.
Once developed, your supply chain plan should be a living, breathing, fluid document. It’s wise to revise this plan as often as needed, such as when there are any major changes in operations, suppliers, customers or technology.
It’s hard to say what lasting impact Covid-19 will have on businesses and their supply chains. Some companies will heed the lessons learned from the pandemic and be proactive in diversifying and better managing their supply chain before another crisis arises. Others will likely continue business as usual and hope that another similar crisis never transpires.
If you’d like help analyzing the risk in your supply chain, contact your CSH advisor. We have operations and supply chain professionals ready to provide assistance.