What the Coronavirus crisis tells us about supply chain risk management. How supply chain mapping and what-if scenario modelling will help you develop risk mitigating strategies for the next supply chain shock.
Supply chain risk management has been one of the trending topics over the last 10 years. Concerns have been generally focussed on localised extreme natural events, such as hurricanes, tsunamis, fires and floods or IT vulnerabilities being exploited by hackers or even financial threats to key suppliers.
There was, of course, the risk of the ‘No-Deal Brexit’, which still remains and did occupy a great deal of management time prior to Christmas. However, given we haven’t had a major global pandemic since Spanish flu in 1918, it’s not surprising that the threat of a coronavirus epidemic to both supply and demand side of supply chains was not something that was really on the radar.
Since this last pandemic, 100 years ago, supply chains have changed dramatically and even since the last global financial crisis in 2008, there has been further change. Back then the Chinese share of global GDP has 7%, now it has risen to almost 20%. Their annual trade volumes of 250 million TEU’s dwarf other nations and now account for a third of all ocean container movements. So, the heavy reliance of global supply chains on China, exacerbated by the underlying complexity and vulnerability of such long-distance supply arrangements, has been put into the spotlight by this crisis.
The coronavirus outbreak strikes at a time when supply chain risk management is in many ways in a worse state than it has ever been. Globalisation has created long-distance multi-tiered supply environments that are potentially very complicated and only partly visible. Add to this, the running of lean inventory policies, as in Automotive and you create vulnerability and fragility.
These factors have outweighed the advances in supply chain IT which would on their own have reduced risk by improving supply chain visibility & interconnectedness. The pursuit of lowest-cost has clouded judgements on sourcing risks and the balancing of slight increases in cost to maintain supplies.
How do you put a supply chain risk management plan in place?
How should businesses react to the supply chain risks that have now been brought into clear focus? Simply adding a “force-majeure” section to your terms and conditions will not be enough.
The basic requirement when looking at supply chain risks management strategies is just the ability to understand what your supply chain actually looks like. Not just down to first-tier suppliers but also second and third-tier where critical components are manufactured.
So, where are they located, how financially robust are they and what are the critical items they provide? The Tsunami in Japan 2011 resulted in the disruption to Automotive supply chains in ways that were not expected. It was not the Tier 1 suppliers that were the cause but the lower Tier suppliers who were providing fundamental electronic components for a range of different assemblies in the tiers above. Do you know how vulnerable your suppliers and their suppliers are to manufacture dislocation?
Once the supply chain is fully mapped, understood and baselined, companies will need to have the ability to model various what-if scenarios. For example, abnormal demand fluctuations, supply-side changes, how would alternative more diverse sourcing strategies change the supply-side risk?
Traditional methods of just using historical data for forecasting just won’t work. Interestingly, it is estimated that only 30% of companies actually have the capability to do what-if modelling. Do you?
Obviously, the cost and effort of conducting risk assessments when many companies are trying to re-establish themselves in the post-shutdown period need to be considered. However, even a quick highly focussed exercise by people who know where to look, could yield real long-term benefit and even help short-term in establishing improved supply chains in the initial recovery period.
Conclusions drawn from Supply Chain Risk Assessments will support sourcing changes, such as on-shoring or near-shoring all or some of your critical supply. This will also help with lead time reduction, lower inventory and increased flexibility to react to demand changes.
With the advent of more automated production and the reduction in labour differentials, near-sourcing was already starting to develop as a trend. So, maybe the high-water mark of globalisation has now already been passed. Maybe we will become less reliant on China as a unique source of goods. On the demand side, looking at scenarios with different strategic locations of stock and the degree of buffering and additional warehouse capacity that can be economically provided. Only by using scenario modelling like this will companies be able to plan for future supply chain shocks.
Supply chain risk management after the coronavirus.
Once, a plan is in place, reaction time to mitigate the impacts of supply chain threats will be reduced, as your plans will – to coin a recently well-used phrase, ‘be oven-ready’. Boards of Directors need to review the internal and external risks to the stability of their companies, they need to assess those risks and mitigate those that they can.
It remains to be seen how long and deep the economic impacts of the crisis will be. However, even now we should be thinking about what lessons we have learnt and how these are used in the development of our future supply chains and risk management strategies beyond this crisis. We need to ensure that the next shock is dealt with in the very best way we can. Business continuity is key to success in the future and ensuring that supply chain disruption is kept to an absolute minimum.
Bisham Consulting is an independent supply chain consultancy with a hands-on, practical and highly commercial approach. We have a 30-year history of successful project delivery in the UK, Europe and around the world and only recommend solutions which we are happy to help our clients implement. Have a look at our full list of services to see how we can help or contact Caren Tomkins on 0044 1628 487000.