Three steps for preparing for global supply chain disruptions

As COVID-19 continues to spread globally, many international firms are facing current or impending disruptions to their supply chains. As part of mitigation efforts, firms should strengthen their risk management processes and ensure plans are in place for dealing with uncertainty in controllable and foreseeable factors. Here is a three-step process to start establishing a unified response to impending disruptions from COVID-19, which involves assessing demand risks, then supply risks, and finally balancing the two.

Before engaging in this process, it is important to note that for firms that have not established visibility into their supply chains, it is important to start that process and prioritize the discussion to quickly understand the severity of the situation, and to assess the possible impact on customers.

The immediate challenge is to understand the potential implications from the impact of the novel coronavirus (or other disruption). This requires having a transparent supply chain with visibility into the flow of goods and services. This transparency can start with mapping out the supply chains. A map of the supply chain will give managers a first-level visibility of their supply pipelines and help them identify supplies that may be coming from or routing through regions affected by the virus. Managers must then identify the events that may happen, such as supply shortages, quality variations, or delivery delays or stoppages. Then they should assess the associated likelihood of these events. This identification process creates a second-level visibility and an understanding of supply dynamics. Armed with this knowledge, management can take steps to mitigate these supply risks before they become pressing issues. These mitigation plans offer third-level visibility.

Once a company has gained visibility into its supply chain, how can it begin to establish risk mitigation plans? Let’s consider a hypothetical example. Suppose a Dearborn, Michigan-based automotive dashboard manufacturer buys components produced in Wuhan, China, and Bangkok, Thailand, for different product lines. Wuhan is recovering from the COVID-19 lockdown, while Thailand has avoided the brunt of infections but still may be vulnerable to future outbreaks. How should this particular manufacturer prepare to mitigate the potential supply disruption?

First, on the demand side, the dashboard manufacturer should work with its buying team and legal team to assess its exposure to financial penalties embedded in all of its contracts should it be unable to meet its obligations to its buyers. The answer to this question provides data and guidance to the management team on how to prioritize these contracts and on how much resources to dedicate to mitigate these risks.

Next, on the supply side, the manufacturer must develop the secondary visibility of its supply chain, which entails an understanding of the nature and the dynamics of the supply-side risk. Armed with this knowledge, the manufacturer can now balance the demand-side financial penalties with the supply-side disruption risk and decide on the appropriate method to mitigate the risk.

Returning to our example of the fictitious Dearborn manufacture, suppose that it could incur a high financial penalty if it fails to deliver one of its products to its customer and that product uses a component that comes from the Bangkok supplier. The supply disruption risk of the components from Bangkok is assessed to be high because the COVID-19 case count in Bangkok may be rapidly rising, which may create labor and material shortages. Supply disruptions may also be caused by transportation restrictions, strict monitoring of the logistics process, and the closure of transportation hubs and borders. Because of the potentially high financial penalty involved, the manufacturer should be motivated to take whatever steps necessary to mitigate the risk of a supply disruption. If a disruption seems inevitable, the manufacturer will need to diversify its supply ecosystem to identify new procurement and manufacturing options in different regions of the world. Perhaps there are suppliers from other regions with lower disruption risk that can supply similar components at a reasonable price to avoid the financial penalty. If no substitute supplier is available or the cost is too high, then it will be helpful to work with the buyer in advance and renegotiate the terms, if possible.

Now consider another scenario where a product has a high financial penalty if it is not deliver on time but it uses components coming from the Wuhan supplier. In this case, while the risk from the Wuhan supplier is lower relative to the Bangkok supplier, there is a possibility that the epidemic may return. The manufacturer should work closely with the Wuhan supplier to build up an appropriate buffer-inventory level based on the manufacturer’s demand rate and the estimated length of the disruption. Once such buffer stock is established, the manufacturer could work with its buyer and the Wuhan supplier to monitor the supply process and identify any changes, such as a shortage in raw material supply or production capacity. If such a disruption is detected, then the company can update its contingency plan again as needed. 

When it comes to disaster recovery and business continuity planning, being proactive is key. The risk assessment process and business continuity plan will help to ensure that critical supply chains can recover quickly in the event of an emergency. After the impact of this crisis has eased, supply chain leaders and teams can direct their attention toward how to foresee the next crisis. For example, they can conduct scenario-planning exercises, identify weak links, and adjust standard operating procedures (SOPs). This is also the appropriate time to develop alternative sourcing and diversify their value chain to strengthen their supply chains and their responses to the next global crisis.