COVID-19: Planning for and mitigating new supply chain risks

It came. The black swan we’ve all (hopefully) hypothetically planned for took flight and severely impacted supply chains across the world. Since black swan events like COVID-19 are extremely rare, cause catastrophic damage to our economies, and continually increase vulnerabilities, they can cause supply chains to suffer not just an interruption, but a complete breakdown.

From a complete and lengthy production halt of some goods, to an immediate and overwhelming demand of others, your supply chain has likely seen unprecedented numbers somewhere on the spectrum. Like these:

The U.S. manufacturing output dropped 13.7% from March to April 2020, the steepest decline on record.

Idle capacity of ocean freight hit a record 11%, which is equivalent to 2.5 million TEU (shipping containers).

Amazon has hired 175,000 people (a little less than the population of Providence, RI) to meet the demand the crisis has caused.

Household supplies saw a 76% increase in purchases over the same three weeks compared to 2019.

The New Supply Chain Risks Due to COVID-19

The risks talked about below may not be new, but the depth and breadth of them certainly are, which makes intensive supply chain management vital.

Worker Health

The production chain has been hit hard by COVID-19 outbreaks. Whether in food production or manufacturing facilities, your workers are at risk every time they enter your doors. By August 7, 2020, “there have been at least 34,200 reported positive cases tied to meatpacking facilities in at least 375 plants in 39 states, and at least 160 reported worker deaths in at least 45 plants in 24 states.” Bear in mind, this is just one national industry. The toll on all worldwide facilities is most likely much, much higher.

Supply and/or Demand Shock

Supply and/or demand shock is a sudden change in the supply of a commodity, resulting in an unforeseen change in price. COVID-19 is a rare case of both positive and negative shock to both the supply and the demand of commodities.

Impacted Business Relations

Restricted travel, channel shifts, closed plants, and successive executive positions are all realities right now, and they all impact relationships with our business partners. This includes investors, manufacturers, suppliers, distributors, vendors, and clients. The domino and trickle-down effects are real and will be felt and dealt with for quite some time.

Mitigating the Risks

While the depth and breadth of the above risks are perhaps unprecedented, the negative outcomes can still be mitigated and minimized. What do the experts in supply chain management have to say about what you should do?

Cash rules during crises, and the COVID crisis is no different. If cash isn’t conserved, bankruptcy is coming.

“Any company can last quite a while without revenues or profits, but without cash, you’re bankrupt. So, you need to do everything you can right now to conserve cash – including immediately devising a 13-week cashflow analysis for your company and setting up a “cash war room” to oversee and manage cash.” -Foster Finley, Global Co-leader of the Operational Performance Improvement Practice at AlixPartners

The optimized lowest-cost supply chain might be putting your single largest business at risk. Outsourcing to a single country or company that was driven by minimizing costs, reducing inventories, and driving up asset utilization may have been too simplistic an approach.

“Creating regional supply chains is not an argument against outsourcing or globalization…The idea is not that we are building walls, but we are building a system that is not concentrated. This allows us to be agile enough to match the appropriate supply points with the appropriate demand points as the situation continues to evolve.” -Sanil Chopra, IBM Professor of Operations Management and Information Systems at Northwestern University

Collaborating with manufacturers, suppliers, and vendors to assess their risks and ability to mitigate them is vital.

Geraint John, Vice President of Supply Chain Research & Advisory at Gartner, suggests attributing a higher risk weighting to countries who are less prepared for the pandemic, linking monitoring to supply chain interdependencies, and conducting contract reviews.

Coda

Though the world is currently in the middle of a black swan event, your entire supply chain isn’t necessarily destined to fracture or fully fail. With the right preparations and mitigations put in place, it can withstand this acute anomaly. Protect your workers, follow the advice of experts, and save your supply chain from this and future black swans.