How to prevent the impact of crisis on supply chains

Developing a reasonable supply chain response to the coronavirus outbreak is extremely challenging, given the scale of the crisis and the rate at which it is evolving.

The best response, of course, is to be ready before such a crisis hits, since options become more limited when disruption is in full swing. However, some measures can be taken now even if you’re not fully prepared. And although its long-term consequences have yet to fully play out, the coronavirus outbreak already provides some lessons about how you can better prepare your company to deal with future large-scale crises.

What can you do now?

The best you can do now is to look for ways of mitigating the impact of the crisis on the supply chains by the following measures.

1. Maintain a healthy skepticism.

Accurate information is a rare commodity in the early stages of emerging disasters, especially when governments are incentivized to keep the population and business community calm to avoid panic. Impact reports tend to be somewhat rose-tinted. However, local people can be a valuable and more reliable source of information, so try to maintain local contacts.

2. Run outage scenarios to assess the possibility of unforeseen impacts. 

Expect the unexpected, especially when core suppliers are in the front line of disruptions. In the case of the corona-virus crisis, China’s influence is so wide-ranging that there are inevitable consequences. Inventory levels are not high enough to cover short-term material outages, so expect cause widespread runs on common core components and materials.

3. Create a comprehensive, emergency operations center. 

Most organizations today have some semblance of an emergency operations center (EOC), but it’s been observed that these EOCs tend to exist only at the corporate or business unit level. That’s not good enough. EOCs should exist at the plant level, with predetermined action plans for communication and coordination, designated roles for functional representatives, protocols for communications and decision making, and emergency action plans that involve customers and suppliers.

4. Know all your suppliers. 

Map your upstream suppliers, several tiers back. Companies that fail to do this are less able to respond or estimate likely impacts when a crisis erupts.

Similarly, develop relationships in advance with key resources, it’s too late after the disruption has erupted.

5. Understand your critical vulnerabilities and take action to spread the risk. 

Many supply chains have dependencies that put firms at risk. An example is when an enterprise is dependent on a supplier that has a single facility with a large share of the global market. The Sendai disaster highlighted this type of exposure, For example, Hitachi manufactured approximately 60% of the global supply of airflow sensors, a critical component for auto manufacturers. 

The anticipated shortage of these items forced some automotive original-equipment manufacturers (OEMs) to ration the remaining airflow sensors to their highest margin product lines. The corona-virus outbreak has exposed Apple’s and many auto OEMs’ dependency on sourcing from China.

6. Create business continuity plans. 

These plans should pinpoint contingencies in critical areas and include backup plans for transportation, communications, supply, and cash flow. Involve your suppliers and customers in developing these plans.

7. Revisit Your Supply Chain’s Design.

Until very recently, most global companies could base their supply chain designs on the assumption that materials flow freely globally, enabling them to the source, produce, and distribute products at the lowest-cost locations around the world. U.S.-China trade policy whiplash, Brexit, and now the corona-virus crisis has challenged the validity of this fundamental assumption. Specifically, the corona-virus illustrates the vulnerability of having so many sources located in one spot and a spot that is far away from critical markets in North America, Europe, and Latin America.

A new kind of design is needed that enables companies to rapidly reconfigure their supply chains and be ultra-agile and responsive to rapidly change global trade policies, supply dynamics, and disruptions. Therefore, the question is: How should companies design their supply chains to operate effectively in a highly volatile world where consumers are intolerant of tardy responses? There are many options, and each one involves trade-offs between the level of risk that the enterprises can tolerate and the amount of operational flexibility it wants to achieve.

Here are two examples:

Redesign with second sources: This supply-chain design provides backup capacity for supply, production, and distribution outages. The backup capacity spreads the risk of disruption across two sources (as long as the disruption does not also affect the second source location). Consequently, it is better to have a second source outside the primary source region. Although this supply chain design lowers risk levels, it incurs higher administrative, quality monitoring, and unit costs.

Redesign to source locally: This design calls for a company to have production facilities with local sources of supply in each of its major markets. Like the above option, it spreads the risk.

Do you find this article helpful in preventing/reducing the impact of the forthcoming crisis?

Let us know what you think in the comment section.

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