As the number of confirmed cases of a neoteric coronavirus named COVID-19 approaches 200,000, the impact of the disease has had adverse effects on the global economy, causing instability in stock prices, depressing earnings projections, and even delaying movie premieres and releases.
Just as scientists are tackling an unknown enemy, corporate executives are largely working blind because the COVID-19 could cause supply-chain disruptions that are never seen before. For the meantime, the best methodology a company can adopt is to analyze possible results in the context of known supply-chain risks based on the historical paradigms and to take precautionary measures that minimize exposure to future disruptions.
The COVID-19 is affecting both supply and demand and hence the threats are more profound than earlier disruptions.
From the supply point of view, China is a huge source of components and finished goods and hence is rightly termed as manufacturing powerhouse. The longer plants in China sit idle, the emptier the global pipeline of parts and components circling the globe, which is meant to feed manufacturers and retailers all over the world. Businesses have expressed inventory concerns related to the inability to procure and ship supplies from vendors in China.
From demand point of view, China is also a major market for goods and services. So, economies that depend on China as a customer are feeling the heat as Chinese consumers have limited their travel and consumption. Unlike supply risk, which supply chains can monitor and measure through close communication with their vendors, demand risk has no real geographic constraints which makes it difficult to predict and, in turn, makes it difficult to plan for retailers and logistics companies.
So, how to become resilient in these times and how can a company be ready for disruptions that come on the road ahead.
First and foremost is Map your Supply Chain. Understanding the location and the live status of various junctions of the supply chain is important at each and every juncture, whether there is an outburst of Corona or not. Successful mapping often relies on hyperlocal information and requires data and information sharing between partners. Managers, armed with a Supply Chain map, can precisely find an exact source of disruption and assess how to react accordingly.
Now lets us understand which companies are most vulnerable and to understand that we need to understand Supply-Chain Bullwhip effect.
For examples let us assume an X% of decline in demand of a product. The retailer speculates that the future sales will also be less and infers his current inventory is too high. The retailer in action cuts his order by twice the amount of drop in demand to the wholesaler. Using the same logic, wholesaler cuts his order by twice the drop in demand to manufacturer. Manufacturer reduces it to same amount to part suppliers and so on. At each level of the supply chain the decline in demand sparks a bigger decline in orders from suppliers. So, each company thinks they need to cut-off production to adjust to declining demand and work off their inflated inventory.
The most vulnerable companies are small and leveraged suppliers upstream in the supply chain that are in danger of going under.
When demand revives, the bullwhip pattern reverses as each tier boosts ordering, both to cover expected higher sales and to quickly refill exhausted inventories. The reverse bullwhip of fluctuating orders and inventories toils the ability of production and logistics operations to keep up with existing demand. After a period during which many upstream suppliers fail and remaining companies fail to deliver during the recovery, a multinational enterprise may find it easier to leave China and set up manufacturing elsewhere.
Lastly, rely on interior solution rather than corner solution. Say, option X is much cheaper than option Y. Choosing a corner solution means you go all out on option X and zero percent on option Y. When you analyze the hazard on hand, this corner solution may not be the best solution. One could use a bit of both, and that’s an interior solution.
The coronavirus pandemic teaches us — once again — that a sturdy supplier-monitoring system that maps sub-tier dependencies is a basic requirement for today’s supply chain and sourcing professionals. Even the best risk-management strategy may not be equipped to handle something on the scale of COVID-19 in the short run as 94% of Fortune 1000 companies are feeling the heat of supply chain disruptions. Hoping for the best while preparing for the worst may not seem like the most diligent business approach to the quandary. But given our lack of knowledge, it is the most judicious strategy for managing risk.