Identifying and Mitigating Supply Chain Risk in the Age of COVID-19
- Supplier Management
The raging COVID-19 epidemic has presented the world with a “once in a century” moment of reckoning. With an ever more connected global economy, and almost instantaneous news transmission, the impact of global health has multiplied since the last global (SARS) epidemic in 2003. Just as the human body needs its vital organs functioning well to stay alive and fight a deadly disease, supply chain is a critical vital organ keeping the global economic engine running.
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How can we look at supply chain risk management more critically amid COVID-19, and react quickly? Unlike geo-political disruptions, wars, and weather events, which tend to be localized or relatively short-lived, COVID-19 has paralyzed entire countries with unprecedented speed. The world certainly wants the shutdown to be as short as possible, and from an economic perspective, smart supply chain management becomes critical to minimize not only lost profits, but the suffering and hardship of consumers.
Identifying Supply Chain Risk Amidst the Chaos
Supply chain risk, in a global pandemic scenario, has five defining characteristics:
Starting with travel & tourism, every single supply chain from healthcare to manufactured goods and retail has been profoundly impacted.
No one knows which region and sphere of human activity will be next to shut down, to what extent they’ll limit activity, and when they might make further changes to policy.
While everybody expects this pandemic to last ‘a few weeks to a few months,’ severe restrictions and total shutdowns are stressing supply chains far beyond what they are normally designed for.
Hoarding behavior can lead to empty shelves within no time. Air travel is plummeting as individuals seek to practice social distancing. Emergency regulations can force manufacturers across industries to either slow down or scale up production and supply at short notice.
The longer the pandemic lasts and the deeper it penetrates, financial distress is bound to increase, in turn causing payment delays, defaults, disputes and delinquencies. Some of your vendors, or even customers, may never recover from the impact.
So how can supply chain professionals manage and mitigate risk more effectively?
Stabilizing the Supply Chain in Turbulent Times
Start by analyzing the demand side.
Get ‘flash forecasts’ from key customers to get directional insights on whether the demand is expected to decrease or increase, by how much, and for how long. Perfection isn’t the goal. There is no point putting together an exact forecast; perform quick scenario analysis to get a range of outcomes.
Then, analyze the supply side.
Start with building ‘situational macro awareness’ by building a heat map of geographic impact – from complete closure to restricted capacity to normal capacity. Superimpose that on a risk-scored vendor assessment, using any common risk-scoring approach such as FMEA, on parameters such as financial risk, bankruptcy risk, quantity risk, lead-time risk etc. This will arm you with an objective and informed view of just how imperiled your supply side is looking.
Now that you have both the demand and supply analysis done, the next step is to identify areas of ‘major’ or ‘severe’ gap. For example, say you are a medical devices supplier with a range of products. One demand-supply scenario might look like this: demand for defibrillators has gone up by 2x, but 10% of supply capacity has shut down and say another 10% in-transit inventory is blocked up. Another might reveal that demand for heart stents in Europe has crashed 30% because hospital beds are being vacated for COVID-19 patients, and your inventory is quickly piling up. Having identified and quantified each gap, you can devise custom mitigation plans, because traditional or one-size-fits-all approaches are unlikely to work.
Once your action plans are established, acting with speed and focusing on organization are key. One approach is to form small teams, each focused on mitigating a specific demand-supply scenario and action plan. Implement an agile approach, with daily outcomes and a defined sprint cycle.
And When This is All Over?
“When the pandemic is over and work goes back to normal, it would be a mistake to let your supply chain management go back to business as usual too.”
While the risk mitigation approach outlined above is efficient to ‘fight the fires,’ it should last beyond crisis time. When the pandemic is over and work goes back to normal, it would be a mistake to let your supply chain management go back to business as usual too. There are important learnings and capabilities that emerge out of this struggle. For instance:
- How does your vendor assessment methodology need to change?
- To what extent do you need to diversify your vendor base?
- How would contracts need to be amended in the future?
- Do your business continuity plan and contingency plans need to be modified?
- What technological and data analytics capabilities do you need to strengthen or add in order to proactively manage future events?
Most organizations will recognize the significance of this event, but the smartest will learn from it.