Coronavirus disease 2019 (COVID-19), which emerged in central China in late 2019, had spread to 144 countries by March 15, infecting over 124,800 people. More than 6,500 deaths have been linked to the virus. And there are concerns that the pandemic, which has also disrupted manufacturing operations and supply chains around the world — not to mention caused one of the steepest declines on record in the financial markets — could be the catalyst for a global economic slowdown. Some experts predict China’s economy could contract for the first time in nearly a decade. And, unfortunately, at the present time, there is no clear end in sight to the pain.
While the COVID-19 outbreak is both disruptive and deadly, it is not a wholly unexpected event. Following the SARS coronavirus epidemic in 2002-2003 and the MERS outbreak in 2015, it has always been a question of when, and not if, a new, severe and more widespread viral outbreak would emerge. No business that conducts regular risk analysis and business impact analysis activities should have been surprised by COVID-19, as the potential for a large-scale health crisis should be considered in any organization’s business continuity management (BCM) and operational resilience programs.
And yet, as the COVID-19 pandemic widens, many companies are realizing they may not be prepared to manage the business disruption related to this event, including from a supply chain perspective.
A Prime Opportunity for Businesses to Assess Their Risk Exposure — And Take Action to Reduce It
Given the major disruption global supply chains have experienced over the past decade alone, it could be argued that businesses should be ready to navigate this new crisis. In 2011, for example, the Tohoku earthquake and tsunami in Japan and severe flooding in Thailand severely tested the mettle of many companies in several industries and their supply chains and operational resilience, exposing major weaknesses and derailing operations and productivity for months and even years — or permanently, in some cases.
The COVID-19 pandemic only reinforces the case that all companies need to understand, at a minimum:
- Who their key suppliers are (including first-, second- and third-tier resources)
- Where those suppliers are located, as well as how close they are to each other geographically
- What alternative and qualified sources are available in the event of a crisis (this includes determining what second sources exist outside of primary markets for supply, distribution and production, as well as what local sources could be tapped in the company’s major markets)
- How quickly the business can pivot to using alternative sources
- What potential risks are involved in using alternative sources (e.g., product quality issues, higher cost of materials)
- How long the company could operate following a severe and prolonged supply chain disruption
Companies will also want to consider pursuing the following three activities as the COVID-19 outbreak continues to unfold:
1. Utilizing a strong third-party risk program (supplier management) as a part of the sourcing process
When supply chain disruptions arise, the value of strategic sourcing becomes only more apparent. By investing in supplier relationships and management, businesses gain a more holistic view of their supply chain, including the various tiers of suppliers that their strategic suppliers use. That insight helps companies control costs and increase efficiency, quality and flexibility throughout the supply chain — as well as reduce risk. But to get that insight and monitor risks persistently, businesses need to have:
- An effective vendor risk management (VRM) program for understanding vendor risks, inspecting and testing vendors, documenting the results of such testing, and more
- A strong third-party risk management (TPRM) program for identifying and controlling potential weaknesses (e.g., quality issues, cybersecurity risks) that exist deeper within the supply chain
- The right technology tools and solutions to support these efforts
COVID-19 is a reminder that these investments can create value for companies in many ways, including improved resource availability and better management of geolocation risk. So now is an ideal time for companies to take a hard look at their current approach to strategic sourcing, and related activities such as VRM and TPRM, to determine where improvements can be made so they can emerge from the present crisis in as strong a position as possible.
2. Reviewing supplier agreements
As explained in a previous blog post, written in the aftermath of Hurricane Michael in 2018, businesses should also expect all critical suppliers to be able to demonstrate how they assess their risks. And, there should be a formal, written understanding of exactly how the supplier would maintain supply in the event of a disaster. Some options include locking in a fixed price, negotiating prioritized supply or having backup sources in the vendor’s supply chain.
3. Prioritizing supply chain sustainability
Many companies are already under pressure from investors, customers, regulators and others to increase their focus on environmental, social and governance (ESG) issues and embrace sustainable business practices. As we discussed in a recent post, the vast majority of sustainability and social responsibility issues are external — from how raw materials are sourced to where and under what circumstances products are made.
One of the less obvious but important benefits of robust ESG risk management in supply chains is a reduced chance of supply chain disruption, including from sudden parts and materials shortages. So, for companies that have yet to consider making sustainable supply chains a strategic business imperative, now may be the right time to give it more serious thought.
Factors That Intensified COVID-19’s Initial Impact on Supply Chains
The COVID-19 pandemic is very serious. But like all crises, it will eventually ease and pass — and, hopefully, for the sake of the human population, that will be soon. Meanwhile, many organizations are concerned about both the current and potential longer-term business impacts due to COVID-19. From a manufacturing and supply chain perspective, two key factors helped to fuel companies’ initial anxiety around this event:
- Timing. The viral outbreak emerged at the end of 2019, when companies had very low or no inventory sitting on the shelf. Many factories in China were closed for several weeks during the winter holidays, including for Lunar New Year celebrations starting in late January. China also mandated factory shutdowns across most of its provinces as it sought to control the COVID-19 outbreak that began in Wuhan, the capital of Hubei province and a major manufacturing hub. So, while factories are starting to come back online in China, production is backlogged because little or nothing has been done since the start of 2020.
- Efficiency. Normally, efficiency is a good thing. However, the widening adoption of just-in-time (JIT) manufacturing and delivery techniques and lean manufacturing and inventory practices, the growing use of offshoring and outsourcing, and increasing reliance on data-driven decision-making have all led to companies tightening their supply chains, working with fewer suppliers, reducing inventories and keeping much less “safety stock” on hand. The result: When a major crisis impacts the supply chain, the disruption is felt very quickly and acutely.
Companies will want to consider the latter realities as they seek to improve their business continuity planning and assess their supply chain risks, including vendor and third-party risks. Even in the middle of a global health crisis like the COVID-19 pandemic, there are many constructive and strategic actions businesses can take to stabilize their supply chain and develop a supply chain response plan that can help them to weather inevitable future disruptions more effectively. Lessons learned from the present crisis can drive these actions.