The spread of COVID-19 is an epidemic affecting hundreds of thousands of people worldwide, with significant economic implications to linger for months to come. China’s dominant role as the “world’s factory” means that any major disruption puts global supply chains at risk. Highlighting this is the fact that more than 200 of the Fortune Global 500 firms have a presence in Wuhan, the highly industrialized province where the outbreak originated, is also the epicenter which has been jolted the hardest. Companies whose supply chain is reliant on Tier 1 (direct) or Tier 2 (secondary) suppliers in China are likely to experience significant disruption.
While impact of Global Sourcing from China is a big factor for managing complex supply chains like Automotive & Retail, breakage of domestic value chains has added to the woes. While Bullwhip effect is visible across supply side, an equally unpredictable demand has kept most of supply chains guessing.
Impact on Global Supply Chains
For few weeks after the start of COVID-19, experts were primarily focussing on Supply Shocks i.e., availability of products & services to last-mile customers. Companies scrambled to sort out what production was feasible, and what demand could be met. As the pandemic crisis deepened and nations have begun instituting lockdowns, supply chains have been experiencing something completely new: systemic demand shocks, where people are stocking up on consumer staples in order to comply with restrictions on movements, in some cases buying months’ worth of goods in a single day.
From Procurement perspective, major global organizations in sectors like Automotive, Engineering, Infrastructure, Renewable and Pharma were significantly reliant on China suppliers, have re-strategize their procurement strategy by resourcing products from other cost-effective countries like Vietnam, Thailand, India and Indonesia. Major effort of procurement staff is has been put in close monitoring supplies of essentials from key suppliers across the globe, removing key bottlenecks and minimizing supply risks. Supplier management has become even more important than before with a serious review of sourcing strategy in medium and long term.
Inbound as well outbound, logistics too has become a critical element as this sector since it involves deployment of skilled workforce, transportation across country borders and states and storage across multiple locations. It also involves multiple clearances at national as well as international level and deep involvement of Government authorities.
Inhouse manufacturing across different sectors is another huge challenge for organizations in managing day to day operations after procurement and logistics have ensured the deliveries. Skewed demand management, flexible shifts, cellular layouts and business continuity planning has become the new normal in most plants and so has the management of plant and warehousing.
Distribution challenges like Bullwhip and Black Swan effects too must be managed effectively to keep supply chain flows and inventory across each channel stage in control.
Management of supply chain disruption
- Procurement: Procurement leaders have concentrated their initial efforts on managing upstream supply disruptions from tier 1 and tier 2 suppliers while rebalancing short-term sourcing decisions in the light of supply network constraints. Now they need to turn their attention to the medium-term security of the supply base, unlocking funds intelligently and building future-proof resilience. This approach will not only help manage the immediate COVID-19 emergency but also build stronger and more resilient businesses ready to thrive as economies return to growth.
Five key areas demand immediate attention:
- Manage people well-employees, customers, suppliers, intermediaries, etc.
- Security of supply
- Effective management of organization’s funds
- Create a robust risk management framework for future and
- Encourage digitization and innovation
- Logistics & warehousing: Organizations need to know what they have in their warehouses, in-store, what is selling at what time, and where, so they can quickly react to changing conditions and customer needs. Having unified inventory visibility across channels in a single database is crucial. This not only enables organizations to make rapid and agile replenishment and stock transfers — it also means they avoid overspend on inventory. Key actions like allocation of more transport capacity to high demand items, customizing hub and spoke model based on geography, encourage supplier direct deliveries to stores will ensure meeting customer demand.
- Manufacturing/Operations: Implement operational safety measures, remote work readiness and online help desk for all stakeholders. Assess realistic demand scenarios and conduct rapid sales operations planning as applicable.
Future of Supply Chains
A decade-long focus on supply chain optimization to minimize costs, reduce inventories and drive up asset utilization has removed buffers and flexibility to absorb disruptions and COVID-19 illustrates that many companies are not fully aware of the vulnerability of their supply chain relationships to global shocks.
Fortunately, new supply chain technologies are emerging that dramatically improve visibility across the end-to-end supply chain and support companies’ ability to resist such shocks. The traditional linear supply chain model is transforming into digital supply networks (DSNs), where functional silos are broken down and organizations become connected to their complete supply network to enable end-to-end visibility, collaboration, agility, and optimization.
Leveraging advanced technologies such as the Internet of Things, Artificial Intelligence, robotics, and 5G, DSNs are designed to anticipate and meet future challenges. Whether it is a “black swan” event like COVID-19, trade war, act of war or terrorism, regulatory change, labor dispute, sudden spikes in demand, or supplier bankruptcy, organizations that deploy DSNs will be ready to deal with the unexpected.
Following the initial COVID-19 outbreak in early 2020, factories in the region are working towards getting back to business. Chinese factories are reopening and resuming production, with eight provinces downgrading their emergency levels to allow for more mobility for citizens and workers. While black swan events like coronavirus cannot always be predicted, understanding supply chain risks and opportunities gives organizations more transparency to plan while maintaining customer experiences in the face of crisis.
Views expressed are author’s personal.