Global supply chains in disarray: Turning crisis management into risk management

guest column:Shaun Jayaratnam

WE have been sailing in uncharted waters the last three months. The scale of this crisis is unprecedented, there’s no blueprint as to how to manage this. There’s mayhem in the market. The coronavirus (COVID-19) now considered a pandemic worldwide. A recession is imminent.

Globally consumers are in a panic. Supermarket shelves in some European and Asian cities emptied as coronavirus crisis grows. The outbreak is already costing businesses millions of dollars in revenues and profits, serious consequences in the global market causing severe financial repercussion.

Production disruptions have largely affected household and hi-tech goods, and textile industries where China plays a core role in the global supply chain. These disruptions have already had an adverse effect on the global supply chain as companies struggle to find alternative suppliers.

Production output of automobile manufacturers in China could drop by 15% during the first quarter of 2020. As an indirect effect, these manufacturers would also suffer from reduced production output. Closure of manufacturing facilities in China has had far-reaching consequences globally.

The virus outbreak hindered initially daily business operations in China, more recently across Asia and Europe.

Because supply chains are complex and intertwined, the virus has thrown everything into disarray.

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On one side you have many suppliers, on the other side you have the consumers, and in-between you have endless chains of interactions between them. Because of this complexity, it’s easy for companies to totally lose visibility and transparency into their own supply chains.

To improve efficiency and ensure higher return to scale, companies along the supply chains specialize in finer parts of the production process. It is not uncommon for supply chains to have six tiers or more. Automotive, electronics, and even the apparel industry have long complex supply chains where parts are produced by multiple suppliers before a product is made and delivered to customers.

Hi-tech goods are likely to be one of the most-affected industries as China remains the world’s largest producer and exporter. Apple is among several multinational companies that have been affected.

Apple shortened store working hours across China and warned that supply chain disruption might also affect operations in other countries. China is the largest manufacturer of iPhones, thus factory closures could hurt Apple’s production volumes.

Besides manufacturers, air transport has also been impacted as major international airlines have stopped their flights to China, Asia and Europe. Cancellation of air routes to these countries will also have an adverse effect on global supply chains.

Air transport remains among the key transportation modes for fragile, perishable or high-value goods which require fast delivery. Disruption of air travel would largely impact chemical products, pharmaceuticals, hi-tech goods and machinery industries. The disruption will immediately affect lean supply chains and in particular those based on speed.

Travel bans, city and country lockdowns, have companies scrambling to expedite shipments. These closures can lead to supply shortages. The ramifications from the outbreak have impacted business greatly.

It’s already hit the travel, tourism, entertainment, and events industries across the globe.

The recent border closure between Malaysia and Singapore led to panic among consumers, companies and Malaysians working in Singapore. There was a rush to secure food shipments from Malaysia, companies had to find accommodation for their labourforce to ensure business continuity.

Asia is at the heart of global supply chains. Of the top nine container ports in the world, seven are in China, one is in Singapore, and one is in South Korea. Four of the world’s busiest air routes are in ASEAN. All three countries are now deeply hit by the coronavirus outbreak.

Collectively, about a third of the world’s economy is being affected, and the outbreak is still ongoing.

It’s impossible now to quantify the overall impact as the crisis is only beginning to unfold. The economic aftermath is expected to last at least a year. However, if the air travel bans remain prolonged, businesses in both China and abroad might start feeling the shortage of goods such as pharmaceuticals, as accumulated stocks deplete.

The global supply chain has evolved since the SARS outbreak in 2003, but China’s role in the global industry increased perhaps 10 fold since then, thus the final impact on industries will depend largely on companies’ capabilities to find alternative suppliers and the success of governments across the world to contain the virus outbreak.

A longer supply chain disruption will result in severe shortages, price hikes, etc It’s time to rethink procurement as we know it, one that does not depend on one location, one supplier to maintain business continuity. Manufacturers should evaluate scaling up within their country of origin, identify develop alternative production hubs and multiple-supply sources.

However, it’s easier said than done as switching suppliers and ensuring the right quality and cost is challenging. It’s a long-term strategic process, the objective is to stay ahead of the curve, being prepared and resilient.

To be resilient, companies must rethink their supply chain policies and practices, develop a comprehensive proactive model.

They must have a detailed supply chain map, a diversified supply base strategy, detect warning signs of possible disruptions, perform operational risk assessment of critical business functions, set up contingency plans based on scenario planning exercises that can respond by shifting production or supply source. Without that kind of detailed map, it is difficult to know the vulnerable links.

No doubt we’re in a crisis but this is also an opportunity to learn, unlearn and relearn.

We must stop being complacent. In the short term, some companies will have cashflow issues, the resilient ones will survive and even gain market share, eg online grocery shopping business, medical supply business. This may also be an opportunity for drone deliveries to gain ground.

Now is the time to turn crisis management into risk management. Companies must diversify their supply base, dive into the many dimensions involved in their supply chains, even their supplier’s supply chain. They must invest in time, money and resources in building a resilient supply chain. An example would be to invest in risk evaluation tools such as machine learning that can find patterns indicating risk or opportunities in macroeconomic, regional and geopolitical health, exchange rate and other data.

The ongoing US-China trade war has already some companies diversifying their supply base. Few have relocated to Vietnam, Myanmar, Bangladesh, even to Africa. This crisis should, must, speed up the trend, with more companies reassessing their market positions, vulnerability and resilience. No more sitting on the sidelines, it’s time for action.

Diversification and uncorrelated sources of supply base is the key, so when one source falls, a tier two or three alternatives may still be operational. In other words, do not put all your eggs in one basket or buy the eggs only from one farm.

All said and done, no risk management strategy could have anticipated nor equipped us with the tools to handle the scale of the COVID-19 in the short run. With the rapid spread of the virus globally, with no vaccine in sight, diversification of supply base right now is of little help.

The COVID-19 is definitely a game changer. However we’re in a better position than we were when SARS hit us. We have more options now and we have an opportunity to build futuristic contingencies that will ensure we’re more prepared to manage the risk. We have to act now.

 Shaun Jayaratnam has a wide-ranging experience of successful sales and business development management specialising in the strengthening of industry and the establishment of operations throughout Africa, Russia, CIS, East Europe, Middle East and Asia.

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