Broken links: supply chain management amid global disruption

September 2020  |  FEATURE  |  RISK MANAGEMENT

Financier Worldwide Magazine

September 2020 Issue

The global nature of coronavirus (COVID-19) has brought considerable disruption to supply chains, with many suppliers severely restricted and others severed entirely. Simultaneously, the pandemic’s disruptive effects highlight the importance of effective supply chain management.

From point of origin to point of consumption, contemporary supply chains involve complex systems that can span the entire globe and are often rife with potential risks. Robust supply chain management allows companies to identify, assess and mitigate these risks, protecting supply chain links in danger of being broken by the pressure exerted by COVID-19.

According to PwC’s ‘Supply chain resilience during COVID-19 disruption’ report, COVID-19 has “elevated the need for greater visibility of suppliers through all the tiers of the supply chain, as the outbreak has caused sequential disruption across the globe”. Furthermore, states the report, the need for companies to have active visibility of critical supply chain components, interdependencies and data to properly assess potential operational and financial weaknesses is more crucial than ever before.

“Supply chains have increasingly become global, complex, multi-tier and multi-company ecosystems to improve economic efficiency,” says Nitin Dsouza, digital supply chain strategy and transformation lead at Publicis Sapient. “They have evolved to mitigate, detect and react to frequent disruptions due to natural disasters, political upheavals, warfare and recessions. However, there is always a rare, bigger and more disruptive event lurking.

“In the annals of supply chain disruption, COVID-19 has been a black swan event and led to supply chain disruption in slow motion,” he continues. “It landed a rare, triple whammy – demand shock, supply shock and financial shock – leading to bullwhip effects across the networks. Global quarantining measures impacted three of the four key flows in supply chains: human flows and subsequently physical and financial flows. The only redeeming feature was that information flows were not impacted.”

In the view of Tom Derry, chief executive of the Institute for Supply Management (ISM), the pandemic has exposed a number of long-gestating supply chain issues. “The drive to cost efficiency over the last three decades has made supply chains, generally, less resilient,” he suggests. “This is manifested in reliance on single- or sole-source suppliers, vulnerability to logistics disruptions, and the resurgence of tariffs on imports and exports.”

In its ‘COVID-19: Managing supply chain risk and disruption’ report, Deloitte suggests that visibility to only tier 1 suppliers is likely be insufficient for most companies in managing supply chain disruption risks, with few able to trace their supply chain beyond these particular entities. “Advanced digital solutions are generally required to trace supply networks reliably across multiple tiers of suppliers that are required to fully understand supply-side risk,” states Deloitte’s analysis. “The domino effect of plant closures and supply shortages across the extended supply network can quickly lead to significant supply chain disruption.”

Risks

As well as being pervasive, supply chain risks can be broadly categorised into four main types – supplier, natural disaster, political and cyber/IT – each carrying a certain level of threat, the acuity of which is generally aligned with the sector-specific supply chain in question.

Andrew Black, a principal at Efficio, outlines these four risk categories in more detail. First, supplier risks are traditionally one of the biggest risks in the supply chain, be it risk around the financial stability of suppliers and broader risks associated with, for example, the use of sweatshop labour by suppliers.

Second, natural disaster risk is especially relevant for companies with global supply chains susceptible to disruption at any point in the inbound supply chain, such as disruption caused by COVID-19 shutting down key supplier countries.

Third, political risk around sudden changes in the political landscape can lead to a range of potential issues, for example loss of intellectual property (IP), increased supply chain costs due to tariffs, and loss of access to key markets. This is likely to become a bigger concern in the 2020s as China and the US continue to ‘decouple’ and the effects of Brexit become clearer.

Finally, Mr Black describes cyber/IT risk as an emerging risk that is rapidly rising to the top of the list of things that worry supply chain leaders. Cyber attacks can cause major ongoing disruptions to business, with smaller companies often having little option but to accede to cyber blackmail to get their business back up and running.

These risks, however, are dwarfed by the magnitude of COVID-19. “COVID-19 is the exemplar par excellence of a supply chain disruption,” says Mr Black. “It came out of nowhere, is near universal in its reach and laid waste to all but the most robust supply chain risk mitigation strategies. It also exposed the lack of shock-absorbers in most supply chains that spent the better part of the last 20 years focused on driving down cost and reducing waste.

“There is an argument that once the pandemic passes, normality will return, but this underestimates both the scale of the COVID-19 impact and the extent to which it is acting as an accelerant of pre-existing trends,” he continues. “Companies need to accept that the ‘one-size-fits-all’ supply chain model is no longer valid.”

Strategies

Prior to the outbreak of COVID-19, any credible company with at least a reasonably sized supply chain will have already established the range of risks it faces, then designed and implemented a comprehensive risk management strategy that can predict, mitigate, detect and react to disruption – a strategy which now requires orientating to a pandemic scenario.

“Leading chief procurement officers (CPOs) are already deploying new strategies in the wake of COVID-19,” observes Mr Derry. “Companies are asking or requiring suppliers to stand up locations in tariff-exempt countries. We are also seeing companies qualifying and onboarding second and even third suppliers to mitigate geographic and political risk.

“CPOs are segmenting their supply base according to the financial condition of the supplier, with a differentiated approach to suppliers with strong financial health versus weaker health,” he continues. “The overarching theme is the recognition that companies should be concerned about ‘risk competitiveness’ in addition to ‘price competitiveness.”

Any strategy, of course, is based on companies having differentiated known risks from genuine black swan events. “Underlying most companies’ approach to supply chain risk management is a process that tries to identify all potential risks and then make a simple calculation of the likelihood of the risk materialising, multiplied by the impact if it does,” says Mr Black. “This process is sufficient for known risks but is unequal to the task when trying to assess risks such as COVID-19 which, by its nature, is impossible to predict but significant if it materialises.

“Nevertheless, most supply chain risk analysis boils down, fundamentally, to assessments of the impact on the business if a supplier goes under or can no longer provide the service or products that are required,” he adds. Good risk management, therefore, should try to answer three basic questions: Who are my key suppliers? Which of them are most exposed to risk of disruption? And what is my strategy for mitigating this risk?

With these questions in mind, a good strategy is one that recognises that since not all risks can or should be mitigated, supply chain practitioners should focus on resilience as well as mitigation. “In other words, build supply chains that can absorb disruptions rather than avoid them,” suggests Mr Black. “This could lead to multi-sourcing key items, increasing inventory of key materials or changing customer expectations around delivery lead-times.”

Technology

A tool perhaps yet to be fully utilised as a supply chain management enabler is technology. Indeed, a more technology-driven approach to supply chain management has the potential to help companies better manage their networks, as well as address burgeoning regulatory compliance concerns.

“Comprehensive supplier risk management technologies have improved massively in recent years; however, they should be used in the context of augmenting human expertise,” says Mr Dsouza. “Simulation of risks using artificial intelligence and machine learning, as well as big data platforms, have enabled an understanding of the entire demand and supply impact at a granular level. Satellite imagery is being used to pinpoint movement of materials, pollution hazards and port congestion, among other things.

“Social and mobile tech are being used to crowdsource detection and update evolving disruptions,” he continues. “Difficult to access deep tier supplier information is being analysed by surveys, satellite imagery and financial flow analytics. The rise of hot data stemming from internet of things (IoT) and mobile devices have led to detection of disruptions in near time. Risk playbook libraries, coupled with augmented and virtual reality technologies, are enabling emergency teams to react more efficiently to evolving risks.”

At the same time, it is essential that companies understand and comply with the various product and supply chain laws and standards that exist at the local, national and international levels. “Legal and regulatory compliance is a much more common requirement in today’s world,” notes Mr Derry. “Whether it was certifying that products did not contain conflict minerals under the Sarbanes-Oxley Act, or more recent anti-slavery legislation in the UK and the US, the list goes on.”

Post-pandemic

While the full impact of COVID-19 on supply chains is still largely unknown, one thing is certain – the pandemic will have global economic and financial ramifications for years to come.

“In a post-COVID-19 world, the biggest challenges will be rethinking the trade-offs between efficiency and resilience on the one hand, and revenue and risk on the other,” foresees Mr Black. “In a predictable world, it makes sense to focus on running your supply chain as cheaply as possible. Equally, when risk is low, it is easy to pursue revenue for its own sake and worry about margin later. But as managers around the world are finding out, when risks increase, costs increase, and suddenly large chunks of the product portfolio are loss-making.

“In the short term, supply chain managers will therefore need to accept the need to build more buffers into the supply chain, even at the expense of some additional cost and an increase in working capital tied up in inventory – what we previously called ‘waste’,” he continues. “Longer term, COVID-19 will accelerate an existing trend to splinter supply chains and move away from the ‘one size fits all’ model – for example, onshoring production of volatile high value items while switching to best cost countries for high volume, predictable items.”

So, whether due to intensifying trade disputes and political upheavals, high-cost natural disasters or other issues, coping with extensive supply chain disruption means it is vital for companies to have adequate risk management strategies in place.

Ultimately, once the pandemic eventually passes, COVID-19 could prove to be the black swan event that finally forced many companies, as well as entire industries, to modernise their supply chain models and repair broken links.

© Financier Worldwide

BY

Fraser Tennant