COVID-19 highlights operational and supply chain risks

COVID-19 RESOURCE HUB | Financier Worldwide

OPERATIONAL & SUPPLY CHAIN RISKS

The Organisation for Economic Co-operation and Development (OECD) has warned that the COVID-19 crisis could cut global economic growth in half, with a wide range of industries affected. It has already presented a rigorous test of business continuity and supply chain flexibility.

As the virus spread across continents, nationwide lockdowns of non-essential businesses followed. Countless companies are either engaged in remote working or shut down. Millions of people have been made redundant or furloughed until further notice.

While these measures may ultimately slow the outbreak, they have also stopped critical supply chains from functioning effectively.

A key factor is the role China – where the pandemic originated – plays in global trade. For many of the world’s largest companies, China is an integral part of the supply chain as a primary producer of high value products and components. More than 200 of the Fortune Global 500 companies, among countless others, have a presence in Wuhan, the Chinese city at the epicentre of the outbreak. According to Dun & Bradstreet, 51,000 companies around the world have “one or more direct or Tier 1 supplier” based in China and an additional 5 million companies have Tier 2 suppliers there, with 938 of those from the Fortune 1000.

In the short term, though China has begun to emerge from its COVID-19 crisis, the cost of goods sourced from the country is likely to increase as a result of overtime and expedited freight costs, as well as paying premiums to buy up supply and hold capacity.

While short- and medium-term disruption will be inevitable, even after the worst of the outbreak has passed and economies begin to reopen, COVID-19 is set to reshape global supply chains.

In the event of a second COVID-19 wave, or when the next novel pandemic strikes, those companies that diversify their supply chain and practice effective supply chain risk management will likely be best placed to ride out the storm. Time will be of the essence. Companies will need to move quickly to activate secondary suppliers in different regions to switch sourcing, safeguard against shortages and secure additional critical inventory and capacity.

Planning and preparation will be key. Companies should coordinate business stress tests covering different scenarios, from contained, localised incidents to global pandemics.

They must also make work safe. Companies will need to invest in specific protective gear, set up alternative operational measures such as crew patterns, remote work readiness and Q&A hotlines, as well as build better communication systems.

Global supply chains are sophisticated mechanisms which, when optimised, can save costs and provide a competitive edge in a congested marketplace. Many rely on ‘just in time’ principles which, while efficient and less risky in certain areas, can also leave companies exposed when something goes wrong – such as pandemics, natural disasters, extreme weather, military conflict, demand shocks, IT breakdowns or export/import restrictions.

The World Economic Forum (WEF) recommends that governments and companies take certain steps in response to crises like COVID-19. First, improve the international and interagency compatibility of resilience standards and programmes. Second, ensure that supply chain and transport risks are assessed as part of procurement, management and governance processes. Third, develop trusted networks, made up of suppliers, customers, competitors and government officials, focused on risk management. Fourth, improve the visibility of network risks through information sharing and development of standardised risk assessment and quantification tools. Finally, improve risk communication before and after disruptions to create a more balanced public and private sector discussion.

The decades-long optimisation process that supply chains have undergone has left companies vulnerable to particular risks. In the future, companies are likely to embrace technology solutions that improve visibility across supply chains and make them more flexible and resilient.

Digital supply networks will be another area of focus, to provide services digitally across borders. Digital networks can break down functional silos and improve connections across the supply chain, which facilitates end-to-end visibility, collaboration, agility and optimisation.

Risk management, business continuity and digital solutions will be integral to the supply chains of tomorrow, helping companies to prepare for, react to and ride out the next black swan event.

Richard Summerfield