Coronavirus (Covid-19) measures are seizing up the global supply chain and have become an emergency for board executives.
Once more, the lack of risk management, resilience and agility in supply chains has been exposed. The argument for greater automation becomes stronger. Checkpoints, quarantine stations and road, river and rail blocks in the Hubei exclusion zone have led to empty shipping containers stacking up in Chinese ports. Given the prevailing flow of supplies, strongly east to west, that means there are shortages of containers in other parts of the globe: products are being made but there’s nothing to transport them in.
Large manufacturing operations are being stalled by disinfection regimes. China’s central bank has begun to destroy and deep clean cash currency.
What might look like a localised crisis quickly has a global impact because supply chains are a network and companies are linked by international processes and network designs. And competition, essentially, is not between individual companies but the supply chains they are part of.
A number of European car parts manufacturing plants have been disrupted because of a lack of necessary raw materials and this trend is likely to continue in the short term in specific sectors depending on the source of component and material supplies. There have been reports of essential electronic components such as vehicle key fobs being transported out of China by couriers in suitcases. Apple has 290 of its 800 suppliers based there. The region is also, for example, responsible for 9% of global TV set production.
Every disruption is different in itself: Covid-19 an obvious tragedy in terms of the loss of lives. But for supply chains every disruption is the same. Like Brexit, flooding, ash clouds, Covid-19 is a test of risk management processes and resilience in supply chains. Companies need to urgently review their supply chain to find out how exposed they are. That means a clear understanding of where all suppliers are based: first, second, perhaps even third tier.
It’s still common for businesses to just deal with a central HQ of a supplier and not know exactly what route the supplies they need are taking. How many of us when we buy a product from Amazon know the actual source and transport chain involved? Companies should map and continually monitor for vulnerabilities in their supply chains in order to anticipate risks and threats and look to widen sourcing locations even if they involve higher unit costs. Developing new partnerships can take time.
China’s manufacturing operations are efficient and technologically advanced – because of local and Western investment – and alternative regions may not have these capabilities.
One method of increasing resilience, increasingly being used in the apparel sector, is buying a certain level of ‘capacity’ rather than individual materials or products. The details are agreed as and when necessary. This means industries can hold capacity across a number of different regions and switch between them when disruptions occur.
Again, just like Brexit or when the switch to a new logistics provider led to no chicken at KFC in 2018, it’s important that lessons are learnt about the fragility of supply chains.
To both customers and boards themselves it all might look and feel like clockwork, but the reality is a bunch of collaborations involving people, technologies and natural phenomena, any element of which can have problems. We have come to expect high quality, convenience and good value wherever we are, but that comes at the price of great supply chain complexity. A complexity we need to understand and manage better.
Simply switching away from China for a period because of Covid-19 clearly isn’t the answer; the risk profile just changes. The way forward is to admit things will go wrong and building up resilience across entire supply networks during the good times, talking and sharing to create collaboration and trust which will then be invaluable through the hard times.
Posted by Richard Wilding in Procurement, Risk
Richard Wilding is professor of supply chain strategy at Cranfield School of Management