When business is good, organisations tend to overlook risk management. This can come back to bite when things take a turn for the worse, as we have seen during the outbreak of coronavirus (Covid-19).
Businesses’ search for efficiencies creates lean supply chains but also vulnerabilities. This fragility has been apparent as organisations work to contend with the disruption caused by this outbreak.
Lessons need to be learned to ensure companies can mitigate the risk of disruption from any future events and procurement should lead the way here.
A growing problem
In mid-February, the virus was considered a ’Chinese condition’ or, at worst, an Asian problem. Now that it has taken hold in Europe and entered the Americas, the repercussions across global supply chains are becoming apparent.
The logistical disruptions, which had been largely contained in China, have rippled out to Europe and North America as the virus has spread. The port of Los Angeles, the largest serving the US, is expecting traffic to decrease by around one-quarter.
The virus has turned from a personal ailment to a broader sickness in global business.
The black swan is the reaction: Not the underlying event
The mortality rate of the virus is relatively low, at approximately 2%. A study from China in February found that for individuals below the age of 50, the mortality rate is 0.4%.
It is, of course, a serious condition. Some 17% of cases are severe or critical and require intensive medical assistance.
Alongside its highly infectious nature and its still unknown properties as a new virus, Covid-19’s explosion onto the international stage is straining both healthcare systems and nerves.
But, outside of the global healthcare system, the disruption is playing out within global supply chains.
Automotive suppliers are seeking to reduce the shortage of supplies, but in their scramble to clutch at diminishing supply they are, in fact, creating scarcity.
US agricultural equipment manufacturer Deere & Co’s logistics costs surged by $40m as it replaced the disrupted ocean shipping industry with pricier air freight alternatives.
Connecting these dots in advance would have been impossible, but it is these measures that have had a significant impact on global supply.
Invest in building risk management capacity
The case for investing in risk management tends to be ignored during quiet periods. Managers assume their untested plans are infallible as the evidence of consistent profits nullifies any serious challenge. Yet, if businesses require 10,000 suppliers at the primary level in a Just In Time model, it only takes one of those suppliers to fail to bring production to a halt. When reality eventually sinks in, companies scramble for costly disaster responses rather than turn to robust continuity plans.
The case for serious investment in supply chain resilience will never be more compelling than during a crisis. Companies should make cases for:
* Building resilience. This isn’t about creating a ‘virus-proof’ supply chain. Many people wrongly suppose that risk is about predicting the next disruptor. As a consequence, they tend to look to invest in the risk identification phase in the form of a predictive platform. Unfortunately, few products available would have predicted this particular risk, nor would it have accurately mapped the negative consequences that have followed. Rather, focus on installing measures that can withstand a variety of impacts.
* Ensuring dual- or multi-sourcing within critical components. The key to many risk initiatives is to spread exposure. Although sourcing from fewer, bigger suppliers may yield lower unit prices, it also increases the disruption costs if this single source of supply fails. Although redundancy is the antithesis of lean production, pre-arranging alternative suppliers in disparate geographies or even industry sectors reduces the exposure to a variety of threats.
* Mapping the supply chain. Many companies have been caught out by learning after the event that they were over-dependent on one single transport hub or connection point. One CPO told me that he had no idea that his supply chain involved China before the goods stopped flowing.
Almost all supply chain disruptions are unpredictable. When threats materialise, the decisions of consumers and decision-makers create an even more volatile environment. It is for procurement to lead the organisation and make a case for a resilient supply chain.