Localised crises caused by outbreaks of coronavirus (Covid-19) have quickly turned into worldwide problems for networks of supply chains. Like the days of the Y2K bug, the 2010 ash cloud and anxieties around Brexit, a lack of resilience and agility in manufacturing supply chains is being exposed.
The road, river and rail blocks in the Hubei exclusion zone in February led to empty shipping containers stacking up in Chinese ports. Given the prevailing flow of supplies, strongly east to west, that means there were sudden shortages of containers in other parts of the globe: products were being made but there was nothing to transport them in. Entire manufacturing operations were being stalled by needing to comply with disinfection regimes. Apple has 290 of its 800 suppliers based in Hubei. The region is also, for example, responsible for 9% of global TV set production.
A number of European car parts manufacturing plants have been disrupted because of breaks in the flow of raw materials from China. There have been reports of essential electronic components such as vehicle key fobs being transported out of the country by couriers in suitcases. The outbreak of Covid-19 in the industrial heartland of northern Italy demonstrated the potential of the virus to have an unexpected impact on supply chains: a key manufacturing hub for Europe known for its strong textile, steel and chemical sectors was suddenly limited by restrictions on movement and the quarantine of employees.
Another implication of the outbreak is the threat from ‘supply chain parallel interaction’ – the disruption from a seemingly unrelated supply chain. In this case, it’s medical face masks or PPE (Personal Protective Equipment) that is being affected. Due to the shortages in pharmacies and chemists, consumers are reported to be turning to building hardware suppliers for face masks and body suits. That means builders, tilers and plasterers and other workers using masks for protection against airborne particulate matter are struggling to get hold of equipment themselves. Under workplace legislation, no protection means no work.
Fears of scarcity lead to stockpiling by manufacturers, and that has its own longer-term consequences. Just small variations in demand from a customer can result in large variations in demand being transmitted up and down the supply chain. A cycle of over ordering and stockpiling leads to ‘demand distortion’ and any further over-ordering contributes to the amplification. Typically, a demand increase of 12.5% will be passed to a supplier as an increase of 26%, resulting in that supplier placing an increased order for their own supplier of 55% - meaning big oscillations in inventories and supplies that can occur for many months, even years into the future. This further pressurizes supply chains creating feast and famine situations across the supply chain.
Know your suppliers
Every disruption is different in itself. Covid-19 has been an obvious tragedy in terms of the loss of life, but for supply chains every disruption is the same: a test of risk management processes and resilience. Manufacturers 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.
Simply switching supplies away from China for a period because of Covid-19 clearly isn’t the answer, the risk profile just changes. 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.
Manufacturers and their chains of suppliers, wholesalers and retailers need to be talking more often. They need to be honest about potential problems, do their best to dispel any lingering mistrust about capacity and supplies, talk openly about what necessary looks like and what might be an overreaction. The implications of stockpiling on organisational agility need to be accounted for in decision-making. Companies should be looking to negotiate with suppliers and customers to develop strategies for holding stocks across the supply chain. Only this way will it be possible to construct semi-certainties and some more confidence within supply chains, and make it easier to deal with any shocks if they come. After all, as we are witnessing, competition is not between individual companies but between the supply chains they are part of.
Building the Temple
Ultimately it doesn’t matter what the cause of the barriers and uncertainty are – be it extreme weather events or political turmoil – the same principles apply when it comes to building a resilient supply chain. This is what I call the ‘Temple of Supply Chain Resilience’ (below). The foundation needs to be an effective supply chain strategy: defining the supply chain processes, infrastructure, information systems and supply chain organisation (how people within the supply chain relate).
The floor of the Temple needs to be Product Design, as risk to the supply chain is often embedded during the design stage for a product. Think about the raw materials used and where these will be sourced from – can a design utilise different materials such as aluminium or steel? Can the product be designed so it can be configured as close as possible to the customer for enabling different products to be configured according to the customer’s needs?
The walls of the Temple are made of four pillars: Agility (to ensure flexibility within the supply chain operations); Collaboration, both internally and externally (the more you collaborate, the greater the resilience you can achieve); Risk management culture (so when people make any decision they ask one simple question: “How will this impact on the overall risk profile of my supply chain?”); and Supply chain design (the locations and network you use, and the equipment you use – a forklift truck on lease may seem a good idea, but where are the spares sourced from?).
The roof of the Temple is supply chain transparency. There need to be high levels of transparency across product flows and network, to reassure everyone involved that the supply chain is operating effectively via connected information systems and good communication. Even simple paper-based supply chain maps are useful for making sure all members have a clear understanding of the entire supply chain.
The crown consists of continuous monitoring and intelligence: making sure your employees, suppliers and customers have ways of keeping you informed of issues so you can act quickly – hopefully quicker than your competitors – so you can always keep ahead, securing the resources you need to keep your supply chain operational, whatever the changing conditions form an unpredictable political environment might be.
The coronavirus outbreak will come under control, but the next serious disruption to supply chains is just around the corner. The way forward is for manufacturers to build up resilience across entire supply networks during the good times, talking and sharing to create collaboration, transparency and trust which will then be invaluable through the hard times.
