COVID-19: How to minimise supply chain disruptions
Many actions are currently being taken in Danish companies. Contingency plans have been identified, scenario analyses are being carried out, and plans have been implemented to minimise supply disruptions due to COVID-19.
Many of our customers are affected, with some reporting that up to 90 per cent of their products will be affected if the pandemic continues. Other customers have moved their production orders from sites in China to alternative locations, where they are running out of raw materials and sub-components they source from Chinese suppliers. It is therefore not an exaggeration to claim that the coronavirus has already created a noticeable disruption in global supply chains.
We suggest there are four practical steps that you, as a supply chain manager, should take now - in addition to the most important action, which is to ensure the safety of your employees.
Four important steps
If this has not already happened, you should immediately review inventory and policies - and ask your suppliers to do the same. You must work with your suppliers to identify the extent and timing of when the supply chain will be affected - including any hidden influences. For example, a hidden influence could be that alternative suppliers depend on tier 3 or tier 4 suppliers in Hubei or other areas where companies are shutting down as a result of the coronavirus.
Secondly, it is important that you communicate with affected suppliers. If Danish companies feel a mild sense of crisis due to the impact on their suppliers' of the corona virus, they can be sure that the sense of crisis is not as mild as it is at the suppliers. It is in times of crisis that it becomes important for supply chains to stick together and support their suppliers. These are the same suppliers that will be important in restoring supply. You must therefore communicate with affected suppliers (and suppliers in the risk zone) to ensure you have a first-hand understanding of whether it is realistic for them to continue to deliver and to what extent. Then you will also have to do a review of the price structure and market position to ensure prioritisation of deliveries so that you are not at the back of the queue when the suppliers become able to deliver again.
Both now and when the situation is over, allocation strategies and mechanisms are crucial. You need to ensure there are clear strategies where everyone knows how to allocate scarce resources. That means clarity on: which markets and customers to prioritise; which orders should the reduced production capacity be allocated to; and how to allocate scarce raw materials and sub-components? In order for the allocation strategies to be implemented, companies must also ensure that the appropriate allocation mechanisms are implemented. When it is decided at the management's daily "COVID-19 morning meeting" that all orders with product x to customer y have the highest priority, then it is important to ensure that the rest of the company follows the instructions so that production capacity and raw materials are allocated to the exact production orders for the selected customer.
Finally, you should reassess future supply chain risk mapping. It is time to consider how to manage supply risks in a broader sense. Supplies can be managed by understanding risks at every level - not only from your own supplier, but from the supplier's supplier and its supplier, etc. More and more companies will probably try to avoid groupings of suppliers in one region in the future.
You must consider whether dual-sourcing is sufficient for critical raw materials and sub-components, and how risk diversification should look in practice to minimise the most significant risks.
And note that a virus like the coronavirus is just one type of supply risk. Other potential far-reaching supply risks may be cyberattacks, natural disasters, collective redundancies or anything else. So no matter what, it's smart to manage your contingency plans and find the right balance of risk.
Søren Graugaard Pedersen and Mads Brandt, supply chain experts at PA Consulting