Mitigating the effects of current disruption on global manufacturing operations provides an opportunity to assess the long-term advantages of implementing smart manufacturing technologies.
As coronavirus spreads rapidly around the world, we are already starting to see significant disruption to the supply chain from the closure of manufacturing facilities. Apple’s supply chain from China is only operating at 20 per cent of capacity and automotive manufacturers have been among the first to be hit: Fiat Chrysler is halting production at a plant in Serbia and Hyundai is suspending work in Korea.
As China’s supply lockdown passes the six-week mark, we are reaching a tipping point. With only a slow build-back of supply from China, we are inevitably going to see shortages of key components across a range of sectors.
The type of exports affected by the lockdown in China’s Hubei province are garments and textiles; mobile phones; electronics; medical products; small components and machinery. Therefore, the disruption caused is likely to be seen mainly in automotive, consumer electronics and pharmaceuticals, meaning the immediate impact on European consumers will be less directly felt.
However, as the virus spreads across the globe, the number of affected supply chains will rise. Both South Korea and Northern Italy have strong industrial footprints, so we can expect further disruption from these regions over the next few weeks.
There are a range of unknowns around the timing and extent of the disruption, but if the slow recovery of the Chinese supply chain is replicated across other infected areas then we could expect to see drops in output of around 30-40 per cent in regions impacted over a three to four-month period. Additionally, further delays are likely to occur as sea freight terminals are affected by more cautious approaches to managing shipping. On a positive note, as the nature of the virus becomes better understood it is likely that it will become easier to control activity while maintaining supply chains.
In the short term, companies should immediately review their inventory levels and policies and ask suppliers to do the same. They should then work with those suppliers to identify the scale and timing of their exposure within the supply chain, including effects that may be hidden. These could be where alternative suppliers are likely to be dependent on the same Tier 3 or 4 supplier in Hubei. Even the best organisations don’t have full visibility of the supply chain back to raw materials and it is often the case that delayed disruption is caused by the lack of minor components.
Companies should also review their contractual obligations with suppliers, paying more attention to the possibility that they may attempt to claim force majeure and avoid liability for failing to supply. Pricing in a constrained supply market will come under pressure and companies should review their agreed pricing structures and market position to ensure primacy of supply - otherwise, they might find themselves at the back of the queue when supply resumes. Larger companies should be prepared to support smaller suppliers with adjustments to order quantities, lead times and payments terms. Above all, companies should continue to communicate with suppliers to monitor the situation.
Resourcing to suppliers not affected in the short-term is challenging from a tooling availability, quality and management perspective and will only be considered if supply is impacted for several weeks.
There will then be a need to prepare for when the epidemic is over. Assuming the controls put in place by the Chinese government work and the outbreak doesn’t spread significantly, the Hubei province and other regions will begin to operate again and supply will be resumed. Companies should work with suppliers to ensure that they are among the first to start receiving deliveries when this happens.
During the lockdown period, companies should focus on their internal planning processes to maximise the use of inventory – after all, events like these are what safety stocks are for. Then, when supply becomes available again, it should be carefully managed though the sales and operations planning (S&OP) process to avoid disruption caused by fluctuating inventory levels.
It’s also time to think about managing wider risks through understanding the location risk across the tiers and reconsidering having isolated supply chains. It is important to avoid clustering suppliers in one region and particularly around similar supply chains. This will be increasingly critical as the world becomes more volatile through climate change and other man-made disruptors. That makes it important to look beyond selecting suppliers based on lowest price only and consider the overall value and the risks in the supply chain.
Early visibility and warning of problems will increasingly give some companies a competitive advantage in managing similar disruptions. ‘Smart supply chains’ are now supported by digital technologies such as 5G, data analytics and artificial intelligence which offer greater visibility and connectivity across the end-to-end value chain and can give early warnings of any problems. The coronavirus disruption provides a clear message about how these new tools are becoming essential for inoculation of supply chains against future shocks.
Tim Lawrence is a supply chain expert at PA Consulting