When reading coverage of the impact of the current COVID-19 outbreak on worldwide supply-chains, many of the headlines talk of this being an ‘unprecedented’ disruption against the norm. This is, of course, an accurate description at the macro level, however significant disruption to major supply-chains has sadly not been an uncommon occurrence in recent years.
For example, the 2011 Japanese earthquake and subsequent tsunami devastated the facilities of many major suppliers to the automobile industry, disrupting the production of many carmakers across the world. The impact of successive hurricanes Harvey and Irma in 2017 disrupted the operations of over 50% of oil refineries in Texas, where 30% of the US facilities are located. The knock-on further disruption was felt in the supply chains of industries dependant on petrochemicals; logistics, construction, engineering, food supply and so on. Unfortunately, there is a long and growing list of examples to draw from, and in the current climate it is understandable that our first reaction is to batten down the hatches, cut costs, increase liquidity, and to protect the short term continuity of our businesses at all costs.
However, while the current situation is unprecedented in its breadth and scale, it is useful to consider what we can learn from prior disruptions at the (significant) micro scale that could help us to plan for the future. Most businesses do not exist in a vacuum. It is therefore incumbent upon us to make sure that our supply-chains continue to operate, not only in the spirit of helping those in need to survive, but also to ensure our suppliers are there to help us to thrive in the new business environment to come.
When we look at any potential for supply chain disruption, supply chain professionals tend to look towards options for back-up, failsafe and redundancy whilst maintaining efficiency (eg. just-in-time production methods). Under our previous normal, this could reasonably be considered to add up to at least an element of resilience. This may continue to be the case in some circumstances, however, we now find ourselves with a disruption event that has shown that our perception of resilience by having multiple sources of supply may, on its own, be insufficient.
To ascertain resilience, this requires a view of the supply chain that is dynamic and fact based. Any review should start with some consideration of your supply chain to the ‘n’th degree. For example:
If this service / supply were to suddenly stop, is my future operation dependent on it? How long could my business continue without any further supply?
Could I insource? Over what time / cost? Can I do this without disrupting customer operations / internal operations?
Does my business rely on a supplier being able to ship locally / nationally / internationally?
What is the health of the supply market, locally / nationally / internationally? What margins do my suppliers operate within? How long would it be before a disruption event would be critical to my business?
Is my supplier dependent on further supply (to the ‘n’th supplier degree)?
These are obviously only a few of the questions that will need to be answered. The answers may lead to some difficult messages from our current suppliers; it is an unfortunate truth that many may not survive. Of those that do, they themselves could face disruption or reduced service for months and years to come. Understanding this, it becomes clear that we need to plan for the future now.
The first step is to undertake an exercise of supplier segmentation to understand business risk and supplier impact. There are many tools and techniques to undertake this assessment (ABC, quadrant analysis, risk/impact, etc), however the output should be aligned to your business continuity and resilience planning, not just cost and risk.
Results should first seek to plot your suppliers against a risk matrix to understand the risk to your operations. Where a supplier is critical or key to your business, this requires an approach to managing their continuity of supply.
The most critical of your supply chain requires a rethink about how you will support them through any disruption event – i.e. they should form part of your plans to protect your business. Prior disruption events led to a closer partnering effort between organisations and their supply chains to work towards a mutual symbiosis.
There are countless examples of businesses continuing to support their disrupted suppliers. A specialist transcription supplier that was all but wiped out by a hurricane in the Philippines had its operations centre and workers’ accommodation rebuilt by its main customers, and a specialist automotive manufacturer was provided business grants and loans to rebuild and relocate its operations following the tsunami in Japan by their main client in Europe, and so on.
These acts were not entirely altruistic; the client organisations saw that the continuation of supply was of critical importance to their businesses and that this was worth the investment. I have no doubt that the business cases will have carefully considered the cost and benefit of finding a new supplier plotted against the measures of their continuation of production, however the result was not to draw inwards but to look outwards to ensure that the decisions were right for their business.
Supplier partnering requires a level of supplier knowledge and management that is not common in most businesses. Supply chain and procurement professionals regularly talk of partnering, however, this is often not a true reflection of the relationship. Partnering requires a level of genuine transparency between organisations, with a desire to replace the customer-supplier model with a transparent approach towards shared objectives.
This will require a sharing of information that, under normal circumstances may seem intrusive, however having shared understanding of financial parameters, P&L, cash-flow forecasts, supply analyses and openly considering mutual risk, may lead to insights that help to protect your own business when you are in a position to return fully to the market.
Not every supplier is, or should be, a partner, but many organisations have historically taken a broad-brush approach based on level of spend or delivery slots, without considering the whole picture. Your customers are waiting for you to emerge from this crisis. If you work with your supply chain, truly understand the risks and don’t shy away from making some difficult decisions to ensure your future resilience with your supply chain, you may find strength in collaboration.