The continuing coronavirus outbreak has demonstrated the double-edged sword that global supply chains can represent for manufacturers. Yes, they can enable just-in-time production. But they can also be highly intricate, leaving little room for resilience in the face of critical disruptions such as those caused by COVID-19.
As the outbreak continues, manufacturers must identify their key vulnerabilities, take steps to keep supply chains up and running, and plan for the future.
Businesses Feeling the Crunch
Shortages are already emerging. One global manufacturer has announced shortages of parts from China that it uses to build construction and agricultural vehicles. Another has halted some production in South Korea because it’s running out of parts. And yet another is exploring the use of air and sea access into Vietnam to prevent delivery delays as China restricts land routes.
With many manufacturers carrying inventory of only two to four weeks, disruptions and uncertainty will persist as the outbreak continues. So far, effects have largely been felt by businesses with very lean supply chains, but deeper systemic disruptions may yet emerge. As the virus continues to spread, we are starting to see impacts on other major manufacturing and trading centers, including in the Middle East, Europe, and North America.
Take Measures Now
Most manufacturers already know who their critical suppliers are. But they don’t always know who their suppliers’ suppliers are. That means they still need to map and understand a significant but hidden vulnerability in their supply chains — and that it’s difficult to predict the impact of shortages and stoppages on their output.
No company operates in isolation, so it's essential to identify continuity risks, any potential bottlenecks, and any single points of failure. By building a simple, three-step action plan, manufacturers can manage the impact of the COVID-19 outbreak or a similar future event. These three steps include:
- Prevention: Talk to your critical suppliers to ensure they have plans to respond to the outbreak and to understand what these plans include. But take other measures to protect your interests in case those plans aren’t effective — identify alternative suppliers you can use as backups and review any contractual liabilities you could face in the event of delays, cancellations, or quality issues.
- Response: Where possible and as working capital allows, stockpile critical supplies. Continue to communicate with existing suppliers, encouraging openness about their level of disruption. And modify orders and shipment arrangements as needed if demand for your products increases.
- Recovery: Find new suppliers if necessary to enable greater resilience. Review lessons learned with critical suppliers to understand how things could be improved during the next disruptive event. Explore and invoke any relevant contract clauses that may help limit costs or accelerate your recovery. And determine whether any failures of contract KPIs constitute a breach worthy of compensation.
By building robust action plans, manufacturers can better position themselves to change suppliers on short notice, monitor potential pinch points, and implement other measures to stay resilient during this crisis and the next one.