COVID-19 and supply chains

Without a doubt, COVID-19 has become a life altering event. The short-term impact is already more severe than that of all previous recent outbreaks, including SARS, H1N1 and Ebola.

All the world’s largest 1,000 companies have been impacted either directly or through their supply chains. The virus’s spread across North America and Europe has affected the movement of goods worldwide and reduced the effectiveness of interconnected supply chains. Global economic growth is expected to trim by three-to-six per cent this year. The medium- to long-term impacts are expected to be more severe. Global investors have withdrawn $26 billion from developing Asian economies plus $16 billion out of India, which threatens a massive economic recession in the region. In Latin America, an estimated 29 million people will likely fall into poverty.

On the supply chain side, the impact varies. Manufacturers of essential products have seen high demand that production capacity cannot meet, whereas non-essentials see a simultaneous drop of supply and demand that can lead to stopping production, risk of bankruptcy and the need for government support. As companies face dual disruptions, it’s important to execute dual strategies like stronger collaboration with suppliers and emergency sourcing to increase production capacity and raw material supply.

Pandemics – a DIRE supply chain risk
Pandemics cause long-term disruption. Their impact is unpredictable and simultaneous across supply, demand and logistics which makes it harder because supply chain recovery plans depend on the severity of the disruption. Not all the 1,438 epidemics that affected supply chains over the past 10 years did so similarly.

Traditional disruption management strategies include contingency planning (for black swan events), monitoring and maintenance (for operational and IT risks), stronger supplier collaboration, flexibility and supply chain restructuring. The challenge with pandemics is that they do not affect single supply chains, but interconnected networks. As companies are forced to manage supply shortages and increased demand, having combined dynamic strategies is key.

Digital technologies play a role in the execution of these strategies. Supply chain collaboration requires on-time data sharing. Data analytics and blockchain help increase visibility as well as accumulating data required to manage production and supplier capacity, and contingent suppliers.

Reshoring not a universal fix
COVID-19 has sparked discussion about the risks of reliance on traditional management practices, global sourcing, single sources and lean inventories. Reshoring production has received much attention and buy-local movements have followed. However, after decades of globalization, bringing back production is not always easy. Many raw materials still need to be sourced globally.

A good example is the N95 mask. The filter on N95 masks require a plastic called melt-blown. China produces half of the world’s stock and Asian factories have supplied it globally for 30 years.

Replacing long-standing global supply chains requires not only investing in scaling up local production but acquiring and building the local technical capabilities to support it and developing new quality management systems. While localization may be easier for less complex products, it will take time for countries to develop the technical proficiency to rely on local production.

Resilience, prosilience and viability
Since the early 2000s, supply chain resilience has been accepted as an important element of business continuity and competitiveness. With the impact of pandemics and threat of major disruptions, the focus has evolved beyond it. While resilience centres around withstanding disruption and recovering performance, it’s clear that businesses need to also anticipate disruption – to be prosilient.

Supply chain viability is the next level of preparedness. It deals with changing structural supply chain designs to adapt and survive long-term disruptions. A manufacturer can have a supply chain design for times of economic stability and growth, for example global sourcing, lean manufacturing or agility; a second design to manage disruptions, like fires, strikes, focusing on being proactive and reactive, managing risk inventories, having backup suppliers. They can have a third design to manage the long-term impacts of disruptions like COVID-19. This can include production changeovers, including moving from production of cars to ventilators or from vodka to sanitizer, as well as resourcing and reshoring. The strength of viable supply chains lies in their ability to anticipate, plan and design a framework allowing them to switch between structural designs based on the environment.

Supplier vetting and selection are key in this process because of the risks introduced by supply chain partners. It is critical to select suppliers that guarantee the reliable flow of goods from one supply chain node to another. Collaborative risks due to lack of cooperation or information between the parties can be avoided through proper selection, information sharing and ongoing performance management.

As businesses prepare for an additional wave or new disruptions, they must focus on creating flexibility in supply chains; frameworks that allow agile switching of structural designs and viability to not only withstand, but capitalize on, the strength of supply chains.

Denis Sanchez, MSc, MA is vice-president of operational excellence at Cognibox.