From the June 2020 print edition
In 1997, the first known human cases of H5N1 were reported in Hong Kong. Six of the first 18 cases were fatal. There were concerns that the “avian influenza” would evolve into a pandemic. By the end of it in 2015, there had been 694 cases – and 402 fatalities. In other words, 58 percent of H5N1 cases were fatal. Canada saw one case, in 2013. That single case was fatal. The bird flu was very deadly but barely contagious.
Canadians, particularly Torontonians, likely remember the 2003 Severe Acute Respiratory Syndrome (SARS) outbreak. From February 23 to July that year, 251 Canadians contracted SARS and 43 died – a 17 per cent fatality rate.
In March 2008, the University of Manitoba Transport Institute produced a report entitled Manitoba Nutrition Supply in Event of a Pandemic. It focused on the following question: How would Manitoba feed its people a balanced diet if provincial and international borders were closed due to a pandemic?
In April 2009, the first H1N1 cases were reported in Mexico and the US. By that November, H1N1 was declining. There had been over 622,000 confirmed cases, in nearly 200 countries and territories – and at least 7,800 deaths.
Between one and two per cent of H1N1 cases were fatal. While this condition was highly contagious, it was not particularly deadly.
North American supply chain managers may have said: “these events are very rare and usually happen far away” or “H1N1 was no worse than the seasonal flu” and “we’re too busy to prepare.” But what if the next big strain is as contagious as H1N1 – and as deadly as H5N1?
Well, the next big strain is here. Starting last year in Wuhan, China, it appears considerably more communicable than H1N1. It is also more deadly. On March 11, the WHO declared COVID-19 a pandemic. By May 22, Canada had 82,413 cases of coronavirus and 6,245 deaths, or a fatality rate of 7.5 per cent. Globally, there have been over five million confirmed cases and over 338,000 fatalities.
Most supply chains face demand and lead time variability. Traditional ways to handle this include carrying safety stock, expediting shipments and managing customer expectations. There is also volatility in oil prices and Canadian dollar rates vis-à-vis the US dollar. Hedging strategies can help protect supply chains from such uncertainty.
There are two approaches to handling major interruptions. One approach, risk management, is proactive and the admonition is “be prepared.” The other approach, crisis management, is reactive. Here, supply chain managers consider the peril and say, “bring it on!”
Risk management versus crisis management
There are pros and cons to each approach. By selecting an approach for dealing with uncertain events, the supply chain manager is placing a bet. The table depicts four possible scenarios in managing supply chain interruptions. An organization can assume a proactive or a reactive position in facing the disruptive event. While a reactive stance implies a lack of planning, a proactive position includes developing an action plan.
Using the reactive approach, an organization will be unprepared. The event triggers crisis management. Time will likely be lost figuring out what to do. Customers and suppliers may be lost to better prepared competitors. However, if the event doesn’t happen, the organization has conserved resources. It takes time, money and talent to create action plans. By foregoing planning, an organization can devote scarce resources to competing, serving customers, developing suppliers, training employees, interacting with constituents and so on.
Alternatively, the proactive approach helps organizations be prepared. This is the essence of risk management. If we cannot prevent bad things from happening at least we can prepare for them. A plan is developed to mitigate an interruption’s impact. If the disruptive event occurs, the organization can respond and recover better. If the event doesn’t happen, the organization has potentially squandered scarce resources.
Warnings from the WHO about a coming pandemic seem to have largely been ignored. Thus, organizations have been in crisis management mode, having adopted a reactive approach.
Place your bets!
How to decide which approach to take? Two words: likelihood and impact. For an event with low likelihood and low severity of impact, the answer is clear: be reactive. The answer should be equally clear for those events with high likelihood of occurrence and high severity of impact: be prepared.
What about low likelihood/major impact and high likelihood/minor impact? These are judgment calls. How do you feel about a one per cent chance of losing a million dollars?
How can we determine whether a proactive or reactive approach is sensible in response to a possible pandemic. With COVID-19, the pandemic is here. That’s 100 per cent on the likelihood scale. Many organizations and governments probably under-estimated both likelihood and impact. Indeed, some organizations likely did not consider it at all. Thus far, its severity has been high.
In its 2009 Global Risks Report, the World Economic Forum (WEF) predicted a five- to 10-per cent risk a pandemic disease would emerge and jump from other animals to humans, with high mortality and transmission. This combination of notable likelihood and catastrophic impact should have made pandemic planning and preparedness a worthy endeavor.
Ten years after, in its 2019 Global Risks Report, the forum included the “spread of infectious disease” rather than pandemic influenza among the risks. This risk was rated below average on likelihood and slightly above average (10th position) on impact. The WEF may have under-estimated both likelihood and impact of a pandemic.
Supply chain strategy
So, you’ve decided to be prepared, at least for next time. What should you do? Consider the following strategic issues. Three long-term trends in supply chain management – single sourcing, low-cost country sourcing and lean logistics – all assume stability in the operating environment.
These days it is critical to have a back-up plan. Supply chain managers must understand the vulnerabilities of their suppliers (and perhaps their suppliers’ suppliers) and their own vulnerabilities. Single sourcing assumes reliability and continuity of the sole supplier. While close relationships with suppliers can be beneficial, dependence on one is risky.
Canada hasn’t had a trade surplus with China since 1991. Many companies have found “great deals” in China. However, environmental and social issues aside, in economic terms this is also risky. Such dependence on a source nation assumes stability of the political relationship and ignores possible disruptions from far away.
Another long-term trend is the shift toward lean supply chains, which focuses on eliminating waste. There are seven forms of waste in supply chains, but inventory is the headliner. The lean approach recognizes that inventory is needed to serve customers. To meet customer demand with lower inventory levels, reliability is essential. Shipments must arrive on time. Goods must be fit for use. Demand must be reasonably level and predictable. Similar to single sourcing and low-cost country sourcing, lean supply chain methods need stability. Any disruption in supply quickly results in stock-outs – and unhappy customers waiting for goods. Any sudden spike in demand also quickly results in stock-outs.
The pandemic has hit supply chains with simultaneous supply disruptions and demand spikes. The response, though largely reactive, has been impressive. Next time, things can be better. One outcome of the 2008 Transport Institute report, Manitoba Nutrition Supply in Event of a Pandemic, was a tool called the Supply Chain Risk Evaluation and Management (SCREAM) framework. It urges supply chain managers to think beyond cost and service in all strategic deliberations. It urges them to consider likelihood and impact of a wide range of possible disruptions. What if our Chinese supplier is unavailable for several months? What if the US border closes? What if 33 per cent of our workforce is out sick? What if we suddenly lose our CEO? What if the federal government takes control of our operations? What if the price of oil rises to $150/barrel (or falls to $15/barrel)? Whatever your business, it’s time to at least consider worst-case scenarios.