On December 31, 2019, the World Health Organization (WHO) learned of several cases of severe pneumonia in the Chinese city of Wuhan. The pneumonia, a strain of coronavirus that WHO later named COVID-19, has since spread through China and into other countries.
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As global leaders and health officials track the strain and make decisions regarding containment, supply chain leaders need to assess and plan for how the virus will impact global supply chains.
“ The full impact of coronavirus on supply chains might not become obvious until sometime in the next few months and beyond”
“The consequences of a pandemic event are hard to predict,” says Koray Köse, Senior Director Analyst, Gartner. “However, the risks always exist and are augmented with further globalization and integration of supply chains. It is not a matter of if it will happen but to change the focus to be prepared when it happens. That is a shift of mindset in risk management and business continuity.”
The challenge of globalization
Although the outbreak is being compared to the 2003 SARS outbreak, China is now much more developed and integrated with the global economy, and the country has significantly improved its transportation networks. This means the supply chain implications go beyond regional concerns. Travel restrictions, shortages in labor and materials, as well as logistical challenges through tightened controls, and hub and border closures will cascade and augment the impact much further today than it did 17 years ago. Indeed, the coronavirus outbreak has already eclipsed SARS.
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How coronavirus could impact supply chain
Though it is difficult to predict the exact consequences of coronavirus, organizations might begin to see impacts across the supply chain, including:
- Materials: Supply shortages of materials or finished goods coming from or routed through logistical hubs in impacted areas.
- Labor: White- and blue-collar labor may not be available due to quarantine guidelines or illness.
- Sourcing: Travel may be restricted to certain areas, limiting the ability to discover, qualify and certify new business or programs and to transact business.
- Logistics: Established hubs and supply networks may experience limitations in capacity and availability so that even if materials are available, they would be stuck elsewhere. Finding alternative routes and means of transportation will become difficult.
- Consumers: Consumers may be more cautious in their purchasing habits due to fears about being in public and potential exposure to the virus. Many may turn to online sales, challenging logistics networks.
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Preparing supply chains for disruption
Disruptions happen. Leading supply chain organizations utilize enhanced risk management processes. They include a framework to continuously measure key risk indicators and to prepare scenarios for controllable and foreseeable uncertainties such as compliance, labor, material, capacity and financial issues.
Epidemics and pandemics present a different scenario. The main impact is a lack of access to staff, decreased productivity and a change in public behavior in terms of shopping practices and spending. “The full impact of coronavirus on supply chains might not become obvious until sometime in the next few months and beyond,” Köse says. “However, supply chain leaders should take initial steps now to monitor and prepare for the impact on their value chain.”
Short-term actions: Do it now
Develop a high risk for supply chain disruption monitoring and response programs for countries impacted by the virus and potential supply chain exposure from tier 1 and below. If lower tier transparency is missing, start building up the program and prioritize discovery to get a full picture rapidly. It’s also important to assess how customer spending might be affected.
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The next step is to make sure all inventory is within reach and outside impacted areas and logistical hubs. Additionally, supply chain leaders should work with their legal and HR departments to understand any financial implications of not being able to deliver supply to customers and provide guidance to employees located in the impacted areas.
Midterm actions: Do it this quarter
In the midterm, the focus should be on balancing supply and demand as well as building buffer stock. Assess opportunities to diversify the supplier ecosystem and review or create the organization’s overall risk management approach. Work with internal stakeholders and strategic and critical suppliers to establish a congruent risk management approach to monitor and prepare for potential material and manufacturing capacity shortages.
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Long-term actions: Do it this year
Once the initial impacts of the crisis are mitigated, it’s all about foreseeing the next “when.” Supply chain leaders and their teams can, for example, conduct a scenario planning exercise and develop action plans. This is the time to discover or develop alternative sources and diversify value chains.
Tackle strategic and concentrated supplies with high value at risk where internal risk capacities to absorb, such as alternative sources, routes, inventory and cash reserves, aren’t sufficient enough to mitigate any major disruption. Being better prepared than the competition might even open new opportunities when the next disruption comes around.