Supply
chain disruption – emerging from a crisis stronger together
28
April 2020,
Iain C. Steel
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.
Re-evaluating resilience
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.
Supplier segmentation
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
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..
(This
article was first published on 28 April 2020 in CEO Strategy
web magazine).
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