- No company is immune to the disruption caused by COVID-19.
- Companies can plan for interruptions by mapping suppliers and buyers.
- They should diversify their supply chain to mitigate any future disruptions.
A bee sting nearly killed me. My passion for beekeeping therefore comes as a surprise to many. Through tending their hives, I observe nature’s complex system of interdependency, adaptability and efficiency.
It is fascinating to apply these observations to the business world. Managing my potentially fatal allergy around 200,000 bees is about mitigating risk. Yet, as I recently learned from the loss of my last hive to environmental change, ecosystems are particularly vulnerable to those risks outside your sphere of influence and control.
The impact of the novel coronavirus (COVID-19) on global trade is a case in point. The supply chain ecosystem extends across and between companies spanning the globe. Firms source goods and services from suppliers around the world, who in turn source from others. Like bees, trade provides an essential service. Yet, when one part of this network is impacted by an event like COVID-19, the whole ecosystem is vulnerable to disruption. This means that no company is immune.
As with my bees, interdependency makes the overall system more efficient, but can introduce unseen risks and vulnerabilities. With global growth being propelled by Asian consumers, an incident on the other side of the world can quickly spread. Just as a chain is only as strong as its weakest link, companies can rapidly discover unexpected disruption across their supply chain.
The Fukushima nuclear disaster in 2011 triggered an unforeseen shock to global car manufacturers. Supply chains were dependent on a single electronics manufacturer so close to the Fukushima nuclear plant that it had to shut down. This abruptly cut supply of the world’s microcontrollers, a type of custom chip used in cars, by around 40% – interrupting car production around the world.
Examples like this reinforce the fact that a company’s supply chain is a strategic consideration. So how can firms effectively manage the risk of unforeseen disruption?
The immediate priority is to care for employees and their families. A process for timely two-way information sharing is necessary so official advice is widely disseminated. In an effort to limit COVID-19 contagion, employees in affected countries have been unable to work from their regular workplace. So enabling remote working can maintain productivity. Considerations range from the practical to the personal during prolonged periods working in a home environment – from broadband speed to employee wellbeing.
The next step is to unearth hidden dependencies through an end-to-end review of a supply chain. Through mapping suppliers and buyers, companies can plan for interruptions down to the component level. Then, as roads, ports and loading facilities face impacts, alternative logistics and distribution options may be required. In the month following the first COVID-19 travel restrictions, around half of scheduled departures on a major Asia to Europe shipping route were cancelled. Having visibility across operations, from sourcing to production to distribution, will enable corporates to prepare contingency options in advance.
Once immediate impacts subside, companies must then prepare for pent-up demand. This upturn can bring a spike in orders, which requires agility. Having financing in place enables resources to be allocated rapidly and flexibly to add capacity and avoid bottlenecks.
Then, in anticipation of future disruption, firms should consider supply chain diversification. A broader range of suppliers across different geographies mitigates the risk of one country being cut off. Stanley Black and Decker, the world’s largest tools manufacturer, has recently expanded US production to avoid reliance on any one geography.
These steps combine to build resilience. This becomes more important as potential disruptions multiply: whether infectious diseases, such as SARS, Ebola or COVID-19; environmental, as with Fukushima; financial, such as the global financial crisis; or political instability. The World Economic Forum’s Global Risks Report paints an unsettled landscape, highlighting intensifying environmental risks. Failure of climate change mitigation and adaption is the top risk by impact, followed by biodiversity loss, as I’ve recently experienced first-hand.
Over time, the distances across which companies maintain supplier relationships may reduce. Both to be closer to the consumer and to mitigate risk. It would, however, be short-sighted to sever the connections which wire global growth. Indeed, the suggestion of reverting to only domestic suppliers would reduce resilience. A range of options is critical as goods, services and skills may be unavailable, uncompetitive, or uncertain close to home. And, as nature disrupts global trade, policymakers must be mindful of easing the burden, rather than adding to the barriers which have restricted trade in recent years.
Businesses cannot control a volatile and uncertain external environment, but they can be flexible in response. As threats multiply, resilience becomes critical. Companies set themselves apart by anticipating external disruptions, to inoculate against the sting in their tail.
This article was originally published by the World Economic Forum, which owns all rights to the copy. It was written by: Natalie Blyth, Global Head of Trade and Receivables Finance, HSBC.