COVID-19: WHAT TO DO? SUPPLY CHAIN PROTECTION MEASURES

13 July 2020

As the novel coronavirus has reached Europe, for the first time a global supply chain risk was "created". The (potential) threats are more serious than in previous incidents. The current concrete massive effects make it clear that no company should take risk management lightly.

The effects of the corona virus will be long lasting. They will put the resilience of a deeply networked global system of supply chains to a severe test.

What to do?

Currently, the best practice for companies is to analyze potential events related to known supply chain risks based on past precedents and take precautions to minimize the risk of future disruptions. Given many unknown parameters, the question can only be analyzed and answered individually by each company. Companies have never experienced such a period of expanding global uncertainty in the last half century.
It is now necessary to focus on immediate stabilization: for example, by rationing critical parts, optimizing alternatives, pre-booking air freight and rail capacity, increasing priority in supplier production, supporting supplier restarts. For medium- to long-term stabilization, the following topics, among others, must be addressed: updated demand planning, network optimization, adjustment of cash inventories, accelerated qualification for alternative suppliers, measures to increase the resilience and agility of the supply chain.

  1. Set up a central emergency coordination unit. Establish cross-functional teams. Create a list of participants with clearly defined decision-making rules - to anticipate unexpected risks. These teams should contact suppliers directly and monitor them permanently. Critical segments or stocks should be adapted in (weekly) updates.
  2. Check the product portfolio of your company and the customer base. Then set priorities. If the capacity is reduced, rules must be established: For which products will be built? Which customers must be supplied first?
    • Identify truly critical components and understand the risks of Tier 1 to Tier 2 suppliers,
    • Define the required inventory buffers and the storage/locations,
    • Identify the origin of the supplies (where does the supplier produce?) to identify the severity of the risk,
    • Optimize limited production and determine the highest margin and opportunity cost or potential penalty.
    Establish simulations: Play through different contingencies. In this way you learn to make coincidences controllable or almost eliminate them. Discuss and test worst-case scenarios. Deal with the topics reliability and operational redundancy. Establish risk assessments, early warning indicators, short communication and notification structures.
  3. Check the suppliers.
    Who manufactures or who delivers critical parts to you? Are there alternative sources? What is the stock status of the suppliers? Segment the suppliers or the goods to be delivered in a two-dimensional matrix according to "business critical" and "current risk level." Then prioritize the contingencies based on the position in the matrix. Next, segment the suppliers according to their overall impact on business continuity.
    • Look for lead time extension to measure performance and capacity against supplier promises,
    • Now try to find alternative sources if supplies are in critical locations as well as try to spread supply geographically (locally versus other regions or even other continents. Speed up the search for additional options,
    • Change the mode of transport to reduce the lead time for replenishment and book capacities in advance according to the current exposure for air freight and rail,
    • Determine which part of the supply can be moved to another location based on the procurement strategy (single, dual, multi) if the outages continue,
    • Determine possible regions and supplier short lists, if an alternative delivery is required.
    Make sure that the teams know all options to requisition supplies or route orders to other suppliers if necessary.
  4. Secure the cash flow - and don't focus on profit first.
    Cash flow is essential. Arrange the payment terms situationally and selectively with your adequate partners. It is important to have profound planning that is constantly adapted to the current situation.
  5. Inform yourself directly - maintain communication.
    Don't be unsettled by reports in the (social) media. You can obtain information from the Chamber of Commerce, federal and local authorities and your local colleagues and partners.

 

Author:
Michael Klemen
Senior Partner @ Swiss IPG Partners Group

 

 

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