By James B. Rice Jr. | Harvard Business School Publishing
Developing a cogent supply chain response to the coronavirus outbreak is extremely challenging, given the scale of the crisis and the rate at which it is evolving.
The best response, of course, is to be ready before such a crisis hits, since options become more limited when a disruption is in full swing. However, there are measures that can be taken now even if you’re not fully prepared. And although its long-term consequences have yet to fully play out, the coronavirus outbreak is already providing lessons about how you can better prepare your company to deal with future large-scale crises.
WHAT YOU CAN DO NOW
Let’s first look at some actions that can be taken in the short term to mitigate the impacts of the crisis on supply chains.
START WITH YOUR PEOPLE
The welfare of your employees is paramount. The companies that recovered the fastest after Hurricane Katrina in 2005 were those that tracked down all their employees who dispersed across the southeastern United States. Procter & Gamble even went so far as to create a local employee village on high ground with housing, foodstuffs and cash advances for employees and their families.
MAINTAIN A HEALTHY SKEPTICISM
Accurate information is a rare commodity in the early stages of emerging disasters, especially when governments are incentivized to keep the population calm to avoid panic. Impact reports tend to be somewhat rose-tinted. However, local people can be a valuable and more reliable source of information, so try to maintain local contacts.
RUN OUTAGE SCENARIOS TO ASSESS THE POSSIBILITY OF UNFORESEEN IMPACTS
Expect the unexpected, especially when core suppliers are in the front line of disruptions. In the case of the coronavirus crisis, China’s influence is so wide-ranging that there will almost inevitably be unexpected consequences. Inventory levels are not high enough to cover short-term material outages, so we should expect widespread runs on common core components and materials.
CREATE A COMPREHENSIVE EMERGENCY OPERATIONS CENTER
Most organizations today have some semblance of an emergency operations center, but in our studies we’ve observed that these EOCs tend to exist only at the corporate or business-unit level. That’s not good enough — a deeper, more detailed EOC structure and process is necessary. EOCs should exist at the plant level, with predetermined action plans for communication and coordination, designated roles for functional representatives, protocols for communications and decision-making, and emergency action plans that involve customers and suppliers.
DESIGNING FOR RESPONSE
The coronavirus story will undoubtedly add to our knowledge about dealing with large-scale supply chain disruptions. Even at this relatively early stage, we can draw important lessons about managing crises of this nature.
KNOW ALL YOUR SUPPLIERS
Map your upstream suppliers several tiers back. Companies that fail to do this will be less able to respond or estimate likely impacts when a crisis erupts. After the 2011 Sendai earthquake in Japan, it took weeks for many companies to understand their exposure to the disaster because they were unfamiliar with upstream suppliers. At that point any available capacity was gone.
UNDERSTAND YOUR CRITICAL VULNERABILITIES AND TAKE ACTION TO SPREAD THE RISK
Many supply chains have dependencies that put firms at risk. An example is when an enterprise is dependent on a supplier that has a single facility with a large share of the global market. The Sendai disaster highlighted this type of exposure. For example, Hitachi manufactured approximately 60% of the global supply of airflow sensors, a critical component for auto manufacturers. The anticipated shortage of these items forced some automotive original-equipment manufacturers, or OEMs, to ration the remaining airflow sensors to their highest margin product lines. The coronavirus outbreak has exposed the dependency of Apple and many auto OEMs on sourcing from China.
CREATE BUSINESS CONTINUITY PLANS
These plans should pinpoint contingencies in critical areas and include backup plans for transportation, communications, supply and cash flow. Involve your suppliers and customers in developing these plans.
DON’T FORGET YOUR PEOPLE
A backup plan is needed for people too. The plan may include contingencies for more automation, remote-working arrangements or other flexible human resourcing in response to personnel constraints.
REVISIT YOUR SUPPLY CHAIN’S DESIGN
Until very recently, most global companies could base their supply chain designs on the assumption that materials could flow freely across the planet, enabling these firms to source, produce and distribute products at the lowest-cost locations around the world. U.S.-China trade policy whiplash, Brexit and now the coronavirus crisis have challenged this fundamental assumption. Specifically, the coronavirus illustrates the vulnerability of having so many material sources located in one spot — and one far away from critical markets in North America, Europe and Latin America.
We believe that a new kind of design is needed that can enable companies to quickly reconfigure their supply chains and be responsive to rapidly changing global trade policies and supply dynamics. Therefore, the question is: How should companies design their supply chains to operate effectively in a highly volatile world where consumers are intolerant of tardy responses? There are many options, and each one involves trade-offs between the level of risk that an enterprise can tolerate and the amount of operational flexibility it wants to achieve. Here are two examples:
REDESIGN WITH SECOND SOURCES
This supply chain design provides backup capacity for supply, production and distribution outages by spreading the risk of disruption across two sources. Of course, this design can only provide backup capacity if the second source is not also affected by the disruption. It’s best, therefore, to place the two supply sources in different regions. Although this supply chain design lowers risk, it also incurs higher administrative, quality-monitoring and unit costs.
REDESIGN TO SOURCE LOCALLY
This design calls for a company to have production facilities with local sources of supply in each of its major markets. Like the above option, it spreads the risk. Since these sources are dispersed, the economies of scale are lower and the capital costs are higher, but the transportation costs are lower.
These are gross simplifications of many design options that a firm can take to reduce risk and ensure response capacity. Obviously, in selecting a design, companies must weigh the costs of each and how each design will affect their ability to serve their customers and compete against other firms.
It’s impossible to anticipate the arrival of global crises such as the coronavirus outbreak, but firms can mitigate their impacts by taking supply chain preparedness to a higher level. They should act before a disruption occurs and adjust and execute new plans afterward rather than start from scratch every time they are plunged into a new crisis.
James B. Rice Jr. is deputy director of the MIT Center for Transportation and Logistics.
Image credits: Eldar Nurkovic | Dreamstime.com