The spread of the new coronavirus, COVID-19, is being felt globally across operations in ways that are difficult to model and assess. The affected regions are at the heart of many global supply chains. Hard information is lacking; concerns are mounting over depleting (or idling) stock; and companies fear they won’t meet contractual obligations on time.
Understanding how global manufacturers are managing through disruptions to their supply chains will help all businesses structure their own responses. Impacts in many companies across many industries seem inevitable. In the near term, the cost of supplies from China may increase, stemming from overtime and expedited freight costs, as well as from paying premiums to buy up supply and hold capacity. Companies are also working through alternative sourcing strategies. It will be critical to identify alternative supply scenarios and evaluate what these mean for operations — for example, as cases of viral transmission emerge in different territories.
Get up to speed on how leaders are responding
Companies with direct exposure to the COVID-19 outbreak are taking a number of actions, including:
Transporting available inventory to areas away from quarantine zones and near ports where it can be accessed for shipping
Securing capacity and delivery status for Tier-2 and Tier-3 suppliers, and securing allocated supplies and overtime assembly capacity where possible
Buying ahead to procure inventory and raw material that are in short supply in impacted areas
Securing future air transportation as supply and capacity become available, shortening what might otherwise be ocean freight-based lead times
Activating pre-approved parts or raw-material substitutions in places where the primary supplier is impacted but a secondary supplier is not
Activating product redesign or material certification resources where reliable second sources of parts or raw material are not already available
Updating customers about delays and adjusting customer allocations to optimize profits on near-term revenue or to meet contractual terms
Shaping demand, by, for example, offering a discount on available inventory in cases where supply may be short for late winter-early spring fulfillment, optimizing near-term revenue
Introducing new products previously destined for China into other plants.
As a practical manner, companies are doing their best to quantify and communicate what they view as supply-and-demand volume changes to their baseline forecasts for the next couple of quarters. It has been hard to get an on-the-ground understanding of how far this has progressed.
Assess mid-term implications
As manufacturing facilities in affected regions slowly come back on line and the information gaps begin to fill, companies will start to address the broader implications to their supply chains. This will likely include the following:
Quantifying the virus’ impact relative to supply and demand disruptions — both today and longer term — and future market performance
Performing an operational risk assessment on critical business functions
Accessing critical supply chain data across all tiers to properly assess the potential damage
Preparing to set up a temporary inventory recovery and evaluation process, where applicable, and pursue alternative sourcing strategies
Communicating with key supply chain stakeholders on supply volume and changes to demand volume for the next few quarters
Conducting scenario planning exercises to understand the operational implications — financial and non-financial.
Improve supply chain visibility
Deploy supply chain visibility tools that provide line of sight to capacity constraints into first-, second- and third-tier suppliers. By going further into their supply chains, global manufacturers can get a more complete profile of where components are coming from for their sourced sub-assemblies. US-China trade tensions had already elevated country of origin and landed-cost considerations, particularly for companies with outsourced or semi-outsourced supply chains. Now, these trade programs will support resilience strategies and compliance related to a range of import/export matters, such as conforming with child labor laws, conflict mineral policies or trade embargoes.
Model new risks and costs
Business leaders should also look at how new tools and technologies can provide greater intelligence. For example, risk evaluation tools that make use of machine learning can find patterns that can indicate risks or opportunities in macroeconomic, geopolitical and global health, exchange rate and other data. In addition, company executives should consider expanding landed-cost tools to include new elements, such as the (potential) cost of carbon offsets. These tools can also rapidly model alternate supply and transportation scenarios, such as rerouting around a port strike or going to an alternate source of supply.
Focus on resilience
With learnings from the outbreak, the competitive forefront of supply chain operations will likely move toward more comprehensive proactive modeling. Companies should understand their supply chains more deeply and in more dimensions. The COVID-19 outbreak is likely to result in longer-lasting reconfigurations of supply chains to build resilience, and this is already under way as some US companies diversify Asia operating models in response to shifting trade policies.
Principal, PwC US