Supply chain risk management: Opportunities in crisis?
Many businesses are facing a supply crisis stemming from weaknesses in their sourcing strategies many years ago. The Covid-19 crisis can be clearly seen in data analysis on risk monitoring and supply chain mapping.
After the March 2011 earthquake and tsunami in Fukushima (Japan), many multinational companies have learned in-depth lessons about potential weaknesses in the supply chain - weaknesses leading to loss of business. revenue, and in some cases, market cap.
Executives must seriously make the supply chain more flexible
Although most companies can quickly assess the impact that Fukushima has on their direct suppliers, it is still limited by the impacts on tier 2 and tier 3 suppliers in the region. affected. Nearly nine years later, it seems that Fukushima's lesson must be recalled as many companies around the world scramble to identify low suppliers - those who do not deal directly - based in the affected areas. Chinese influence.
Many companies are probably also thinking back on their dependence on a single company for direct purchases. Supply chain managers know the risks of individual sourcing, but they do it anyway to ensure their supply or meet cost targets. Often, they have limited options to choose from and more and more of those options are available only in China.
In many cases, the root of the supply chain crisis stems from upstream decisions. For example, conventional plastic sourcing is vital for some industries from a supplier or a region. Such decisions through the supply chain, even affect companies that do not directly source materials or products from China but from their suppliers.
Risk management principles should be applied at a minimum, to levels 1 and 2 of the company's supply chain. In some cases, it will not be possible to find multiple sources for certain parts or materials. For example, a supplier may own unique intellectual property; sometimes not enough to justify two sources, or many simple sources are not available. In these cases, companies need to complement their traditional sourcing practices with new data sources and new approaches to understand and minimize the risks they face.
At a minimum, companies should invest in monitoring 24x7 of their global suppliers. Some companies, such as General Motors, have gone beyond that and spent years mapping their supply chains. Mapping involves engaging suppliers as well as knowing which parts originate or go where. When companies have advanced knowledge of where disruptions come from and which products are affected, they will have time to implement immediate avoidance and mitigation strategies, such as shaping demand by replacement costs, inventory purchases, replacement capacity, inventory allocation control ...
In the first weeks of 2020, their supply chain mapping companies knew which parts and raw materials originated in the Wuhan and Hubei areas. The Covid-19 translation once again raises the lesson: The system of monitoring suppliers and subordinate dependencies is a basic requirement for today's sourcing and supply chains.
After each disaster and lead to disruption, there is a series of lessons on how to manage risk in the supply chain. In the early 2000s, the supply chain spread across the globe as manufacturing changed over cheap labor and products could easily become obsolete in a short period of time, such as apparel and fashion. and consumer electronics. But many global brands have learned from disruptions such as the SARS epidemic or the Japanese earthquake that production disruptions in one part of the world could cause the whole chain to be abandoned from very necessary.
In the past two decades, an important buzzword in supply chain management is resilience. A flexible supply chain must be able to detect early warning signs of disruption and must respond by shifting production to alternative sources. It must have a diverse supplier or some contingency plan in order to use backup vendors. However, for a business to detect disruptions, they must have a good deal with their supply chain. Without a detailed map of the supply chain, it is difficult to know the vulnerable links.
Covid-19 is affecting large parts of the world and is at risk of a pandemic, even the best contingency plans may be inadequate. The scale of this crisis is unprecedented in modern times. For weeks, China basically stopped all activities. Most factories stop producing and bustling cities once they become "ghost" towns. This situation is certainly not something one can predict or fully plan. There are 9 leading container ports in the world, 7 of which are in China, one in Singapore and one in South Korea. All three countries are currently heavily affected by the outbreak of Covid-19.
In general, about one-third of the world economy is affected and the disease is still ongoing. This is a crisis moment, but this can also be an opportunity. In the short term, many businesses, especially those in the service industry that rely on "crowds" and have a high number of customers, may have cash flow problems. Stronger companies will be able to survive or even gain market share. In the long run, companies should think about turning crisis management into risk management. Every large business that relies heavily on suppliers or consumers in areas affected by the virus should think about diversifying its supply base. Executives must be serious about making the supply chain more flexible.
At Orgit, we are problem solvers, next-generation thinkers, and efficiency aficionados. Operating at both local and global scales, Orgit offers comprehensive solutions packages developed by in-house industry experts, tested against real-world scenarios, and designed for the changing supply chain. Learn more about Orgit’s solutions or get in touch with our experts today.
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