Risk in Context

COVID-19's Critical Disruption of Complex Supply Chains

Posted by Ron Tomsic March 04, 2020

Over the past two decades we have witnessed China grow into the economic powerhouse it is today. However, not only has its economy grown, but its factories supply manufacturers around the world through supply chains boasting overwhelming intricacy.

The global supply chain is not a new phenomenon. It's the overwhelming complexity of the modern supply chain, with firms' supply lines aligned with new manufacturing nations and emerging centres of excellence, that has changed the nature of how goods are produced, assembled, and distributed. However, the quest to be lean and agile through the miracle of global just-in-time production leaves little room for resilience in the face of new or critical disruptions such as those caused by COVID-19, with major firms worldwide reporting stoppages and slowdowns. 

Understanding the complexity of supply chains and the potential impact of new disruptive events is key.

A factory in Wuhan, China may provide parts to a firm elsewhere in Asia, which also supplies a factory in Düsseldorf, with the final product emerging in the UK. Some shortages are already emerging from the coronavirus outbreak. A global manufacturer has already announced shortages of parts from China such as electronic components and castings used to build its construction and agricultural vehicles. Another has stopped some car production in South Korea because it’s running out of parts. And another announced that it’s exploring the use of air and sea routes into Vietnam as China restricts land routes. Conversely, Chinese imports are also facing disruption with increasing friction at ports. For many manufacturers, the hidden vulnerabilities in their supply chain – the supplier's suppliers – also need to be mapped and understood.

A Challenging Outlook

With manufacturers across industries, from automotive to electronics to pharmaceuticals to heavy industrials, carrying inventory of only two to four weeks, disruption and continuing uncertainty of supply will be felt if the crisis is prolonged. Currently, we are only seeing initial impacts in those businesses with very lean supply chains, but deeper systemic disruptions may yet emerge. But with COVID-19 cases on the rise in South Korea, Iran, and Europe, we are now starting to see the effects of the virus in other major manufacturing and trading centres. 

With many firms unable to trace all of their suppliers in today's highly interconnected world, it’s making it difficult to predict the impact of shortages and stoppages on their output. Normal global demand will also be suppressed as citizens continue to be quarantined and global travel is curtailed.

Building Transparency and Resilience 

No company operates in isolation, so it's essential to identify continuity risks to the business, any potential bottlenecks, or any single points of failure. By building a simple 3-step action plan manufacturers can manage the impact of a the COVID-19 outbreak or future pandemic:

Prevent

  • Talk to critical suppliers to understand their plans.
  • Identify alternative suppliers as backup.
  • Review any contract liabilities in the case of delays, cancellations, or quality issues.

Respond

  • Stockpile critical supplies if possible, and if working capital allows.
  • Continue to communicate with existing suppliers, encouraging openness about their level of disruption.
  • Adapt orders and shipment arrangements to fit current demand (particularly important where increased demand may be expected).

Recover

  • Find new suppliers if necessary to deliver improved resilience.
  • Review lessons learned with critical suppliers to understand how things could be improved for the next time.
  • Explore/invoke any relevant contract clauses that may help limit costs or increase the speed of your recovery.
  • Decide whether any failures of contract KPIs constitute a breach worthy of compensation.

By building a robust action plan, an organisation will be more agile so it can change suppliers at short notice, have real-time visibility at every stage about developing pinch-points, and implement other risk management measures to ensure its business remains resilient.

Ron Tomsic

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