The raging Coronavirus is unquestionably taking an economic toll and its adverse fall-out on industry is unfathomable. We bring some reflections from our regular contributor Prof. Omera Khan on the direct and indirect impact of the pandemic and lessons we can derive thereon — Editor.
In mid-February, as the factories of over a quarter of its Chinese suppliers remained closed, British construction equipment manufacturer JCB put its workforce on short time. There simply weren’t enough parts coming through from China to keep production of its iconic yellow diggers at planned levels.
Meanwhile, over the Atlantic, Apple was forced to warn that it would not meet its quarterly revenue targets, due to shortages of Chinese-sourced iPhones—even though none of its Chinese contract manufacturers were located in cordoned-off Hubei province.
Elsewhere, other manufacturers reported similar problems with consignments simply stuck in Chinese ports, as stacked-up containers piled ever higher. According to the New York Times, the tonnage of idled container ships around the world now exceeds levels reached during the financial crisis. Many shipping containers are stuck in Chinese ports, or held up in factories, that shortages of containers are emerging elsewhere in the world.
Three months ago, none of this seemed remotely likely. In mid-December, which of us had even heard of the coronavirus sickness that was starting to take hold in Wuhan?
Worse to follow
The worst will surely come. Around the world, grocery shelves are emptying, as consumers panic-buy, fearing supply interruptions and prolonged periods of isolation or quarantine.
Fearing shortages of Chinese produced key pharmaceutical ingredients, many countries are banning the export of critical medicines. Less seriously—except perhaps for the teenage and twenty-something demographic—fast fashion retailers are also holding their collective breath.
The world will recover; of that I have no doubt. Things will eventually get back to normal. The darkness is always darkest just before dawn, and we are as yet some way away from seeing chinks of light. Surely they will, eventually, come.
Wake-up call
What will also come, though, is the recognition that the business world’s approach to sourcing and supply is not fit-for-purpose. As with the Japanese earthquake and ensuing tsunami of 2011, I’m expecting businesses to see today’s disruption as something of a wake-up call.
Whereas in 2011, the wake-up call was largely restricted to automotive manufacturers, this wake-up call will be more far-reaching: many more manufacturers, retailers, and LSPs (logistics services providers) will all be looking to do things differently.
Differently how, precisely? For those of us close to the world of supply chain management, it’s not difficult to guess at the kinds of things we can expect.
BMW
First, we’re likely to see a greater emphasis on building risk-awareness into supply chains. Many businesses have no idea of the risks they run in their far-flung supply chains, until it’s too late—and disaster strikes. BMW, for instance, was one of a number of manufacturers to initially assume that it wouldn’t be affected by 2011’s tsunami and earthquake.
Wrong: deep down in many car manufacturers’ tier-3 and tier-4 suppliers, the exposure was ample. For BMW, at least, the lesson was learned. Its supply chain risk management system is now multi-tier deep.
In short, the message from today’s coronavirus epidemic is the same as in 2011: supply chain risks are not always obvious. Black swans do indeed occur: expect the unexpected, and you won’t be disappointed.
Second, the virus underscores the importance of transparency, resilience, and agility in supply chains. Companies need to better understand their capabilities, and develop better planning, monitoring and response strategies—with agility as the watchword. Demand planning should place agility ahead of accuracy, while sourcing should place agility ahead of cost.
Just the other day I read about a small UK specialist steel machining firm that is seeing a boom in demand, as Chinese competitors are shut. Interestingly, the company’s management report that several customers are now reporting that they are switching sourcing back to the UK permanently, having seen the benefits of a shorter and more flexible supply chain.
Agile LSPs
LSPs too will have to become better at monitoring, reporting, and managing the flow of goods along supply chains. What we see today is that many customers don’t know where their shipments are, or how—or if—they can be expedited. Coordination needs to be better, and communication needs to be better. To me, that sounds like a job for control towers, and I’m expecting LSPs to increase their investment in them.
Thirdly, as I’ve written before, we may need to re-think the very notion of the supply chain itself. Chains are too linear, too uni-directional, and too mechanistic a paradigm to provide the resilience that we need, going forward.
In a world striving for agility and resilience, ‘supply network’ and ‘supply web’ are closer to the paradigm that we want, bringing connotations of flexibility, two-way flows and multiple sourcing connections. Interestingly, post-2011, automotive manufacturers are now far more receptive to dual-sourcing—something that was an anathema before.
In short, then, we can expect greater risk-awareness, a bigger focus on resilience and agility, and more flexible supply networks—all very welcome developments. However, why on earth does it take a coronavirus pandemic to bring them about?
(Prof. Omera Khan is Professor of Supply Chain Management at Royal Holloway, University of London and Executive Strategy Advisor for the Supply Chain Academy.)
