Mitigating coronavirus-related supply chain disruption – to customers and the bottom line

The coronavirus (COVID-19) epidemic has spread to nearly every industrial country in just a few months, and global suppliers of key commodities are either slowing or stopping production. As supplies dwindle, both commodity and freight costs are increasing.

Companies have to consider how to mitigate both immediate and mid-term (two to four months out) disruption related to procurement, manufacturing, replenishment and customers. Because global suppliers of required commodities are reducing or idling production, companies must assess current stocks and alternative sources, provide guidance if supply shortages require slowing production, evaluate logistics and transportation alternatives, and establish COVID-19 customer response teams.

Procurement

In the short term, companies must assess which of their critical components are sourced from tier 1 suppliers located in areas where COVID-19 has led to quarantines or production slowdowns. They then have to focus on how existing inventory, production and purchase order fulfillment will be affected.

Companies also must identify locations of all tier 2 and tier 3 suppliers that work with their tier 1 suppliers to assess the potential inventories of key commodities.

If any of these suppliers are at risk of shutting down, companies have to research alternate sources of supply. This may include reviewing suppliers in other parts of the world, determining if supplies can be moved from a COVID-19 affected area to another location, and identifying methods to expedite the product qualification and approval process (PPAP) for alternate suppliers.

Finally, companies have to review safety stocks and inventory levels for all critical products across their supply chain, ration critical parts if necessary, access aftermarket supply banks and increase near-term orders of raw materials in limited supply.

In the mid-term (two to four months), companies must continually assess the supply chain and identify areas of product supply risk. This may lead to arrangements with alternative and near-shore suppliers for key products. Companies must set budgets and approval processes for emergency spending and track COVID-19-related costs as a baseline to determine the financial impact of supply chain changes. This cost tracking can also help prepare for future adverse events as well as support documentation for tax write-offs or incentives related to possible COVID-19 stimulus packages.

Companies also must review all supply chain contracts and business interruption insurance policies, engaging legal counsel as necessary.

Manufacturing

Manufacturers in the U.S., especially those who rely heavily on Chinese suppliers, are feeling the impact of COVID-19 now. To minimize this impact, companies must designate a central supply chain function that can communicate and coordinate updates among planning, procurement and sales regarding inventories of raw materials, work-in-progress and finished goods.

In the mid-term, companies can focus on internal initiatives around best practices regarding lean manufacturing, offshoring and outsourcing.

Replenishment

In addition to quick action regarding critical supplies, companies must immediately evaluate logistics and transportation alternatives. They should consider moving inventories from quarantine zones to ports where products can be more easily accessed. They also need to procure and reserve space on international shipping and airfreight carriers.

In the mid-term, companies should implement supply chain sales and operation planning (S&OP) software, if they aren’t already. This will help companies optimize planning over a three- to six-month window and segment products based on supply availability. Companies also should determine if they can make critical components in-house instead of buying them.

Customers

Stay close to customers! Align customer support staff with each external customer to communicate updates on supply constraints. Establish COVID-19 customer response teams across core work streams: human capital, financial analysis and risk management, supply chain, sales and marketing, and information technology.

In the mid-term, review customer demand patterns, since customers likely will buy more essential goods and services and fewer non-essential ones until the crisis passes. Also, review supplier payment terms and work with the finance department to discuss revised payment terms if necessary.

Companies should develop portals so that customers and suppliers can access updated information in real time without communicating with an employee. This will save time for everyone. Work closely with customers, who are likely affected by COVID-19 in their own way, on flexible ordering models and revised payment plans.

Long-term outlook

The U.S.-China trade war initiated in 2017 accelerated manufacturers’ diversification of their global supply chains. The pandemic has amplified the urgency.

For low-cost manufacturing, China continues to maintain advantages such as developed infrastructure and concentration of facilities supplying key global industries. However, the days of thinking of China as the default one-stop shop have passed. Southeast Asia, Mexico and Brazil are emerging as attractive longer term alternatives with a reduced risk profile.