Before the coronavirus began to surge in the U.S., it was already having a significant adverse effect on global businesses, with 94% of Fortune 1000 companies seeing COVID-19-related supply chain disruptions before March.
According to Terry Esper, associate professor of logistics at the Fisher College of Business, a problem at the outset was that the coronavirus was primarily viewed as a local issue affecting China. However, supply chain management impacts were already occurring at the global level, as Fortune 1000 companies had global supply chain operations in China and were experiencing direct product and inventory flow interruptions. In fact, data from business analytics firm Dun & Bradstreet indicated that, at the time, at least 163 Fortune 1000 companies had one or more direct, Tier 1 suppliers in the impacted region, while at least 938 of these companies had one or more smaller suppliers in Tier 2.
How COVID-19 Exposed Supply Chain Weaknesses
“When COVID hit, suppliers, starting with Chinese vendors, stopped producing,” said Nader Mikhail, founder and CEO of cloud-native supply chain automation platform Elementum, in an email to The Balance. “Between people contracting the disease or quarantining, the factories froze and supply chains throughout the world came to a grinding halt.”
In a separate email interview, Sukhi Jutla, co-founder & COO of jewelry-focused B2B platform MarketOrders, said that the pandemic also exposed many weaknesses across supply chains, particularly in regards to managing the delivery of products and logistics, and businesses not being used to such fast turnarounds and increased volumes. “Online systems were not fully end-to-end and we saw websites crashing when closed retail outlets forced online traffic,” she said. “Current systems didn’t plan for adapting to online and digital ways of working.”
How Companies Averted Disruption
Still, not all companies incurred significant negative impacts or losses. Researchers at the Harvard Business Review (HBR) reported in March that while many businesses were still in data collection and assessment mode, manually trying to identify which of their suppliers had a site in the specific locked-down regions of China, a “small minority of companies” endured because they had precise measures for early detection and effective contingency planning.
According to the HBR researchers, these companies’ investments gave them better visibility into the structure of their supply chains and the necessary information—on suppliers, sites, parts, and products at risk—readily available so they could secure constrained inventory and capacity elsewhere and avert disruption.
These analyses demonstrate the increasing importance of having a strong contingency plan for unexpected situations like coronavirus.
So, if you want to ensure your business remains afloat and functioning smoothly during uncertain times, here are a few key factors that caused the supply chain disruption and how you can safeguard yours.
Single Sourcing Material
Many companies may prefer to work with a single vendor because of product availability or financing convenience. For example, a business may opt for ordering an entire lot of plastic from a single vendor in China, where there is a larger supply and lower cost. Ordering from a single vendor can also create additional benefits like discounted deliveries and leverage in negotiations. But while single sourcing can save some money, it can ultimately be harmful to businesses if the vendor doesn’t provide the material on time.
“Companies [that are] unwilling to increase costs to enable flexibility double down on the same suppliers, the same partners, and the same systems,” Mikhail said. “It is literally like shoving the square peg in the round hole: With enough force, it looks like it just might fit, even though we all know it'll eventually fail.”
The phrase “don’t put all your eggs in one basket” serves as a good warning for businesses considering single sourcing offers. Despite the benefits, depending on a single vendor to fulfill all your orders can be risky as any incapacity on the vendor’s part could have serious repercussions for your business.
Instead of relying on single sourcing, work with a variety of providers based on your own cost-benefit analysis.
Monitoring Sources and Supply
Because of the potentially higher costs associated with mapping and monitoring suppliers across the world, companies may choose to skip this step in the supply chain. However, the investment can pay off during times of crisis. In another HBR report, researchers noted that companies can benefit because they are able to triangulate —within minutes or hours—how their supply chain could be impacted in the days, weeks, and months to come. This advance knowledge can, in turn, quickly inform them on executing avoidance and mitigation strategies like offering discounts on substitute products and controlling inventory allocations.
MarketOrders’ COO Sukhi Jutla suggested that you should also try to digitize processes as much as possible so you can collect data on your current operations. “Use these data insights to run your businesses more efficiently; for example, using data insights to predict demand surges or using geographical data to create more efficient routes in your logistics operations,” she said.
Artificial intelligence (AI)-powered tools have made it easier and more cost-effective to map and monitor a large database of sources around the world.
Pinpointing Customer Demand
A global crisis like the coronavirus pandemic can make it difficult to pinpoint an accurate scale of customer demand. This can lead to under or overproduction, creating scenarios that lead to wasted capital or lost sales.
In a McKinsey report on supply chain recovery during coronavirus, businesses are advised that during their sales and operations planning process, they should use their industry experience and available analytical tools to find reliable demand signals from their customers—both short- and medium-term—that are realistic and reflect underlying uncertainties in the forecast. This, in turn, can help them determine the necessary supply.
The Bottom Line
Several months into the pandemic, many companies seem to have been able to weather the crisis, but Elementum founder Nader Mikhail warns that temporary fixes aren’t enough. “This is a wake-up call for companies to modernize their supply chains and proactively invest in flexibility and agility,” he said. “What happens when the next virus takes hold? Or the next natural disaster hits? What if Chinese supply chains are blocked because of geopolitical tensions? It is the time to reap the future benefits from being proactive rather than paying the price for being reactive.”