Creating a more resilient supply chain post-Covid-19
The outbreak of the pandemic has disrupted cross-border trade as well as lean (just-in-time) production with tight inventories. Developing lean supply chains delivering quickly and cost effectively around the globe has been a trend in the past decades, allowing companies to take advantage of lower labour cost in some jurisdictions. This concept is coming under scrutiny after the disruption caused by the pandemic.
In the UK, food supply chains have adapted quickly and effectively to the new demand dynamics after restaurants and pubs had to close which created new demand for grocery shops while some panic buying reduced the supply of some products. But even here some staples took a long time to reappear on the shelves. Meanwhile, healthcare supply chains faced higher hurdles and revealed strategic weaknesses in inventory, procurement and supply chain resilience. The consequences from the lockdown have not been worse for the supply chain management of the overall manufacturing sector only because the pandemic did impact the demand side at the same time as production was halted.
Prepare for further disruption
Restarting production needs special attention. Experts are warning of aftershocks in the supply chain when production restarts in some jurisdictions. This is likely to particularly affect international supply chains since each country will have a different strategy and timeline to relax the lockdown rules. Further, if large regions restart production sites simultaneously this can create spikes in demand for raw materials and individual components. The finely tuned supply chains that were created with the pre-Covid-19 just-in-time production strategy are unlikely to work smoothly for some time, particularly if lockdown measures are tightened again due to a new spike in coronavirus cases.
Border restrictions and lockdown measures may remain in place in some jurisdictions, impacting consumer spending and investment, while affecting international trade and global supply chains for an unforeseeable time. Economists expect the global economy to face a sharp, but short-lived recession. Among sectors likely to be particularly impacted will be automotive, textiles and electronics. This is driven by the ripple effect from the lockdown of major manufacturing hubs starting and the demand shock in the hospitality and travel sector. The situation may change abruptly: The hardest-hit sectors are predicted to see the strongest recovery in 2021 as pent-up demand is released in line with a recovery in sentiment, and production ramps up.
Creating a new strategy
A new business strategy following the relaxation of the lockdown rules should include a thorough assessment of the supply chain’s resilience to better understand where products are sourced. Creating as much transparency as possible is essential to allow for adaptations to the network to address uncertainties businesses are facing following the pandemic.
Businesses are looking to shorten and simplify supply chains. Global supply chains have, in some cases, become complicated and opaque. Not all companies that sell finished goods have a clear view of companies further up the chain. This is particularly important for higher-value manufacturing processes with longer supply chains. In a worst case scenario, the absence of a key part may again force the shutdown of a whole production line, magnifying the global impacts.
The lockdown has created financial challenges that some businesses may find difficult to overcome and has increased the risk of insolvencies. Restructuring or insolvency proceedings usually add delay to operations. An option some companies may consider is to support a key supplier financially at least for the short-term. Some companies may resort to stockpiling and creating buffer inventories. Expanding the use of warehouses will, however, inflate cost.
In another example, supply chain and risk managers are reassessing whether supplies from single-source factories in Asia are appropriate. Splitting the supply chain to mitigate the shortfall if one supplier fails to deliver can be an alternative solution. To reduce the risk, a business may for example decide to source 80% of a key component in a low cost location and 20% locally. Moving production closer to key customers can be advantageous since it may allow businesses to react quicker to demand changes, enable shorter lead times and lower risks. This does, however, often create higher costs.
Digitising the supply chain may offer opportunities to create more predictability and a more resilient business. Big data analytics can assist firms in streamlining their supplier selection process, cloud-computing can facilitate and manage supplier relationships and logistics and shipping processes can be greatly enhanced through automation and the Internet of Things (IoT).
The pandemic has also added pressure for companies to invest in automation and the use of robotics to mitigate against the disruptive impact on supply chains from the lockdown.
1. Crisis management
• Formalise the Crisis Management Team (CMT)
• Create roles and responsibilities
• Communicate regularly on the changes within your business (using mass notification techniques where possible)
• Provide regular information about the Government’s advice on how to control the spread of the virus – some relevant websites are listed at the end of this briefing note
2. Human resources
• Identify staff critical to your key services
• Consider how you would cope with a sudden loss of 10%, 25% or even up to 50% of current staffing levels.
• Bear in mind the loss of staff may be indirectly due to Covid19 (i.e. staying at home to care for self-isolating family members).
• Cross train other staff to “act-up” temporarily
• Implement home working (and consider the ongoing effectiveness of this strategy medium to long term, as employees may have to fulfil support roles (i.e. child care)
• Encourage highest standards of hygiene and self-isolation in line with Government advices
• Review requirements to ensure liquidity
• Evaluate the impact of supply chain disruptions on margin, cash flow, loan repayments, etc.
• Ensure resources are available to continue payments out
4. Supply chain
• Re-evaluate recovery strategies and timescales
• Review external dependencies in your extended supply chain
• Consider how any sole suppliers may be affected by the current situation
• Consider how geographical locations may be affected by possible government restrictions
• Maintain communication with key suppliers and be prepared to adjust products and services if shortages are anticipated
• Consider limiting your products and services to match the resources that are available to you
• Identify essential customers and contracts to support and fulfil
• Consider how to work cooperatively with other organisations, including your competitors
• Where supplies are unavailable consider alternative means of delivering your products and services
• Ensure that adequate spares and maintenance agreements remain in place. Where these are no longer available, it may be necessary to adjust plant operating parameters to extend the lifespan of equipment.
Please contact your local/usual Lockton contact for any further support.