How To Prepare Your Supply Chain

Today’s supply chain is global. Prior to 2020, supply chain leaders laughed when they said, “When local supply chains sneeze the global process catches a cold.” The severe contagious disease outbreak known as the 2019-nCov now makes this statement passe.

The ripple effect is just beginning. Companies are not well prepared. Only one-third of companies have “what-if analysis” and teams capable of modeling the impact. Two-thirds of companies do not know the locations of second and third-tier suppliers. What to expect? Many, many surprises….

A Look at History

The impact of the Chinese economy is substantial and growing each year. In 2019, the U.S. GDP was $21.4 trillion as compared to the Chinese GDP of $27.3 trillion. In contrast, in 2018, the US GDP was $20.6 while the Chinese GDP was $13.4 trillion.

For the supply chain leader, the pervasive nature of this event is a new phenomena with unprecedented uncertainty. As reference, in 2013-2018, the top three supply chain impacts were security hacks, west coast port slowdowns and hurricanes.

Supply Chain Leaders’ Views on the Impact of Prior Disruptions

Expected Impact

Recovery is going to be long and knotty. We are writing a new chapter in supply chain risk management. While many think that the answer is a shiny new piece of technology the answer is far more pervasive. The largest issue is the complexity of the global supply chain. Fight supply-centric thinking: start with a focus on demand to manage supply.

Comparison of Risk Drivers

The first impact is the downturn in Chinese demand. With the containment of travel and the implementation of quarantine zones, trade is disrupted. Normal demand patterns are disrupted. Over 400 companies have warned on the impact of the Coronavirus on Q1 earnings. Expect these impacts to stretch into Q2. What to do? Model based on actual market demand.

In a company, when it comes to demand, good news travels quickly while bad news travels slowly. As a result, expect bias. As you work through the issues, realize that order history will not be a good predictor of demand to guide you through recovery. Traditional sales and marketing data is also obsolete. There is no substitute for local market data.

The second impact is supplier disruption. Expect surprise. In the coming days, we will see the Ford story from Thailand floods replayed. Take a page from history. In 2011, disruption to one of Ford’s second-tier suppliers during Thailand floods idled global production for one of its most profitable production lines. Driven in part by greater global trade and the adoption of lean operating principles, Ford’s operations were global with little in-house working inventory. The Ford team learned that their second-tier supplier had an issue when the critical parts for the manufacturing did not arrive to their factory on time. The team was caught by surprise because they did not know the location of their suppliers. In the coming months, this will happen over and over again to over 70% of manufacturers. This is a time where supply chains will compete against supply chain. For some brands, the impact will be long-lasting…

Today, when it comes to risk management, supply chains are in worse shape than in 2011. This is despite the investment in technology. The issue? They are just more complex. As a result, I expect to see the Ford story play out over and over again….

Next steps? Build an action team. Deploy supplier development teams to map the location of first, second and third-tier suppliers. Make contact and offer help. Prepare plans for alternate sourcing. Invest in modeling capabilities to give suppliers accurate forecasts based on the shifts in demand.

Take care of your people. Follow precautions. Where possible, shut down offices and ensure flex hours. Stress on Asian teams will be high. Be supportive.

Every supply chain will be impacted. None will be unscathed. Surprise will be the common theme. Good luck….