Dr. Yossi Sheffi has written a couple of excellent books on supply chain risk management (e.g., The Resilient Enterprise,” so he comes with some credentials in terms of offering thoughts on the current coronavirus crisis.
And that just what Sheffi did, writing a guest editorial column last week in the Wall Street Journal, titled “Supply Chain Risks from the Coronavirus Demand Immediate Action.”
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The insights as usual are excellent.
It’s a really big deal, Sheffi says, commenting that “the coronavirus could cause supply chain disruptions that are unlike anything we have seen in the past 70 years.”
With many unknowns, the best course of action for companies is to analyze possible outcomes in the context of known supply chain risks based on historical precedents, and to take precautionary measures that minimize exposure to future disruptions, Sheffi says.
The problem: we really don’t have a good analogs of some previous, similar crisis to consider in terms of the supply chain, Sheffi notes. The impact of coronavirus could be much deeper and last much longer than say the SARS panic of 2003, which really came and went very quickly, with little impact.
Another facet of this crisis is that it may have a huge impact on both supply and demand. China as factory to the world and now with a huge consumer market puts it in a much different place than 2003.
“Today’s supply chains are global and more complex than they were in 2003” Sheffi writes. “Not only are Chinese factories affected by lockdowns and quarantines, production sites in other countries already are running low on parts for products assembled in China.”
He cited the example of Apple, which works with suppliers in 43 countries, all of which receive components from Apple’s contract manufacturers in China.
Interestingly, Sheffi cites the famous Bullwhip Effect as a potentially key aspect of potential supply chain problem. As companies over-react to falling demand signals, companies further back in the supply chain can see orders from their customer drop dramatically – and many small but essential component manufactures could be in danger of failing, Sheffi says.
When demand recovers, a reverse Bullwhip Effect can take hold, with overly aggressive orders up and down the chain, with many suppliers then struggling to keep up.
All this may lead some companies decide to avoid these and future risk by pulling at least some souring out of China.
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Netting all that out, Sheffi offers five actions companies should consider now:
1. Set up a central emergency management center: At this point it can be virtual but should include a clear roster of participants with clear decision-making rules in case of a pandemic.
2. Review the company’s product portfolio and the customer base in order to set priorities: If capacity is reduced, there will need to be rules for which products should be built and which customers should be supplied first.
3. Review suppliers: Who makes critical parts? Are there alternate sources? What is the suppliers’ inventory status?
4. Plan for operating to maximize cash flow rather than profits.
5. Maintain communications with federal and local authorities, as well as Chinese and other Southeast Asian friends and colleagues on the ground.
“Hoping for the best while preparing for the worst may not seem like a rigorous business approach to the crisis,” Sheffi concludes. “But given our lack of knowledge, it is the most prudent strategy for managing risk.”
What do you think of Sheffi’s recommendation for dealing with coronavirus? Let us know your thoughts at the Feedback section below.
