Expert Insight: COVID-19 is Blunt Reminder to Address Supply Chain Challenges
While people’s health is the number one concern during the COVID-19 pandemic, supply chain disruptions are near the top of the list of business risks. As governments and organizations step up containment and mitigation measures, the knock-on effects on businesses will increase.
Not long after COVID-19 started spreading, and even before the World Health Organization (WHO) had declared a global pandemic, companies started adjusting revenue targets downward, in a clear indication that the current crisis was going to have effects that extend far beyond the health system.
A study by the Institute for Supply Management found that nearly 75% of companies have seen disruptions in their supply chain, partly due to transportation restrictions related to the ongoing pandemic. And more than 80% of respondents believe their business will be impacted by COVID-19 disruptions.
Supply Chains Stretched
China, where the COVID-19 pandemic originated, accounts for 15.4% of products and services produced globally. In Wuhan alone, the outbreak’s epicenter, there are approximately 500 manufacturing facilities. The extensive quarantines established to stem the virus’s spread inevitably affected the production process and rippled across global supply chains.
Today’s economy, built heavily on just-in-time production, leaves little room for disruptions or delays. With COVID-19 now present well beyond China, the effects are widespread. Additionally, as consumers engage in panic buying and hoarding of essential products, retailers in many places have sold out of certain items, with alcohol-based cleaning products and toilet paper prime examples. Add transportation challenges to the mix and retailers face challenges to restock their shelves.
Many restaurants across the country have been restricted to take-out and delivery as authorities try to limit crowds to curb the spread of disease. But as they continue trying to serve their communities, they too are likely to experience similar shortages, even at a time when their revenues are likely to decrease.
Inconsistent sales will make it more difficult to project inventory needs, which could lead to shortages on one end and spoilage on the other. Additionally, shifting to a delivery and takeout model will likely require restaurants to rethink their menus and move toward food items that will retain their quality during transportation.
Take Preemptive Action
Even before COVID-19, breaks in the supply chain happened, caused by challenges ranging from natural catastrophes to cyberattacks. But retailers and restaurants can take action to protect themselves from supply chain disruptions. And it all starts with information. Retailers and restaurants need to ask: What is my secret sauce? What are the products or ingredients that I cannot operate without? Which suppliers do I depend on for these items?
Answering the above questions can provide a clear understanding of the prioritization of products and ingredients that most affect your operations. It will also make clear the costs associated with not having those items available.
Organizations also need to clearly understand the entire supply chain — including their suppliers’ own suppliers — and be able to identify vulnerabilities. It can be worthwhile to talk with your suppliers to discuss their resiliency plans and ensure they have suitable contingency measures in place. For example, if one of your main suppliers depends on raw products from a country that is affected by a trade ban, you might want to ask whether they have an alternate source and if so, whether it meets your standards.
Create Risk-Agnostic Plans
It might seem impossible to have a plan in place for every potential event that could adversely affect your supply chain. The good news is that you don’t have to. Instead, think beyond single exposures and consider the supply chain’s overall vulnerabilities. And then address those vulnerabilities through contingency plans that can be tweaked according to the specific peril.
Creating a robust contingency plan is not an overnight exercise. Don’t wait until you are forced to look for alternative suppliers.
Start immediately, including conversations about pricing so that you can quantify the cost of your contingency plans.
Some restaurants and retailers have attempted to secure alternate suppliers as the COVID-19 event started to expand, but this will prove increasingly difficult as supply chains stretch thinner. With depleted supplies and increasing demand, suppliers are likely to prioritize long-term customers over new requests. Restaurants and retailers that had planned for a diversified supply chain likely have strengthened their ability to use existing relationships and to secure orders from other suppliers.
It’s important to work with your broker or insurance advisor to review your policies and determine what coverage is in place for different supply chain challenges that might affect your operations. Additionally, find out in advance what information your insurer will require to process a claim so that you can have those details available.
Finally, regularly review your supply chain’s pain points and update your plans to ensure they will respond to changes and emerging risks.
For some, the COVID-19 outbreak is a harsh wake-up call. Although it struck unexpectedly, the WHO and others have long been warning the world to prepare for major disease outbreaks. Some organizations had specific outbreak plans in place, others were able to adapt longstanding emergency response plans. But some organizations were taken by surprise. The current crisis highlights the importance of preparing for all potential disruptions, and to constantly review and rehearse plans, even for risks that do not appear to be imminent.
Retail and restaurant companies are well-advised to step back and analyze their resiliency plans when faced with a break in their supply chain.
Mac Nadel is retail/wholesale, food & beverage practice leader at Marsh, a global leader in insurance broking and risk management. He can be reached at [email protected]