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Investec Chief Economist Phil Shaw sits down with Professor Richard Wilding OBE to discuss how the COVID-19 outbreak is hitting global supply chains.
Read a summary of the discussion below.
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COVID-19 and supply chain disruption
With the coronavirus crisis sending shockwaves around the world, and a third of the global population in a lockdown, nowhere is the impact of COVID-19 being felt more acutely than in the supply chain. The disease and associated isolation enforcements are shutting down whole sections of the supply chain network.
When businesses think about their supply chains amid these unprecedented challenges, there are four key elements to consider, according to Professor Richard Wilding: supply chain processes; supply chain infrastructure; information systems; and the organisational component, which effectively means people.
Supply chain managers typically take a proactive approach to supply chain risk – contacting suppliers in areas facing disruption and remedying the situation. Given how rapidly this virus has now spread, however, we are also seeing the organisational part of the supply chain being impacted.
“If people are no longer able to get to facilities, that can have a knock-on effect on processes,” said Wilding. “Ultimately, you can then end up with challenges with information systems because the capacity of Zoom, or Skype, for example, just isn’t there.”
Wilding added that air freight has been severely disrupted – not least because of personnel shortages, meaning cargo flows are also affected. That has led the major logistics companies to lease aircraft in significant numbers. There has been an additional disruption in terms of containers, which are now stranded in various locations around the world.
There is capacity in the wrong places, and so even when supply chains do start moving again, there will be challenges associated with getting everything back to the right locations. The good news is, said Wilding, that China has managed to get back on course reasonably quickly, reaching near-normal levels now for specific products.
Food for thought
The food industry is facing particular challenges right now. But while parts of the sector are grappling with significantly reduced capacity, other parts have excess capacity because they have been shut down. Large hauliers that supply restaurants, for example, have warehouses full of food and other supplies. These companies are now attempting to redeploy to the health service, supermarkets and other areas facing shortages.
A relaxation of competition law has supported that, which means logistics providers and supermarkets can work together on the food supply chain. Those that are proving most successful are those with a tradition of buying capacity rather than products, Wilding explained.
This is a model commonly used in the apparel market, as well as electronic items. But we are now starting to see it with the manufacturing of respirators, as companies with similar technologies already in place, refocus their efforts. Another example is the high-end cosmetics companies, and even breweries, that have started to move into the hand sanitizer market.
Meanwhile, capacity for home delivery is another crucial element of the food supply chain that has experienced severe disruption due to personnel shortages and a surge in demand. However, here again, a raft of initiatives are taking place, ensuring those most in need are prioritised.
Optimising your supply chain management
While the supply chain disruption we are currently experiencing is of an unprecedented scale, supply chain disruption itself is a relatively regular occurrence. And yet the supply chain is usually under-represented at a board level, said Wilding. COVID-19 is teaching us that competitive supply chain resilience must be taken seriously, right at the very top.
Senior management must understand the company’s supply chain strategy and product design. Collaboration and relationship building are also vital. And then you have to be agile. “We are now finding that even stable supply chains are becoming incredibly volatile. Companies need to think through how they can build supply chain structures which can cope with that volatility,” Wilding added.
A culture of managing supply chain risk, supply chain transparency and continuous monitoring and intelligence are also critically important. This could involve anything from monitoring the Twitter feeds of the prominent logistics providers, to using specialist tools such as DHL Resilience 360. Industry associations include the Chartered Institute of Logistics and Transport, and the Chartered Institute of Procurement and Supply, are also valuable sources of information.
As well as the main supply chain disruption, there are several associated effects that businesses should watch out for, according to Professor Wilding. One is demand amplification – or panic buying. Supply chains must gear up to cope with a big boom in demand, which is then followed by a lull. This can then lead to a substitution effect.
Also, in 1997, Toyota faced significant disruption in its supply chain following a fire at a critical supplier. This shut down all its tiered suppliers within four days.
It also had associated impacts on electricity, gas, food and transportation – otherwise known as supply chain parallel interactions – demonstrating how seemingly unrelated products can be affected by supply chain disruptions.
We could potentially see similar side effects that emerge in the current situation. When people use kitchen towel because toilet paper is unavailable, for example, this could lead to blockages in the sewer system, disrupting the water supply chain. “These are the kinds of parallel interactions we need to keep an eye on,” said Wilding.