COVID-19 is the biggest disruption to hit global supply chains since the Tohoku earthquake and tsunami that devastated Japan in 2011. The scale, reach and speed at which this coronavirus has spread from China to South Korea to Italy and many other countries around the world makes it an event of unprecedented magnitude in the modern era.
Not surprisingly, COVID-19 is now the risk that supply chain professionals are most worried about. Preliminary data from a live Gartner survey shows that close to half regard it as a “significant risk” to their network operations. The epidemic has overtaken concerns about tariffs and trade wars, and cybersecurity at the top of our risk ranking, as the chart below illustrates.
This coronavirus has highlighted the fact that supply chains are not just physical constructs made up of raw materials, production lines, inventories, warehouses and trucks. They are also human constructs. When people cannot get to work at factories, distribution centers, ports and other facilities, supply chains inevitably grind to a halt.
This simple truth is reflected in the impact that our survey participants — spread across multiple continents and industry sectors — say that COVID-19 is having on their businesses. Almost two-thirds report that their employees have already been affected in terms of travel restrictions, the need to work from home and so on. And over the next few weeks, the impact of such measures on staff is set to increase, with 44% expecting this to be “significant.”
Supply and demand are other casualties of this human health crisis. Half of our sample say they have seen the ripple effects manifested in shortages of raw materials, components and finished goods, as well as supplier manufacturing and transportation capacity (findings that are reflected in the risk ranking above).
The impact of these supply-side constraints is expected to worsen for the remainder of this month and into April.
On the demand side, more supply chain professionals report decreasing customer orders and sales than increasing ones (driven by higher demand for items such as medical consumables and food). And this gap is set to widen over the coming weeks (see chart).
Actions Companies are Taking
What about mitigating actions that companies and their supply chain organizations are taking in response to the coronavirus? Again, we asked survey respondents to classify these in terms of employees, supply and demand. The results so far reveal the following:
- Employees. Almost every organization has reinforced health and hygiene measures, such as handwashing, for staff and workplace visitors. Three-quarters have cancelled internal events, conference participation and other face-to-face meetings, and banned employees from visiting company, supplier and customer sites. More than half have asked staff to work from home, and this practice is expected to be the most used during the next few weeks. A quarter also say staff may be asked to stay at home on an unpaid basis, compared with just 5% that have implemented this to date.
- Demand. Almost two-thirds have set up a crisis management team charged with evaluating demand signals, making short-term trade-off decisions and so on. More than half have alerted customers to potential delays or product shortages, and 43% have devised an allocation plan for finished goods. Looking ahead, putting orders on allocation is expected to grow, along with the postponement of new product launches, shifting existing inventory around the network, withdrawing certain product options from the market and increasing lead times.
- Supply. The establishment of a crisis response team is also one of the most common actions on the supply side. Almost three-quarters have also analyzed stocks of raw materials and components to gauge how long they can keep running production lines with existing inventories. Seven out of 10 have assessed the visibility of suppliers in affected regions and have engaged strategic partners to put business continuity plans into effect. Over the coming weeks, scenario planning and identifying alternative sources of supply are expected to be deployed more widely (see chart below).
It Pays to Be Prepared
In my role as a sourcing and procurement analyst, I talk to many companies about the benefits of proactive supply risk management. Initial conversations with executives who have championed investment in resilience-building capabilities since Japan in 2011 suggest that they were able to use existing supply-side visibility, processes and playbooks to quickly assess their exposure to affected regions. These capabilities have allowed them to begin to take appropriate mitigating actions of the kind described above.
We don’t yet know how bad this coronavirus crisis is going to be, in either human or financial terms, or how far into 2020 its impact will be felt. But it reminds us that we cannot take the smooth running of our people- and capital-intensive supply chains for granted, especially when they are globally interdependent, safety-stock-lite and time-critical.
COVID-19 should be a wake-up call to boards of directors, CEOs and supply chain leaders that being well prepared for disruptions, regardless of their cause, is not an optional extra. It is a business necessity.
To participate in our survey, Weathering the Supply Chain Storm, click here
Gartner Supply Chain