In a modern, global economy, supply chain disruptions are simply a reality of doing business. Whether the cause is a natural disaster like the Thailand flooding in 2011, or the almost shutdown of the China borders thanks to the spread of the coronavirus, businesses need to prepare for the imminent risk of potential supply chain disruptions.
The most common causes of supply chain disruption include:
- Natural disasters
- Political disruption
- Accidents, such as crashes or explosions
- Labor strikes
- Economic events
Severe natural disasters are one of the disruptions that are hardest to plan for and can have the greatest financial long-term impacts. In the case of the flooding in Thailand in 2011 — which affected at least 9,859 factories — it virtually wiped out a large portion of global hard drive production for nearly two years, causing a near doubling of prices. Major automotive companies including Toyota, Nissan and Honda were forced to halt production for as long as six months due to lack of key electronic components. As a result, Toyota lost 240,000 vehicles, Honda lost 150,000 and Nissan lost 33,000. These losses impacted the automobile supply around the world, including creating significant shortages in Malaysia, Indonesia and the Philippines.
The same concerns are being raised again today with the impact of the coronavirus (COVID-19) impacting China most dramatically, but with a ripple effect being felt around the world. At the time of this article, more than 75,000 people were known to be infected with the virus and over 2,000 people have died. China has a lockdown on more than 775 million people from traveling and multinational companies around the world have severely restricted operations, which in turn will lower future economic forecasts.
Impacts Large for Manufacturing
For supply chains, the impact is even greater, specifically in manufacturing. While much of retail has pushed inventories to market with concerns of tariffs and Chinese holidays, manufacturing for current demand is already feeling the impact. Sea-Intelligence reports that the reduction in overseas shipments from China has already costs them $350 million per week, and that number is only expected to grow as factories remain idle or operating at far less than capacity.
Meanwhile, electronic and automobile manufacturing has also taken a significant hit, with Apple warning investors of lower sales numbers based upon the impact of the virus, and Jaguar’s parent company, Tata Motors, announced that plants would be shutting down in England due to a parts shortage of components from China. It seems that once again, the events of 2011 are repeating themselves.
There has been this push to lean out supply chains over the past five years. While this process has reduced costs, it oftentimes comes with a converse increase in risks. By relying on only one supplier or one region for key components, those risks are exposed when a disruption of the supply chain occurs, which is exactly what we are seeing happen now.
The meteoric rise of both Walmart — as a leader in controlling every element of both manufacturing and supply chain costs — and Amazon — for driving supply chain efficiency — is the primary business driver for an increased emphasis on using supply chain as a strategic advantage, fueling the current business environment of reducing supply chain costs simultaneously while increasing speed. Without putting in place contingency plans, this approach can put the company at risk if there are disruptions in the supply chain.
From my past industry experience, we learned from the supply chain disruptions we had in the past and created redundancies in our supply chain that could quickly ramp up and take up the additional manufacturing demand when we needed. We created a network of global suppliers by region in the process.
Caution Ahead: Entering New Markets
Entering unstable international countries to be a first mover has also been a strategy employed by businesses to capture new markets, but while the growth trajectory may be tempting, they are also exposing the company to the risks of an unstable government. As we are seeing currently in some parts of Central and South America, governments are nationalizing foreign companies, effectively putting these foreign entities out of business.
Many businesses fail to take the necessary steps to prepare for such events, either out of a desire to maintain low operating costs or lack of awareness as to the impact these events can have on their businesses. Some companies are aware of the risks of doing business in a particularly unstable regions but take the calculated risk to gain an edge on the competition by being an early entrant to a market. In some volatile regions, business interruption caused by labor strikes or political disruption can take weeks, or even months, to resolve. These are quite challenging for the impacted businesses to foresee and make the necessary changes to mitigate the impact before it happens difficult. In the case of natural disasters, like the flooding in Thailand, companies simply need o be better prepared in regions susceptible to natural disasters.
A World Economic Forum report titled “Business Resilience in Supply Chains” revealed that major supply chain disruptions can reduce an impacted company’s share price by 7% on average, so the impacts are tangible. While larger companies like Apple may be able to weather the storm, many smaller and medium-sized companies may simply never recover.
Our physical infrastructure needs to be considered, much like our networks designed for data, where there is a well-developed contingency plan and redundancies already built into the system design, but it’s the cost of these contingency plans that companies are hesitant to invest in.
Implementing a thorough contingency plan will require financial resources up front, but in the long run there is a good chance that a thoughtful contingency plan will save money, and perhaps the business, in the case of a serious business disruption. Here are four tips for mitigating supply chain disruption through contingency planning:
- CREATE BACKUP RELATIONSHIPS: Companies working with suppliers located in different regions should identify and develop relationships with backup suppliers. Should a disaster occur, those existing relationships may give you an advantage over competitors who were similarly impacted and reduce the impact on your company.
- BUILD FLEXIBILITY INTO CONTRACTS: Ask vendors, like transportation companies, whether they have contingency plans in place and if you can see those plans. If possible, build flexibility into your transportation contracts to give your business the opportunity to transition between land, air or ocean delivery methods in the case of a potential disruption in service.
- EXPLORE ALTERNATIVE PORTS/ROUTES: In the case of port labor strikes, developing relationships with alternative ports and securing bookings in advance of potential disruption dates are measures that can be taken to mitigate impact. Unlike natural disasters, labor strikes are usually easier to predict. Following The Journal of Commerce’s news about ports and labor strikes is a good method of ensuring that you’re not taken by surprise.
- DON’T FORGET ABOUT INSURANCE: Investing in insurance is an underutilized strategy that can provide your company with an opportunity to recoup costs in the event of a major disruption.
Developing contingency plans does not necessarily require sacrificing a lean supply chain. But it does require that companies acknowledge the risks and consider the benefits of global inter-connectivity. When events thousands of miles away can have immediate and lasting severe implications, being prepared for such events becomes essential. We are experiencing this type of disruption now, showing that despite the risks, history definitely repeats itself.
About the Author:
Gregory Healy, senior vice president, leads the Supply Chain and Logistics Consulting team in the U.S. for Occupier Services. With over 20 years of global manufacturing and supply chain experience as both a senior executive in the corporate world, as well as owning a supply chain consulting practice and a third-party logistics business, Gregory has real world experience that brings a unique perspective to the Colliers team.