Coronavirus outbreak puts focus on supply chain risk
Global supply chains have been disrupted by the coronavirus outbreak, and companies need to diversify suppliers and rethink strategies like lean and just-in-time manufacturing.
Like any chain, a supply chain is only as strong as its weakest link.
The coronavirus (COVID-19) outbreak that was primarily centered in the highly industrialized city of Wuhan, China, has laid open the fragility of the global supply chain. Manufacturers that have built complex supply chains around the globe for many years had better begin to pay attention to supply chain risk or face serious long-term consequences.
The greatest cost of the COVID-19 outbreak has been human, with more than 79,000 reported cases and 2,623 deaths as of February 24, the vast majority in China, according to the World Health Organization. The COVID-19 virus has spread to 32 countries and the WHO Risk Assessment for China is "very high."
The costs to the world economy are still being tallied, and the global supply chain has suffered consequences as companies have had to shutter manufacturing operations and as supplies are languishing in ports.
Apple is one example of a company that has been affected. Several facilities that make iPhone components have been shut down at least temporarily in response to the outbreak, and many Apple retail stores in China have been closed. In an investor guidance statement on February 17, Apple said that the "worldwide iPhone supply will be temporarily constrained," and that the company will miss revenue targets for the next quarter.
A fragile supply chain
All this demonstrates the fragility of the global supply chain, said Rosemary Coates, president and founder of Blue Silk Consulting, a management consulting firm that focuses on global supply chains and is based in Los Gatos, Calif.
The concentration of so many suppliers in one area elevates the supply chain risk for manufacturers, Coates said.
"Most of the big automakers have production plants in the area, and to supply parts for them, all the suppliers are clustered around those manufacturers," she said. "They not only supply parts to production, but also global repair parts. So the next thing that we'll probably see after production plants around the world shut down … is that we're not going to be able to repair cars because they won't be able to get parts to repair anything."
Even without an epidemic, supply chains are actually pretty fragile, Coates said, and one of the reasons may be the just-in-time (JIT) and lean manufacturing strategies that have held sway for many years. These methodologies have helped manufacturers control costs and improve efficiency by reducing waste and ensuring parts are introduced only when they are needed. However, they may increase supply chain risk because manufacturers no longer need to rely on stocks of inventory.
"Now we see small inventory and working with just-in-time processes, so there isn't inventory -- it's just not being produced and you can't get it," Coates said. "Most of us are going to be impacted by global supply chain disruption in terms of shortages of products around the world."
Many potential supply chain risks
The COVID-19 outbreak is only the latest example of a disruptive event that contributes to supply chain risk, said Simon Ellis, program vice president at IDC.
"If you think about disruptions -- whether it's the next disease problem, the next war, additional trade conflicts, climate change-related weather disruptions -- the palette of potential disruption for the supply chain seems to be broader and deeper and wider and more intense," Ellis said. "The coronavirus is the symptom; the disease is a lack of resiliency, the fact that supply chains are inflexible."
Simon EllisProgram vice president, IDC
The efforts that companies have made around JIT and lean manufacturing principles are a large contributor to the problem, Ellis agreed.
"If implemented imperfectly, lean ends up meaning brittle, and if all of a sudden the inventory supply stops, you don't have weeks of cover, you have days or sometimes even hours of cover," he said. "Supply chains have done that to reduce costs, to reduce consumer price increases, but that comes at a cost. If there's structural disruption that you don't anticipate, you'll feel the pain from that disruption much more quickly than you might have years ago when perhaps there were larger reservoirs of inventory."
Diversify the supply chain
So the question that all manufacturers need to answer is what strategies should they put in place to mitigate supply chain risk of disruption.
Manufacturing in China has received much of the attention about supply chain disruption lately because of the coronavirus outbreak as well as issues like the trade and tariff war that's being waged. One remedy is to diversify operations and not be so entrenched in China, according to Coates.
That may be easier said than done.
"China's so heavily industrialized, and in some cases there are parts that are only available from China, so that's one of those weaknesses," Coates said. "We've been encouraging companies to start developing alternative sources for a while since the tariffs went into effect, and now with the [COVID-19] virus, it just magnifies the urgent need to do that, to have alternative plans and sources around the world."
Ellis said reverting to an older pre-JIT strategy and increasing inventory stocks may be an unnecessary overreaction. Introducing more flexibility into products and not having suppliers geographically concentrated makes more sense.
"Either the products you make have to be more flexible so that you can still make them if a particular component is not available, or you have common components," he said. "[Also,] make sure you diversify supply out of one particular region."
It's always better to have a variety of suppliers and not simply rely on the lowest cost alternatives, said Dana Gardner, president and principal analyst at InterArbor Solutions LLC.
"It's always been the case that you don't want to concentrate all of your eggs in one basket, but it's difficult to predict where issues can crop up. Now it just happens to be a contagious disease risk, but there are all sorts of other forms of supply chain risk," Gardner said. "This is a reminder, and it's not specific to any geography or any particular kind of risk, but it's better to invest in diversity than it is to go to the lowest cost suppliers because, in the end, the risks could be higher."
Technology helpful but limited
Technology can also play a risk reduction role. There are platforms and applications that help organizations assess and manage supply chain risk, including Blue Yonder (formerly JDA Software), Infor Nexus, Llamasoft, Resilinc and SAP Ariba.
These applications can be useful in providing a degree of supply chain visibility and can serve as early warning systems, but organizations have to decide if they want to carry the costs of running a system that may only be needed if something goes wrong, Ellis said.
"If you have some of these applications and make an organizational commitment to be a resilient supply chain, you probably can outperform your competitors if something goes wrong," he said. "But all the time nothing goes wrong, you're probably carrying slightly higher structural costs, because you've built this just-in-case capability."
Supply chain risk assessment applications can be useful, Gardner said, but only if they are combined with on-the-ground human knowledge and relationships. The technology may not be able to fully predict a risk to the supply chain, but it may be useful in helping organizations respond to an event and get back to normal after a disruption.
"It will be interesting to see if organizations that have invested in intelligent platforms and invested in data and resiliency can bounce back faster than organizations that don't," he said.
Faster reaction time an advantage
Indeed, the biggest advantage supply chain risk applications offer is an ability for an organization to react faster than competitors to a disruptive event, Ellis said.
"If you can see a problem before it manifests itself and be proactive, or see it so quickly that you can react faster than everybody else, you've got a better chance of taking advantage of the suppliers that are available," he said. "If there are six suppliers in the world and five of them get flooded, that sixth supplier is going to get a lot of phone calls, and they are going to take the business from the first couple that call, so being fast to the alternatives is a big part of supply chain resiliency."
Supply chain risk assessment applications that have advanced analytics and AI technology can help organizations determine weak spots in the supply chain and often suggest actions to mitigate the issues, Coates said. However, they are far from being widely adopted in manufacturing.
"Those kinds of tools are coming of age, but the world is full of lots of small and medium businesses -- even in automotive and aerospace -- and these smaller companies don't have the luxury of buying a big AI system," she said. "So risk assessment has to be done in different ways, either personally by putting somebody on an airplane and going around to look at the suppliers and assessing the risk, or some other process like that."
Ultimately, the global supply chain may be the victim of its own success.
"The problem with the global supply chain is you've got a bit of your supply chain everywhere," Ellis said. "So if there's a major problem in one part of the world, chances are it's going to impact you because part of your supply chain is there -- because part of your supply chain is everywhere."