Report on Supply Chain Compliance 3, no. 6 (March 19, 2020)
There is not a media outlet in the world that isn’t carrying a story about the new coronavirus and its effects on peoples’ daily lives. A primary focus of a number of reports and articles is the effect the coronavirus is having on economic conditions and, more specifically, supply chain management. The effects are indeed dramatic. Supply chains, from electronics to toys to automobiles to pharmaceuticals, are experiencing dramatic decreases in supply and demand as factories go offline and consumers pare back purchases.
The outlook is bleak for business owners with extensive supply chains weaving through China. Most reports predict a turndown of the global economy that may lead to a global recession, while governments and societies grapple with how to best tackle what has become a global pandemic.
If we consider the World Health Organization report released following its trip to China, however, then there is light at the end of the tunnel. Through severe measures that most countries wouldn’t be able to impose, China was able to stem the expansion of the outbreak and gather a large and useful data set. According to the report, the infection rates, symptoms and death rates are all manageable and do not represent an existential threat to human society. Instead, the coronavirus and its spread present an opportunity to learn, prepare and be ready to weather unexpected and unpredictable crises that arise in the future.
You should have been ready
The scope of the virus and its dramatic effects on the supply chain demonstrate that companies were not ready for a crisis. Despite almost two years of tariffs, a concerted effort by the United States government to counter Chinese influence and economic strength, multiple years of difficult business conditions in China, and the emergence of alternatives to China as a production base, most companies were still caught flat-footed by the spread of the coronavirus and the effects it had on business operations.
“The embrace of lean manufacturing and just-in-time delivery of components, pioneered by Toyota in the 1970s, has made production more efficient but more vulnerable to disruption, as companies stockpile fewer and fewer necessary materials,” states an article in The Economist. “The median firm in the S&P 500 carries only 66 days of inventory, and some have far smaller buffers than even that—Apple has just nine days, according to data from Bloomberg.”
Not only were best practices focused on efficiency and speed, as opposed to resilience and sustainability, but most organizations did not have a solid crisis response plan in place. When the crises hit—and they have been coming one after another when it comes to trade, supply chain management and China—companies found themselves reacting, instead of carrying out contingency plans that had been drafted for such occasions.
We discussed contingency plans in the previous issue of RSCC and offered up examples of crisis management protocols, but the key to a good response plan is to have it set up and ready to go for when a crisis occurs. Coming up with the plan during the first days of the crisis will result in more negative, unintended consequences that benefit no one.
Aside from having a crisis response plan in place, companies should have also recognized that global supply chains are in fact far less global than one would think. The global supply chain is dominated by China, the world’s premier manufacturing base and the country with the most consumers in the world. With all the political and social problems that stem from China’s interactions with the rest of the world—tariffs, sanctions, blacklisting, lawsuits, pressure to give up secrets in exchange for access, etc.—companies should already have been diversifying their suppliers and spreading the risk around. And it’s true that companies have been trying to move to Southeast Asia or Bangladesh, but the ties that bound companies to China were and still are too strong to make easy exits.
Many articles are calling for companies to diversify their supply chains and not lay all of their eggs in one basket. But when raw materials and components are made in China, along with finished products, finding alternatives that can do it right, quick, cheaply and get it delivered on time is extremely challenging.
The most important thing any organizations can do right now is put together a modular crisis response plan that can be pulled off the shelf. Keep that plan up-to-date and living. Communicate that plan to employees and stakeholders. There will be more crises to come. Political considerations—especially in the U.S.—have put major crises in the waiting, such as climate change, on the backburner. Companies cannot afford such luxurious ignorance.
Climate change is a real thing, and it will affect your supply chains. Reliance on one nation—an autocratic giant that cuts corners on business ethics, human rights, environmental stewardship and worker safety—will come back to bite you. Enjoying the fruits of a global value chain, streamlined and efficient, exposes one to the possible risk of paralysis in the event of slowdowns or shutdowns due to unforeseen catastrophes.
A compliance program that takes into account sanctions and trade; environmental, social and governance risk; and has a component devoted to supply chain risk is not just a good suggestion; it is an absolute necessity.
Companies should have had contingency plans in place for crises such as the coronavirus for a long time, but it’s not too late to put one together now.
Having a vibrant compliance program that has a supply chain component is crucial for a company to survive the influence of global crises on business operations.