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How manufacturers can protect their supply chain in times of crisis

Mar 27, 2020

The COVID-19 coronavirus has turned out to be a black swan: a rare and unpredictable event with major disruptive consequences. There’s no doubt COVID-19 is putting an enormous strain on the entire world economy.

Solutions for these black swans are usually not “out of the box.” There’s no playbook about how manufacturers should react during a pandemic. So if you’re shaking your head, asking, “Why wasn’t I prepared for this?”, understand there are no set answers. But there are certain things you can plan for.

The supply chain risk management plan

When we work with business owners who are critical of their company running day to day, we help them put together what’s called a “day after” plan. It’s one that, hopefully, they never need to use, but if needed will act as a playbook for how to deal with an unforeseen event.

Coming out of this COVID-19 crisis, I recommend that the leadership team of each business make a concerted effort to craft their own day-after plan in case of any future events. It’s also wise to revise this plan as often as needed, such as when there is a change in major suppliers, technology or other major operations. 

COVID-19 has caused significant supply chain disruption around the world, so while a day-after plan should focus on the well-being of the entire enterprise, I want to talk specifically about the supply chain. 

You will find the below exercise may expose current gaps in your supply chain strategy, or help you develop a supply chain strategy that you can implement right away. (I would also recommend conducting a SWOT analysis prior to kicking off a project like this in order to crystallize your thoughts around the challenges you face.)

Map it, gap it and wrap it up

The first step in this supply chain exercise is to map your current supply chain around business-critical products.

The purpose of this exercise is to identify how your company fits into the overall supply chain. Be sure to include logistics here because when a supply chain breaks down, it is often due to the logistics portion. 

For example, if your company is sourcing primarily carbon steel plates and you are located in the Midwest, your map should be fairly straightforward and compact — that’s a great thing. If there are major gaps or sources of potential interruption (e.g., borders closing and all steel is sourced from another country), you should highlight this area for robust mitigation plans.

Second, conduct a gap analysis. This is a critical part of protecting your supply chain. A gap analysis should include sourcing information, a technology analysis and a cost matrix.

Sourcing information: Get a list of all of your parts in your part master. Make sure all parts have at least two sources to buy from. Be sure to engage with secondary suppliers periodically (dual source if possible) in order to monitor their business health and capacity and to maintain an ongoing relationship with them in case something does happen. If the one key source you’re buying from shuts down, you don’t want to have to build a relationship with another supplier during a crisis. That takes a long time, especially because they likely already have product allocated to other customers.

I’m not advocating to dual source MRO items or other supplies or to put a lot of effort into monitoring those types of products; however, for your top direct spends, having a dual source increases your odds of procuring materials in the event of a black swan.  

Also note that when I say dual spend, I don’t necessarily mean 50/50. There are benefits to larger spends with quality suppliers when it comes to products being on allocation. Weigh each situation separately and have face-to-face conversations with suppliers in order to form and maintain a solid partnership. 

Consider meeting with or engaging with partners in other countries such as Mexico or India for your key items. There is no need to research individual companies in those countries; rather, consider working with a sourcing expert who deals with each of these countries on a daily basis. Have conversations about how long it would take to ramp up to make parts for you if needed in a crisis. 

While not the quickest solution, this may cover the backend of your schedule as your inventory is depleted and not replenished as quickly through your own operations.

Technology analysis: Technology plays a major role in today’s business environment and will play even a bigger role as time goes by. Conduct a thorough technology analysis (i.e., an IT health check) of all of your systems — from hardware and software that helps to run your business, to security and everything in between.

Ask yourself these questions:

  • Are all of our people prepared, trained and able to work remotely if needed?
  • Do I have security measures in place in order to conduct business safely? This must consider the systems and the human components. Most systems are breached by breakdowns in security measures by individual employees. 
  • Are my systems up to date with the latest trends, and do I have a robust back-up plan in place for my data?
  • Have I taken advantage of specialized software for sourcing for my critical direct spend materials and logistics needs?
  • Have I audited my suppliers’ technology systems to ensure they are able to support me during a crisis? Have we run a stress test?
  • Am I using dashboards effectively in order to communicate key issues to leaders in real time if needed?

Once you have the answers, prioritize them from the biggest risk to your business to the lowest, and start working to close those gaps.

Cost matrix: Frankly, there will be additional costs associated with a plan such as this. You will need to work with your finance department, executive leadership, sales and marketing, and maybe your financial institutions to understand what costs you might incur, how those costs can be passed on, the impact to your balance sheet and cash flow, and what value to your customers your plan provides.

Read more: 9 ways manufacturers can increase cash flow

Note that as time goes by, customers will begin to press for pricing reductions and other concessions and tend to forget about the most recent black swan event. Careful negotiation will need to be done in order to demonstrate to your customers that there is a cost to ensuring that you will not be a broken link in their supply chain.

Create pro forma financial statements taking into account any additional costs you may be incurring through these activities. Start with your part cost and work through your normal budgeting practice to use as a baseline. Then, begin to do “what if” analyses around increases in certain part costs and the effects on your margins (don’t forget added fixed costs through upgrades in technology and equipment). Plan to work with your customers to reduce these over time while still maintaining adequate supply. Highlight any major changes in part costs between suppliers, and focus on reducing those gaps. 

Be transparent with your customers, as well. You don’t want to scare them, but you do want them to understand that ensuring an uninterrupted supply of goods to them during a crisis may have an additional cost. I think we will see prices rise immediately after this COVID-19 crisis ends as companies struggle to rebuild their balance sheet and compete over supply for goods.

Finally, wrap it up. Creating your future supply chain plan with the above exercises will take months to complete, but wrapping it up means turning it into a usable plan and putting it into place to ensure your supply chain is protected during the next unforeseen event.

This supply chain plan should be a living, breathing, fluid document that can and should be referred to as any part of normal business strategy planning. Major changes in operations, finance, customers, technology, etc. should be the impetus for a modification to it.

Start mitigating your supply chain risks

Black swan events are never alike, and no company can ever be 100% prepared for an event like the COVID-19 pandemic. However, going through an exercise like the one above will help your supply chain run more efficiently and be as prepared as possible should an unlikely event occur.

Learn more insights on how to prepare and strengthen your supply chain strategy. Register for our April 29, 2020 webinar: Supply chain strategy: Responding to COVID-19 and preparing for the future.

Author(s)

Joe Girard
Joe Girard
Manager
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