Big or small, disruptions along global supply chains are normally regional and foreseeable, which is why most well-run businesses can prepare for them. Auto manufacturers, for example, diversify their supply bases geographically to limit their exposure when a regional disruption prevents some suppliers from delivering their parts or components. Major chocolate retailers can anticipate peak demand periods like Christmas, Easter, Halloween, or Valentine’s Day and coordinate their supply networks to ensure sufficient inventories. But the disruptive forces unleashed by the COVID-19 pandemic quickly traversed the planet, rendering risk management strategies designed to mitigate the impact of disruptive regional events ineffective.
The viral outbreak first triggered an abrupt drop in demand for non-essential businesses such as tourism, hospitality, and fashion. Some goods experienced a huge increase in demand as consumers stocked up on emergency supplies and working from home became the norm. But as the health crisis developed into a global pandemic, whole industries witnessed a wave of closures, workforce reductions, and order cancellations as social distancing measures disrupted revenue streams that rely on personal interactions, such as real estate sales, automobile dealerships, and shopping malls. In just a matter of weeks, financial markets tanked as the manufacturing of non-essential goods came to a screaming halt, furloughing legions of factory workers.
Meanwhile, despite implementing various safety measures to protect workers, businesses that remained operational faced production interruptions due to employee outbreaks. After dozens of workers tested positive for COVID-19, Cargill’s meat plants in High River, Alberta, were forced to close, and over one-third of Canada’s total beef-processing capability was interrupted.
The pandemic further altered employee expectations and consumer habits while driving politicians to announce unprecedented levels of emergency spending, not to mention protectionist measures that forced global businesses to navigate often competing national expectations, raising the tension in negotiations for supplies of personal protective equipment (PPE) to the level typical of disputes in foreign affairs in some cases.
The widespread lack of preparedness that COVID-19 exposed is not surprising. Nevertheless, countries and corporations alike are now examining supply chain strategies, aiming to reduce exposure to future global events. With an increase in nationalism driving louder calls for reshoring, the global economy could see a reduction of supply chain network dependencies. But there also needs to be a higher level of collaboration among supply chain partners. And in light of the disruption we have just witnessed, managers around the world need to understand that simply focusing on increasing preparedness isn’t enough.
Effective, responsive measures should be taken as soon as a company is exposed to any disruption. And as noted above, effective strategies already exist to mitigate the impact of a regional event. Depending on the scenario, supply chains can be reengineered via emergency sourcing, logistics rerouting, workforce rescheduling, or fundraising. Demand can also be redirected by way of product substitution and price adjustment. Similar tools can also be used when a disruption is global in nature—at least when the impact on demand is positive.
When Amazon experienced a spike in orders due to social distancing, for example, the online retail giant expanded fulfillment and delivery operations, creating thousands of jobs, while temporarily increasing wages for hourly workers. To manage demand in the early stages of the pandemic when consumers’ appetite for digital devices was expected to increase as many Chinese suppliers were idle, Apple applied purchasing limits on popular products then adjusted them as some supply concerns subsided. When demand overtook supply for disinfectant products, Clorox cut its ad-display activity on Amazon. Reckitt Benckiser, the manufacturer of Lysol wipes, jointly launched a campaign to counter hoarding by encouraging consumers to think about the needs of others and shop responsibly. Amid the pandemic, Costco finalized a deal to improve its ability to deliver large items to its online customers via a US$1 billion acquisition of a logistics specialist.
Mitigating the impact of a sharp drop in demand or lengthy supply shortage is much more challenging. With schools and restaurants closed, Canadian dairy farmers were forced to address the industry’s unexpected oversupply issue of milk by dumping it in April, despite collectively donating 2.5 million litres of the perishable product to food banks. Businesses in other industries facing a negative impact on demand during the pandemic responded with worker layoffs and contract cancellations.
While these responsive actions can help companies survive until market conditions improve, at least over a moderate timeframe, further mitigating disruption requires adding flexibility to business processes and product offerings. When faced with a sharp drop in demand for their traditional offerings during the virus outbreak, some companies swiftly reviewed their strengths and moved to help meet demand for other products and services, either directly or via the utilization of their supply chain expertise. UPS partnered with government task forces in transporting vital testing equipment and setting up testing sites. Hockey equipment manufacturer Bauer started producing medical protective equipment. Automakers and other manufacturers retooled to churn out respirators and ventilators. Utilizing their purchasing and logistics capabilities, French fashion firms LVMH and Kering secured millions of medical masks to support pandemic-fighting efforts in France. These activities didn’t make up for lost revenue, but they did demonstrate commitments to corporate social responsibility, creating value in terms of goodwill when the previously profit-oriented use of supply chains was disrupted.
Dealing with supply shortages entails more tactical moves. First, demand needs to be managed, which is why supermarkets put purchasing limits on items like toilet paper. The varying levels of needs amongst customers also must be addressed, which is why Amazon prioritized sales of essential medical supplies to hospitals and government agencies.
Supply shortages can also be addressed by adjusting the supply base and effectively utilizing procurement resources and talent. This is particularly important for critical supplies. 3M produces the filters for N95 masks in-house, but it buys non-critical components like straps and metal nose clips from third parties. Instead of relying on distant suppliers during a pandemic, it started sourcing non-critical materials from regional suppliers. When faced with a shortage of PPE, the State of Colorado put together a manufacturing and sourcing task force that secured two million medical masks just days after the World Health Organization announced the global pandemic. The task force also assisted the efforts of local manufacturers that retooled to produce medical gowns, face shields, and hand sanitizer.
Last but not least, innovation has a major role to play when facing supply shortages. While watching demand for ICU ventilators skyrocket in Italy amid a constrained global supply chain, a Canadian group of medical professionals, engineers, and entrepreneurs designed the Pantheon Emergency Ventilator using a streamlined number of components that can be easily sourced or machined locally. Another innovation spawned by the impact of the pandemic’s disruptive forces on supply chains is the use of 3D-printed respiratory valves, which were reverse engineered by Italian manufacturer Isinnova for use in a Lombardy hospital after traditional supplies dried up due to unprecedented demand.
The lesson here is simple: companies need to mitigate supply chain risks in different domains in different ways (see Table 1). In the short to mid-run, companies can employ responsiveness and flexibility to enhance their chance of survival. In the long run, firms should stay forward-looking over political, technical, and social developments, and should strategically retool, repurpose, and transform their supply chains. Doing this effectively requires scrutinizing one’s supply chain, upstream and downstream, to develop a strategic plan with all the risks presented by today’s chaotic market—regional and global—in mind.
Table 1: Combatting Supply Chain Risks in Different Domains
The first step is relatively simple. Plot out a supply chain with you in the middle and upstream businesses that provide you with goods or services on one end. These are your suppliers and they should include component manufacturers, subassembly operations, packaging retailers, providers of third-party logistics (3PL), etc. Now place your customers on the opposite end of your chain, making sure to include any downstream entity (business or consumer) that pays to distribute, retail, or directly use any good or service that you produce.
Once all your suppliers and customers are plotted, make a list of the following:
- assets you own (plants, factories, tooling, raw materials, WIP, inventories, etc.)
- resources you can access (business connections, financial markets, think-tanks, databases, etc.)
- your expertise/core competencies (patents, technologies, know-how, reputation, etc.)
The next step involves identifying the critical players in your supply chain. A critical supplier typically (a) provides a unique offering that you can’t obtain elsewhere or (b) boasts a market foothold that can’t be matched. Non-critical suppliers generally provide products/services on a volume basis and can be easily replaced. Core customers generate significant amounts of your revenue. According to a general rule of thumb, your top 20 per cent of buyers represent your core customers because it is not uncommon for 20 per cent of a business’s customer base to generate 80 per cent of total revenues.
After your supply chain is mapped out and its core suppliers and customers are identified, the next step is to highlight bottlenecks and redundancies. Bottlenecks determine a supply chain’s throughput. Examine the general utilization rate of your assets and resources, taking note if you find areas that constantly run at high or nearly full utilization. If any, these are your internal bottlenecks. Conversely, redundancies are resources that run at low utilization. If none of your resources run near full utilization, then external forces determine your throughput. If your supply is sufficient to meet demand in a competitive market, then demand is a bottleneck and supply is a redundancy. But when supply shortages force customer orders to backlog, then supply becomes a bottleneck while demand becomes a redundancy.
To plan for the impact of disruption, assess how economic and political events, market trends, emerging technologies, or social movements might impact your supply chain. Any potential for a drastic shift in the balance of your bottlenecked vs. redundant resources, along with the potential emergence of new critical suppliers or the disappearance of core customers, warrants planning to take transformative actions (see Table 2).
Table 2: Supply Chain Transformation Actions
When your own resources/assets/expertise become a consistent bottleneck (top green box), you will ultimately need to expand the corresponding resources/assets or acquire additional talent. However, if the bottleneck appears temporary and therefore doesn’t necessarily justify expanding (e.g., by investing in factories), or if one cannot afford the time required to expand operations, substitution and circumvention are other options. For instance, instead of heavily investing in new operations to meet the (hopefully) temporary increase in demand for PPE, 3M partnered with automobile manufacturers. For uncomplicated products, it is also possible to mitigate production bottlenecks by offering a raw materials kit that end users assemble themselves.
When your own resources/assets/expertise incur more redundancy (top orange box), and this shift isn’t temporary, resources need to be trimmed in a way that extracts the most value. For example, prior to dumping milk during the pandemic, Ontario dairy farmers donated as much oversupply as possible to food banks across the country. When hit with a surplus in 2018, dairy farmers in Pennsylvania invested in equipment to use excess milk to produce longer-life dairy products such as cheese and yogurt, so when faced with an oversupply in the future, the industry in Ontario might seek to preserve more value by partnering with downstream producers.
Businesses with spillover capacity or expertise may also offer auxiliary services as circumstances warrant. As an example of best practices, 7-Eleven has been using its warehousing and distribution network to develop new business in logistics.
When your supply is the bottleneck and demand is the redundancy (middle and bottom green boxes), critical supplies need to be carefully rationed according to customer value and urgency. This is also when bottlenecks should be attacked through innovation. Playing the price card to secure critical supplies is another option, but launching a bidding war should be considered a last resort. For non-critical supplies in bottleneck mode, one needs to place delivery assurance as a top priority after price. Otherwise, you might be accepting higher risk to save insignificant differences in cost. As non-critical supplies typically do not form bottlenecks during normal times, firms should engage in a continuous search for additional qualified suppliers to maintain a healthy supply pool over the long run. When dealing with redundant demand, on the other hand, one should triage sales and prioritize core customers. Note that in situations like a pandemic, core customers can be assessed by their level of need. In a supply shortage situation, non-core orders can be backlogged and aggregated for the sake of economies of scale. In logistics, emergency orders will be shipped immediately via the most-timely transportation means, while regular orders may wait on the ground until there is sufficient volume for efficient truck-load movement.
When your demand is the bottleneck and supply is the redundancy (middle and bottom orange boxes), the company might need to adapt like restaurants that started using their supply chains to operate as online grocery stores in order to serve customers in a different way during the pandemic. Adapting ahead of an anticipated large shift in demand is riskier, but should always be considered. Either way, when facing this scenario, a business will ultimately need to align its resources/assets/expertise with the new market conditions. Maintaining safety stock and healthy relationships with members of the supply pool is a must. Companies in this situation also need to ramp up the exploration of their own strengths in order to effectively plan for the future, as explained below.
Not all disruption is foreseeable, but systematic preparation improves a company’s chances of surviving the disruption by making them more responsive, flexible, and strategic. To maximize your ability to mitigate the impact of disruptive forces over the long term, create a table of working zones for your supply chain, including assets and resources, products and services, suppliers, and clientele. Then use the chart below to highlight the current state of your supply chain, along with potential alternative states and foreseeable future states (see Table 3).
Make sure you update this chart relatively regularly in order to keep prepared for whatever comes your way. On the surface, this practice might appear general in nature, but it helps managers maintain a deep understanding of a supply chain’s strengths and weaknesses, which enables effective transformations when conditions change.
Table 3: Working Zones of Your Supply Chains
The chaos created by COVID-19 went well beyond supply chains, impacting every aspect of business and social life. As the death toll and number of infected individuals continue to increase, nobody knows what the future holds. Clearly, combatting global disruptions of this magnitude is one of the greatest challenges confronting the current generation of management professionals.
As members of the business community reflect on the path forward, we all share a duty to collectively improve the preparation, responsiveness, and flexibility of the ventures that drive the global economy, with the goal of better meeting demand and maintaining employment when faced with future disruptions.