COVID-19: The Black Swan has landed

Here’s the situation: The COVID-19 outbreak has had a profound and significantly disruptive impact on the global economy, and as of this writing, the trajectory suggests the effects will continue into the near future. Owing to the globalization of supply chain ecosystems over the previous 2-3 decades (especially into China and other developing world regions) seemingly no company is immune.

One unique attribute that differentiates this crisis from others in recent years is its worldwide effect on both demand and supply. Companies are experiencing wild changes in demand for their products as customers (both businesses and consumers alike) re-prioritize their activities and expenditures. Many healthcare related products have experienced an expected surge in demand; however, day-to-day consumer products have also seen unexpected spikes in demand largely due to hoarding from the fear of geographic lockdowns, shortages and curfews. Many consumer durables and industrial equipment companies are experiencing a sharp decline in demand. The supply side is severely disrupted due to regional lockdowns, global transportation slowdowns and market stoppages, as well as significant shortage of labor due to health concerns.

Notwithstanding the real improvements that companies have made to improve agility and visibility into their supply chain, the ability to navigate this global COVID-19 crisis is exposing what continues to be a historical challenge: the capabilities to identify and adequately manage key risks to supply chains, especially from “Black Swan” events. Even robust risk management programs born out of previous crises (H1N1, SARS, Fukushima, etc.) are being pressure tested because of how broadly and quickly the COVID-19 outbreak has materialized with continued uncertainty. Now is a critical time to use a data-informed approach to identify the greatest risk areas to supply and demand and develop immediate, medium and long-term mitigation and resiliency strategies.

How to respond

There may never be a definitive therapeutic treatment for such unforeseen supply chain disruptions from diverse events; but, companies can develop their own private vaccine to make their supply chains more resilient. The vaccine is a data-dependent, step-by-step process as detailed below.

In the immediate operating environment, firms must keep essential product flowing in the face of significant disruptions. This may mean a quick prioritization of products and customers and a manual allocation process. Armed with these priorities, the logistics function must manage product flows with potentially significantly diminished transport capacity. For example, canceled airline flights are already leading to price spikes for airfreight movements. Each product movement may become a real time decision regarding cost and value tradeoffs. Companies should plan to implement quick, centralized work flow and approval processes for any changes made.

In the near term, if not already done, companies must develop a deep, data intensive understanding of their end-to-end supply chain network, from raw material sub-tier suppliers to the ultimate end users of their products. Where is each node located? What is its size and relative value? What are the fulfillment and flow patterns that drive demand creation and supply replenishment? What are the lead times and SLAs? Companies should segment their product portfolio along criteria such as demand volatility, volume and value. This can also help identify valuable customers whose business may be worth prioritizing.

Formalizing risk management is essential

In the medium term, companies should create a risk assessment of the entire enterprise supply network and ecosystem based on the types of disruptions and uncertainties specifically posed by COVID-19. Find the greatest potential failure points; for example, sole-source suppliers or a concentration of manufacturing/ distribution facilities in “hot spots.” Assess the agility of the supply chain in rapidly ramping up or ramping down throughput or rerouting the network around choke points. Out of this activity several actions will emerge that can be prioritized based on urgency, time-to-value and complexity. Some examples:

• Fast-tracking identification and qualification of alternate supply sources;
• Redeployment of strategic inventory to prevent stock outs in case of labor disruptions or border closures;
• Alternative shipping modes (for both inbound and outbound) with trade-offs on cost, time, availability and flexibility; and
• Increased communication and transparency of demand forecasts or supply status and to collaboratively improve plan accuracy and avoid Bullwhip effects with upstream and downstream partners.

Simulation leads to mitigation

In the longer term, the COVID-19 pandemic has shown that solving only for an emergent Black Swan crisis is not sufficient. A robust and integrated risk management program driven by leadership and spanning the entire supply chain ecosystem is critical. Formal multi-functional risk reviews must be set up where risks can be continuously surveilled and evaluated by designated risk owners as circumstances change.

Mitigation plans can often be evaluated in terms of implementation time and cost, capacity, stock out potential and other factors with scenario simulation and modeling available in today's planning tools. Sophisticated risk management tools integrate with ERP systems and can receive 3rd party risk data to increase visibility and reality. Proactive action on such plans and transparency with partners – even including them in such activities – is critical. A governance structure must be in place whereby critical business objectives and risk tolerances are communicated by leadership and propagated down through the organization. Similarly, risks and proposed mitigations/costs must be integrated across the organization and escalated to management for rapid approval.

Managing risk

Organizations with formal risk management programs designed to reflect, digest, and respond to their risk environment are far better equipped to handle exigent crises such as COVID-19, and other events or circumstances large or small. If such a program is lacking or ineffective, any tactical response being contemplated for today's situation should be placed in the broader context of investing more in the processes and tools required to ensure business continuity and sustainability in the face of an unpredictable and volatile global operating environment.

Matthew Lekstutis is a global managing partner in supply chain consulting at Tata Consultancy Services.

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