Mitigating Impact of the Coronavirus on Supply Chain

Editor’s Note: Koray Köse is Senior Director Analyst, Gartner

The World Health Organization has issued a global state of emergency due to the coronavirus outbreak. Officially named COVID-19, the virus originated in the Chinese city of Wuhan and has since spread through China and into other countries.

As global leaders and health officials track the strain and make decisions regarding containment, supply chain leaders need to assess and plan for how the virus could impact global supply chains.

The ramifications of a pandemic event are hard to predict. However, by taking necessary steps to assess risk and prepare for the potential fallout from an event, supply chain leaders can mitigate its impact.

The Challenge of globalization

Although the outbreak is being compared to the 2003 SARS outbreak, China is now much more developed and integrated with the global economy, and the country has significantly improved its transportation networks. This means the implications for supply chains are global in nature and will be felt across a number of industries. Travel restrictions, shortages in labor and materials, as well as logistical challenges through tightened controls, and hub and border closures will cascade and augment the impact much further today than it did 17 years ago.

The potential impact on supply chain

Though it is difficult to predict the exact consequences of the coronavirus, impacts across global supply chains are already being felt and could include:

• Materials: Supply shortages of materials or finished goods coming from or routed through logistical hubs in impacted areas.
• Labor: Availability of white- and blue-collar labor may be limited due to quarantine guidelines or illness.
• Sourcing: Travel restrictions to certain areas, limiting the ability to discover, qualify and certify new business or programs and to transact business.
• Logistics: Established hubs and supply networks may experience limitations in capacity and availability so that even if materials are available, they won't be easily transported. Finding alternative routes and means of transportation will be a challenge.
• Consumers: Consumers may be more cautious in their purchasing habits due to fears about being in public and potential exposure to the virus. Many may turn to online sales, straining logistics networks.

Preparing supply chains for disruption

Disruptions happen. Leading supply chain organizations utilize enhanced and dynamic risk management processes. They include a framework to continuously measure key risk indicators and to prepare scenarios for controllable and foreseeable uncertainties such as compliance, labor, material, capacity and financial issues. Dynamic risk management also focuses on unforeseen disruptions and integrates a multisource strategy with flexible capacities to turn on when needed to enhance resilience.

Epidemics and pandemics are different. The main impact is a lack of access to staff, decreased productivity and a change in public behavior in terms of shopping habits and spending. While the full impact of the coronavirus won't be felt for many months, now is the time for supply chain leaders to take steps to monitor and prepare for the impact on their value chain.

Short-term actions

Develop a high risk for supply chain disruption monitoring and response programs for countries impacted by the virus and potential supply chain exposure from tier 1 and below. If lower tier transparency is missing, start building up the program and prioritize discovery to get a full picture quickly. It's also important to assess how customer spending might be affected.

Next, make sure all inventory is within reach and outside impacted areas and logistical hubs. Additionally, supply chain leaders should partner with their legal and HR departments to understand any financial implications of not being able to deliver supply to customers and provide guidance to employees located in the impacted areas.

Midterm actions

The focus at this point should be on balancing supply and demand as well as building buffer stock. Assess opportunities to diversify the supplier ecosystem and review or create the organization's overall risk management approach. Work with internal stakeholders and strategic and critical suppliers to establish a congruent risk management approach to monitor and prepare for potential material and manufacturing capacity shortages.

Long-term actions

Once the initial impacts of the crisis are mitigated, it's all about foreseeing the next “when.”

For example, supply chain leaders and their teams can conduct a scenario planning exercise and develop action plans. It's also a good time to discover or develop alternative sources and diversify value chains.

Tackle strategic and concentrated supplies with high value at risk where internal risk capacities to absorb, such as alternative sources, routes, inventory and cash reserves, aren't sufficient enough to mitigate any major disruption. Being better prepared than the competition could even open new opportunities when the next disruption comes around.

It is not about analyzing “if” a disruption will happen but about establishing action plans and being able to deploy rapidly “when” disaster strikes.

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