Supply chain disruptions are a cause for concern for both businesses and consumers alike. Sometimes disruptions are localised affecting only a small number of businesses and on other occasions they can have huge global ramifications affecting a diverse range of businesses.
What is a Supply Chain Disruption?
Supply chains are a sequence of processes that facilitate the production and distribution of a product from a supplier to an end consumer. Any sudden change that impacts this process negatively can be considered a supply chain disruption.
Typical causes of disruption include; natural disasters, transport delays, price increases, cyber-attacks and pandemics. In recent weeks we have seen the widespread affect that the Coronavirus has had on global supply chains affecting a huge number of companies, regions and people.
It is clear that the extended shutdown of parts of the world’s economy is now feeding through to impact supply chains as existing stocks are depleted. Businesses need to focus on how to minimize supply chain disruption and to adjust rapidly to a changing landscape. This includes among others, infrastructure, tax and employment implications of changes and the option of quickly reversing changes if the situation stabilizes quickly.
Mattias Hedwall, Global Chair, International Commercial & Trade, Baker McKenzie.
6 ways to prepare for Supply Chain Disruptions
By their nature, supply chain disruptions occur unexpectedly and so planning ahead for every eventuality is essential to mitigate loss when such a disruption occurs. Build an effective strategy to manage your supply chain disruptions using the 6 considerations below.
1. Develop a contingency plan
Consider alternative processes to help you develop a backup plan for supply chain disruptions. Create an emergency budget that can be invested as required, in the event of a crisis.
2. Build an inventory
Collate essential supplies including finished products and components so that your business can continue to flourish even once a disruption occurs. By having a stockpile of supplies at your disposal, businesses can buy themselves some time to mitigate risk and will be able to continue operating for a short while during a crisis.
3. Complete a risk analysis
Audit your supply chain thoroughly to highlight points of weakness. Doing this will enable you to identify the aspects of the supply chain that may be most affected by a disruption and that may benefit from having an alternative option in place. Such an analysis can provide the opportunity to consider and evaluate processes that may otherwise be taken for granted and to assess where weaknesses lie so that a contingency plan can be implemented.
4. Create a catalogue of alternative suppliers
Identify and communicate with suppliers in alternative regions so that if a political crisis or natural disaster occurs in one location you will have an equivalent supplier in a different area. This is particularly important for businesses that rely heavily on a small number of suppliers. By diversifying in this way, you will be more able to mitigate risks in the event of a crisis. However, it is worth noting that this is not a perfect solution for all disruptions as pandemics have a global impact that affects suppliers in all countries.
5. Collaborate with a logistics expert
Working with a logistics expert can be hugely beneficial for companies needing support during supply chain disruptions. Such experts will be able to help you find courier solutions and can provide advice on fees, surcharges and duties to ensure that you are not caught off-guard.
6. Explore the use of predictive tools
Make use of the technology that will enable you to evaluate potential threats before they occur. Apps with geopolitical overviews, systems analysing cyber threats and AI mapping can all be hugely beneficial in giving your business an advantage in determining potential risks.
7 steps to take once a disruption has occurred
In some cases, the impacts of supply chain disruptions are unavoidable and preparations for a crisis, ineffective. Reactive crisis management solutions should be considered whilst the disruption is occurring for which the following steps may be useful.
1. Contact costumers
Inform customers about any delays that may affect their orders, providing transparency on the issue and explaining the reasons for such a delay. By keeping consumers updated and managing their expectations they are more likely to be understanding during a disruption.
2. Consider the key aspects of the supply chain
Establish which parts of the supply chain are most crucial and find alternative suppliers for these critical products as a priority. Identifying these key aspects will be invaluable when preparing for potential future disruptions.
3. Assess remaining inventory
Carry out a physical inventory of both the finished goods and components that you have remaining to determine how long you will be able to continue operating for even in the event of a crisis. Remaining inventory includes:
- Finished goods in warehouses
- Blocked inventory undertaking testing/quality checks
- Spare-parts inventory that could be repurposed
- Low quality parts that could be reworked
- Parts in transit that can be delivered more quickly
4. Consider changes in buyer behaviours
Some disruptions may be felt on a larger scale and may impact upon buying behaviours. For instance, natural disasters and pandemics may affect demand, the items purchased and the way in which goods are bought. As businesses do not operate within a vacuum, understanding these changes is essential to ensure that the products and service that you are offering is relevant. Consider pivoting the types of product that you sell or the way in which you sell to meet customer demand.
5. Prioritise safety
The safety of staff working at any stage of the supply chain should be of paramount concern. Ensure that any strategy whether relating to production or distribution prioritises staff safety and the safety of customers so that everyone feels safe when manufacturing and purchasing your products.
6. Be flexible
When considering all aspects of the supply chain, identify areas where flexibility can be afforded. If certain processes can be undertaken more slowly or in a different way to ensure better safety then consider how your business can accommodate this.
7. Evaluate cash flow
Supply chain disruptions will inevitably affect cash flow. However, by running stress tests you will be able to identify aspects of the supply chain that are most likely to have a financial impact. Once these have been highlighted you can plan and amend overheads to minimise losses.
The future of supply chains
The global Coronavirus crisis has highlighted a number of weaknesses within supply chains that many businesses may not have been aware of. Such weaknesses include over-reliance on a single supplier, the limitations of just-in-time inventories and the absence of a contingency plan. Traditional linear models are increasingly being replaced by digital supply networks (DSNs) that offer overarching visibility, more agility, improved optimisation and greater collaboration.
Many supply chain disruptions such as pandemics and natural disasters are unforeseeable but businesses can put themselves in a better position by creating a smarter global supply chain using technology such as the Internet of Things, artificial intelligence, robotics and 5G (link to relevant KH articles or hubs for each technology) to their advantage.
Enhanced supply-chain management and adoption of digitalization has never been more important. Companies with well-considered supply-chain risk management processes will be better-placed to identify the impact of disruptive events on their supply-chain and product-offering, providing them with an opportunity to assess how to best respond in tough circumstances.
Anne Petterd, Baker Mckenzie, Technology, Communications and Commercial Partner Sydney.
Changing the way that your supply chain operates is not something that can be done overnight and may prove difficult after the Coronavirus. However, as a priority, businesses must evaluate their processes frequently and must invest in the resilience of their supply chains to mitigate risks now and for the future.
Please contact Distrelec for support and guidance in this area and we will be more than happy to assist.
