Global supply chains have become more sophisticated in recent years. This sophistication is due to supply chains becoming more digitised, adopting operational efficiencies and embarking on a culture towards leaner supply chains, combined with an increased cognisance for the necessary risk mitigation measures to increase overall supply chain security and performance. This can often make the purchase and movement of goods appear to be seamless to customers and consumers. This in turn, has led to a more demanding consumer base and has raised expectations of businesses in terms of delivery costs and lead times.
The reality however is that the globalisation of supply chains, while important for business competitiveness, has always had inherent risks and is susceptible to a greater number of disruptions and challenges. In recent years, there have been challenges to the supply chain industry in areas such as transport, personnel and consumer demands. In the transport sector, costs are increasing due to an older demographic and increasing fuel costs. In addition to this, it is becoming increasingly difficult to attract people into the industry. These factors, amongst others, can place financial and operational constraints on global supply chains. The outbreak of COVID-19 has highlighted these pre-existing fragilities and threatened to undermine the functionality of global supply chains.
This pandemic will undoubtedly act as a catalyst for businesses and organisations to review their current business operations and supply chain model to allow them to become more responsive and adaptable to future issues that pose a similar risk to their organisation’s success. Businesses are now facing new challenges to ensure that key products and materials are manufactured and transported to international customers and consumers. A significant increase in demand for food and pharmaceutical products, amongst others, combined with significant production and transport challenges, has placed further constraints and challenges on the industry.
China’s importance to international trade has also come into sharp focus in recent weeks. China is a primary producer in the technology, textiles, pharmaceutical and automotive sectors, amongst others. For businesses that are sourcing key components from the Chinese market, they may be experiencing significant disruptions to their own production and overall ability to meet consumer demands due to factory closures and delay to the manufacture of products. The Wuhan region in particular is considered a manufacturing hub within China with approximately 500 manufacturing facilities located there and the factory closures that were put in place is likely to have long-term impacts for a variety of industries.
As non-essential businesses such as the textile industry have temporarily shut their stores across the globe, there has been an increase in cancelled orders and laying off staff in textile production. The immediate closure of factories in Wuhan at the beginning of the year had a major impact on clothing retailers around the globe. Wuhan, is a centre for international textile production and is responsible for 37.6% of all global textile exports according to the World Trade Organisation (WTO). An example of the impact that these closures had is evident in the wedding industry. While wedding dress production plays a significant part in the overall textile production in China, a significant volume of materials and fabrics are also sourced from China. In this regard, while factories in Wuhan temporarily halted production, the reliance on China for key materials and fabrics also impacted other countries abilities to continue manufacturing wedding dresses.
While the virus originated in China, the pace at which it has spread across the globe is further impacting transport channels and ultimately the production and movement of goods. The Bangladesh garment sector for example, the second largest garment exporter after China, is at risk of collapsing. Since the introduction of social distancing and further restrictions across their primary markets, Europe and the U.S.A, approximately 4 million workers are at risk of job losses. While the societal impact is drastic, there are also long-term considerations for businesses that may struggle to recover from severe financial losses. The impact this could have on the wider clothing retail sector could change the way in which many businesses do business today.
In Europe, the impact of the spread of the virus is also being heavily felt within the manufacturing industry. Italy, which has been heavily impacted by the outbreak, has also had to limit its manufacturing in response to the virus. Automotive original equipment manufacturer (OEM) Fiat Chrystler, for example, staggered its factory shutdowns across its plants.
While there are many immediate challenges facing organisations, the long-term impact of the pandemic can be shaped by the actions businesses take now.
Map your supply chain:
Undertaking a comprehensive mapping exercise will allow businesses to identify their suppliers at all levels, including their supplier’s suppliers. In doing this, they will have detailed oversight of the key suppliers, logistics providers, transport channels and transport modes being utilised at all stages of their supply chain. In the event that there are further factory closures or knock-on effects and delays, having this detailed overview of their supply chain will allow businesses to make early, informed decisions to ensure their supply chain remains open and functional.
Multi sourcing rather than single sourcing:
For businesses that have historically sourced their key materials and products from one single supplier, they should now consider adapting to a multi-supplier approach. While it may often be simpler and more cost effective at the outset to source from a single supplier, in events and circumstances such as these, it leaves businesses vulnerable and effects their ability to remain competitive. With the potential for further factory closures, delays to lead times and overall supply chain disruption, businesses should consider identifying alternative suppliers in different geographical areas. In doing this, they will mitigate the risk of relying on one supplier within a particular region if a similar event is to occur in the future. It also allows the business to better prepare for the medium-long term impact of the pandemic. As a starting point, businesses should look at their suppliers in higher risk countries at the start of their fight against the outbreak in their region. This will allow businesses to identify if further factory closures or delays on re-opening will impact on future stock levels. In addition to this, it may also provide businesses with an insight into both regional and individual suppliers readiness to react to future issues.
Explore alternative inbound and outbound solutions:
Similar to single sourcing, many businesses use the same transport and logistics provider and utilise only one mode of transport when exporting or importing their products. The medium-long term impact of COVID-19 may require businesses to source components from different suppliers or utilise different modes to continue to service customers and consumers. Businesses should now begin to explore alternative modes of transport and transport providers before the impact is fully realised. This will allow them to act in a timely manner and make decisions when required. While the outbreak of this pandemic may be the catalyst that instigates this review, there are many benefits to undertaking this exercise, including potential operational efficiencies and financial optimisations. It provides organisations with opportunities to build relationships with new suppliers during this time so they have potential for increased options for uncertain times.
Enhance inventory capability:
While many businesses may have reduced their inventory capabilities in recent years in order to move towards a ‘just-in-time’ supply chain model and avoid associated inventory costs, it is unlikely they will have a sufficient level of ‘buffer’ stock to respond effectively to the potential shortages and delays caused by the spread of the virus. Businesses should now begin to assess their inventory and stock requirements to identify if they would have sufficient supplies that would allow them to service their key customers in the event of shortages and delays.
The timing of the outbreak in China coincided with the Chinese New Year, a time in which most organisations increase their inventory demand due to factory closures and reduced transport movements. In addition to this, many Irish organisations undertook stockpiling in preparation for a No Deal Brexit at the end of January. As a result, many will find themselves with additional stock levels to meet the initial customer and consumer demands. Businesses should however undertake detailed reporting of their current stock and inventory levels in order to understand the key risk regarding product shortages or overstocked / slow moving products. This will allow businesses to understand at an early stage where their risks lie and put in place plans to mitigate against these.
The outbreak of this pandemic has caused unprecedented challenges for many businesses operating within the supply chain. While the full impact is still unknown, businesses should take actions now to manage the medium to long-term impacts such as product shortages and outages to allow them to remain competitive in the months ahead. For many businesses, this will be a balancing act between mitigating risk while managing costs and ensuring that customer and consumer demands are met.