Seeing deeper into supply chains is key to overcoming disruptions such as COVID-19By Ranna Rose, Head of Operations and Customer Success, Resilinc
Every year, procurement officers and supply chain professionals are confronted by a myriad of natural disasters, factory fires, corporate restructuring and other disruptive events that have slowed their supply chains or even brought them to a halt. But for many it took the COVID-19 pandemic, a black swan event of historic proportions, to open their eyes to the need for greater visibility into the deep sub-tiers of their supply chains.
Supplier disruptions continue to rise
With border closures occurring across many countries worldwide and increased restrictions in the United States due to rising coronavirus cases in the summer of 2020, the number of global supply chain disruptions has risen steadily throughout the year. By the start of the second quarter of 2020, more than 35,000 supplier disruptions were recorded globally and the numbers continued to climb. From February through April 2020, Resilinc data revealed an average of 400 new global supplier disruptions each month.
This disruption is especially evident in China, where 460,000 factories shut down in the first quarter of the year, according to one big data service company, and 4,800 Chinese companies issued force majeure notifications in early March. This weighs heavily on the global supply chain since more than half of the world’s manufacturing emanates from Asian countries such as China, the Republic of Korea, Japan, Chinese Taipei, Singapore, Indonesia and India. The amount of trade with China alone is enormous – over 500 billion U.S. dollars.
According to a Resilinc global heat map presented in a webinar on 23 April 2020, the United States also experienced 19,000 supplier disruptions from January to April of this year. Very few countries have escaped the disruptive nature of COVID-19 and its impact on supply chains.
The need for greater visibility
Supply chain disruptions are not a new occurrence. Over the past decade, Resilinc’s EventWatch service has alerted Fortune 500 companies across many industries of thousands of supply chain disruptions annually. Using artificial intelligence and machine learning, Resilinc monitors news, social media and government reports in 160 countries and across more than 100 languages to send immediate alerts about factory fires, power outages, floods and earthquakes, and human-made disruptions such as corporate restructuring, lawsuits or regulatory actions. Resilinc sent its first alerts about a pneumonia that would later be called COVID-19 occurring in Wuhan, China on 28 December 2019, and by 4 January 2020 Resilinc received its first supplier confirmation of a disruption. Resilinc notified its clients that same day so they could begin identifying their impacted suppliers and enact mitigation tactics.
As we now know, COVID-19 caused an unprecedented number of disruptions which impacted nearly every corner of the globe within a few months. In its wake, many companies were blindsided. They scrambled to identify their suppliers located in China, then Europe and eventually across the United States that were facing lockdowns and restrictions. Most companies reported the lack of visibility into their supply chain as their number one problem, which hindered their ability to take swift and decisive action. For many, it took several weeks to identify which suppliers were located in the affected regions. Procurement officials realized they had limited information about their suppliers’ global operations and, most dramatically, learned they had little visibility into their suppliers’ own suppliers. It took many companies over three months to react and get their mitigation efforts stabilized and moving forward.
While most industries were hampered, some surged ahead during this time, such as healthcare, life sciences and medical devices. This has presented increased challenges for Customs administrators in ensuring proper regulatory oversight and proper licensing in light of reports of counterfeit and substandard critical medical devices entering the supply chain, such as face masks, gowns and hand sanitizers. This is often the result of companies that do not qualify or evaluate their suppliers’ own suppliers.
Beyond the COVID-19 infections, there were other reasons why suppliers became disrupted including their interdependence, the impact of the pandemic on workers and their children, continued trade wars, and suggestions of reshoring.
Suppliers are interdependent across the globe
Many companies began experiencing disruptions due to their interdependence on other suppliers across multiple countries. For example, when a factory in Malaysia that provides specific materials to factories in China shuts down, those factories in China have access to a limited amount of that material. This contributed to 1) a shortage in certain items and 2) an elevated level of allocation or rationing of certain supplies. In many cases, the cost of goods for certain items increased as suppliers were forced to pay higher prices for specific materials in order to prevent delays in getting their products shipped to clients.
While some workers returned to work around the globe after an initial first wave of coronavirus infections, the reality is that most factories are still operating at reduced capacity. Many factories are working under new COVID-19 compliance measures requiring further protections for employees which can slow productivity as compared to previous years. At the same time, schools continue to remain closed or behind schedule in some regions, preventing many parents from returning to work.
Although the United States/China trade disputes started before the onset of COVID-19, the disputes continue. It is unlikely that the United States will stop all imports from China, as it and many other countries are heavily reliant on Chinese manufacturers and suppliers. However, the United States could impose additional embargoes or tariffs which would further strain the global supply chain, especially as China is the epicentre of global manufacturing, including 66 billion U.S. dollars in trade between Hong Kong, China and China. To say this is an important region in the world for manufacturing is an understatement.
As a result of COVID-19, supply chains will experience significant shifts in the coming months and years. Many companies have publicly stated their intention to relocate or reshore their operations. This is a time-consuming and costly initiative which can take months or years and cost billions of dollars. Relocation can be a complex undertaking, especially for companies in the medical devices, life sciences, pharmaceutical and healthcare industries. These supply chain shifts can cause delays and further disruptions to the global supply chain.
Companies are learning to be better
Fortunately, companies are learning from these types of supply chain catastrophes. From the earthquake in Kobe, Japan, to hurricanes slamming into Puerto Rico, to the Great Recession, supply chain practitioners and Chief Procurement Officers (CPOs) are realizing the importance of having visibility into the second-, third- or fourth-tier suppliers in their supply chains. By analysing data extracted from continuous monitoring of world disruptions, supply chain experts can increase their visibility and get ahead of their competitors during major events. They need to know where their parts are made and who their suppliers and sub-tier suppliers are.
The value of mapping
While monitoring disruptions is the first step to managing risk in the supply chain, many buying organizations are realizing they only have the address of a supplier’s corporate office and not where the products are made. By mapping suppliers and their parts by location and type, companies can identify the manufacturing sites and develop contingency plans based on the different types of disruptions that might threaten those locations. For example, if a devastating hurricane is headed towards a manufacturing location, such as when Hurricane Maria hit Puerto Rico in 2017, buyers and sellers can proactively identify which facilities and products may be at the greatest risk and start identifying alternate manufacturing or assembly sites should a disruption occur.
Since COVID-19, companies are moving quickly to increase their visibility into their global supply chain, knowing where suppliers are located, which items or materials originate from there, the identity, location and ranking qualifications of second- and third-tier suppliers, and which have the most critical failure points. In the digital age of machine learning and artificial intelligence, mapping suppliers is easier and more cost-effective than ever before. It is this type of data that is so important to mitigating a quick and organized response. A recent Gartner study indicated that the number of companies looking to institute visibility and risk management into their capabilities over the next two to three years has soared from 21% to 66%. It is highly likely that companies that invest in this capability for their businesses will do so for the long term – a positive reaction to the devastation left in the wake of COVID-19.
Supporting suppliers’ financial health
In light of the avalanche of supplier disruptions caused by COVID-19, companies should consider shoring up their suppliers’ financial health to ensure they survive. In China, nearly half a million companies have gone out of business during the COVID-19 pandemic. This can be prevented by companies offering their suppliers loans, investments, upfront purchase of raw materials or placing future orders now. Lockheed Martin, for example, is one such company that furnished up to 50 million U.S. dollars in advances to small suppliers. In the end, helping suppliers survive through COVID-19 will pay dividends in the long run for the lenders, as they will enjoy preferential treatment during future allocations and shortages.
Navigating supply chain disruption using new data tools is similar to a pilot flying through the fog. Bad weather conditions require pilots to rely on their instrument panels to get them through safely; it is the data that guides them. The same is true for supply chain executives. Digital tools, such as artificial intelligence, machine learning and data are available – they just need to embrace them.
Ranna Rose is head of Operations and Customer Success at Resilinc, the world’s leading supply chain monitoring, mapping and resiliency solution.