According to a recent report by the McKinsey consultancy, the COVID-19 pandemic “has once again driven home the necessity of managing operational and supply chain risks. It has catapulted these issues to the top of CEOs’ agendas, and the unexpected now has to be considered probable.”
Statistics obtained at the end of April, 2020 depicted the early impacts of COVID-19 on companies around the globe. In order of severity, they were:
As companies face the prospect of a “W-like” economic recovery in the months ahead, they’re having to address three “Rs” in their approach to supply-chain risk management: Respond, Recover and Renew.
What we initially saw in the early days of the pandemic was the “bullwhip effect”: the uncertainty caused by distorted information flowing up and down the supply chain, which leads to a severe imbalance between demand and supply. In the “respond” phase, companies experienced under-demand and oversupply, with the exception of the healthcare industry, which had the opposite problem: an over-demand and undersupply of personal protection equipment (PPE). Many companies have had to reduce their product portfolios and re-scale their supply chains. In the “recover” phase, companies have been entering new market channels and reinventing product lines. In the “renew” phase, successful players will continue to pivot and rescale their supply chains.
The challenges will be many. In this second wave of the virus, companies need to ensure the safety of staff, over-communicate internally and externally, stay close to existing partners, develop crisis-management teams, improve visibility up and down the supply chain, consider adopting allocation strategies to keep critical customers in business, make decisions that balance risk-reward and cost-benefit considerations, and watch cash flow. Cash is king in a crisis. Finally, think about exploring the Altman Z-Score to evaluate company financial health, and cash conversion cycle to improve cash flow.
In the months ahead, companies will need to address several action items: Improve supply-chain visibility upstream to suppliers and downstream to customers. Identify risks and begin assessing them using quantitative methods. Digitize the supply chain through modeling of a digital twin. Run “what-if” scenarios to see how the supply chain reacts to various risk stimuli. And build response plans for mitigating the impact of the largest risks.
Gregory L. Schlegel is founder of The Supply Chain Risk Management Consortium, and executive in residence for supply chain risk management at Lehigh University.
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