The coronavirus is not to be taken lightly. As of mid-February, the number of cases worldwide had risen to more than 64,000 globally, 63,000 of which were in China, with the death toll at almost 1,400 and climbing.
The human tragedy of a spreading disease that’s potentially fatal is, of course, the prime concern. But the virus also is having a serious impact on global commerce, especially when it comes to the logistics of moving products through the various stages of the supply chain.
Shortages of finished-product inventories are being recorded across the board, notes Koray Köse, senior director analyst with Gartner. In addition, there are growing limitations on the capacity needed to get product to market, especially that which is sourced in China.
At the same time, the supply of raw materials is building up, resulting in a three- to five-times reduction in pricing on world markets. “They’re not being used, while the mines are continuing to produce,” says Köse. “And you don’t just shut off the smelters.”
Impacts are being felt at the end of the supply chain as well, with the closing of retail stores in China. And while most of those shutterings are temporary, they’re nevertheless affecting workers, whose pay is already low.
The ramifications are extending beyond China. Hyundai closed an auto plant in South Korea for lack of parts, an action that spills over to subassembly producers. The practice of just-in-time manufacturing, which minimizes on-site inventories, has only served to hasten the effects on automotive supply chains.
Global producers have weathered many epidemics, including the 2003 SARS outbreak, which afflicted nearly 8,100 people worldwide and resulted in 774 deaths. (SARS, for severe acute respiratory syndrome, is caused by a coronavirus.) But companies don’t appear to have learned their lesson about the danger of concentrating sourcing within one geographical area. (They might also have been schooled by disasters such as the Japan earthquake and tsunami and Thailand floods, both of which struck in 2011.) Instead, they have continued to seek economies of scale realized by minimizing the number and location of key suppliers.
Perhaps this time they’ll wake up. Cost concerns “are still valid,” says Köse, “but there are better alternatives to manage complexity in the supply chain through diversifying sources, while creating an environment of competition among suppliers.”
Fortunately, the concept of global risk management is beginning to take hold in the executive suites of many manufacturers, distributors and retailers. But mere awareness of risk isn’t sufficient, Köse says. Companies that focus solely on the cost of response and recovery are simply causing “an additional burn to P&L — it doesn’t add any value.”
Köse urges executives to embrace the concept of what Gartner calls dynamic risk management. It involves taking a proactive approach to heading off damage from various kinds of disaster, by designing a more flexible and resilient supply chain.
One way to achieve that goal is, of course, to increase the number of suppliers within additional geographies. On paper, such an approach presents its own set of risks, including the higher cost of raw materials and components, and a lack of standardization among parts made by different suppliers.
Spreading the business around does indeed often result in higher prices, although far-seeing executives will realize that the additional upfront expense is still less than the cost of scrambling for supply in the event of a disaster. But the problem of standardization is solvable, Köse believes, by the application of automation.
“It’s what engineering has been saying for decades,” he says. “Automation can help you to standardize the output, and achieve tolerance levels within acceptable standards.”
By being able to draw on products of consistent quality from more than one part of the world, manufacturers can seize competitive advantage in times of crisis, Köse says. “You could be the one meeting demand while others cannot.”
It’s not a question of juggling probabilities, he adds. “You’re driving preparedness toward events that will come, and you’ll be the one who’s reacting flexibly and with resilience. Those are capacities you can turn on quickly.
“Then you lean back and watch these things unfold,” he adds. Available market share is the easiest kind to obtain.”
Why haven’t more companies adopted this frame of mind? Köse suggests that the culprit is short-term thinking, caused by pressure on executives to show ever-rising profits on a quarterly basis.
“CFOs [chief financial officers] don’t understand when an ROI is not imminent,” he says. “They don’t realize that dynamic risk management is an investment with a huge upside potential. They thought they invested in crisis management, but it’s not an investment at all — it’s an expense.”
Köse cites the German semiconductor producer Infineon as one example of a company that was able to turn to alternative suppliers outside China when the coronavirus hit the city of Wuhan. The company was rewarded with a 15% boost in its share price.
Will more companies follow suit, and embrace the model of dynamic risk management? Köse offers equal doses of pessimism and optimism. On one hand, he observes a continuing lack of alignment between supply chain and finance, the latter of which “doesn’t have time to look through a two- to three-year time span.” On the other, he has hopes that companies will come to realize the long-term benefits of a more proactive approach to supplier risk — “something they utilize as a contribution to exponential growth of market share.”
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