By: Koray Kose, Sr Director Analyst at Gartner,
John Johnson, Sr Writer at Gartner,
Sarah Watt, Sr Director Analyst at Gartner &
Michael Kung, Sr Executive Partner at Gartner
As the coronavirus continues to spread, companies around the globe are starting to restrict travel to China and major airlines have cut their routes to China. A potential health pandemic brings different scenarios - mainly the unknown, along with a general sense of panic by the public. This uncertainty can complicate the usual rehiring process that occurs post Chinese New Year celebrations, when some factories regularly face a drop in workforce of about 20% or more. Given the coronavirus outbreak, the replenishment of trained workers will undoubtedly cascade into reduced output and capacity utilization for a foreseeable time until the number of new infections stagnates and treatments become available.
Given this, the impact on global supply chains could be significant. Wuhan, where the outbreak began, has grown significantly in the last decade, focusing on traditional but also high-tech industries. The city developed into a major transport and manufacturing hub and ranked as China's ninth-best economically performing city. A lockdown of the city for a week or longer could disrupt logistics networks and many industries.
Impacts on global supply chains from a pandemic event, such as the SARS crisis in 2003, can be varied. This is a critical and valid comparison baseline, since the coronavirus is closely related to SARS. Looking back to the SARS outbreak, China is now much more developed and integrated with the global economy, with significantly improved transportation networks. These are all enabling factors for the virus to spread even faster beyond regional implications. Travel restrictions, shortages in labor and materials, and logistical challenges through tightened controls and hub and border closures will cascade and augment the impact much further.
Therefore, the supply chain will unavoidably show signs of unforeseen disruption, which will require further thought and action. In general, the risks for supply chain are manifold:
- Materials: Supply chains may face supply shortages of materials or finished goods coming from or routed through logistical hubs in impacted areas.
- Labor: White- and blue-collar labor may not be available due to quarantine guidelines or illness. In China, the usual rehiring process following the Chinese New Year celebrations (known as “job seasons”) has become more challenging in recent years due to a competitive labor market. An outbreak means that replenishment of the trained workforce becomes increasingly difficult, impacting output and capacity utilization.
- Sourcing: Travel may be restricted to certain areas, limiting the ability to discover, qualify and certify new business or programs and to transact business. The costing baseline and budgets may show variations that complicate cost control measures and show unpredictable purchase price variances.
- Logistics: Established hubs and supply networks may experience limitations in capacity and availability so that, even if materials are available, they would be stuck elsewhere. Finding alternative routes and means of transportation will become difficult when many industries experience this simultaneously.
- Consumers: Consumers may be more cautious in their purchasing habits due to fears about being in public and potential exposure to the virus. Many may turn to online sales, challenging logistics networks.
Supply chain organizations typically manage these unknowns through risk and business continuity management approaches. Leading companies utilize enhanced risk management processes, including measures to dynamically assess risk, impact and effectiveness of controls. This includes a framework to continuously measure key risk indicators and to prepare scenarios for controllable and foreseeable uncertainties such as compliance, labor, material, capacity and financial issues. It also focuses on aligning the organizational risk appetite and strengthening its risk capacity and supply chain resilience to absorb uncontrollable and unpredictable challenges to its best abilities. From our perspectives, supply chain leaders involved in direct material sourcing and supply chain services should take the following initial steps to monitor and prepare for the impact on their value chain.
Short Term (This Month):
- Develop a high-risk supply chain disruption-monitoring and response program for countries impacted by the virus and the potential supply chain exposure from Tier 1 and below. If lower tier transparency is missing, start building up the program and prioritize discovery to get a full picture as soon as possible.
- Assign high-risk weighting to suppliers and subtiers from emerging and developing countries with less developed healthcare systems that are less prepared. Link the country monitoring to supply chain interdependencies within the region. Work closely with demand planning to assess how consumer spending may be impacted as part of the decision-making process to build inventory within reach and outside of affected routes for at least the next quarter.
- Conduct a contract review to understand any financial implications of not being able to deliver supplies to manufacturing locations and customers. Assess force majeure clauses and exclusions. Engage with human resources to provide any additional guidance to employees located in the impacted areas, and reassess the travel policy and guidance for employees travelling to impacted regions.
Medium Term (1 to 3 Months):
- Focus on balancing supply and demand, building buffer stock as necessary as part of the business continuity strategy, especially with the unpredictable volatility of material and logistics in the force majeure context.
- Assess opportunities and start to diversify suppliers now to ensure raw material security and manufacturing capacity. More complex supplies will require time and resources from discovery, to qualification and integration, which must start in parallel to mitigate systematic impacts.
- Establish a congruent risk management approach to monitor and prepare for potential material and manufacturing capacity shortages, working with internal stakeholders and strategic and critical suppliers. Review the organization's assessment of consumer confidence for fluctuations of demands.
Long Term (3 Months or More):
- Implement and utilize enhanced risk management, including scenario planning to create preemptive action plans. Tackle strategic and concentrated supplies at risk to reduce exposure of value when internal risk capacities, such as alternative sources, routes, inventory and cash reserves, aren't sufficient enough to mitigate any major disruption.
- Review the NPI process and utilize design measures to discover or develop alternative sources and routes in order to diversify your value chains. At the same time, analyze cascading implications of changes in volumes, quality and markets.