|17th February 2020
No sooner has Brexit vanished from the media than news bulletins are awash with headlines about the Coronavirus. The situation in China, and beyond, regarding the rise and spread of the Coronavirus is troubling. Our best wishes must go to all those affected by the outbreak, to healthcare professionals treating those affected, and to scientists working to identify potential vaccines. Aside from the human costs of Coronavirus, there will certainly be a significant impact on the Chinese economy and on manufacturing and logistics in the region. Considering the unexpected nature of many supply chain disruptions, how can we prepare for the risks that can come our way?
At SUPC, we have gone out to suppliers to assess their Business Continuity Management (BCM) Plans, with a particular focus on plans for addressing impacts from the Coronavirus. We want to make sure that they are looking at short, medium and long-term contingencies to protect the supply market – whatever the new challenge may be. We encourage our members to use our supplier assessment template to make sure their local suppliers are ready for the next thing that comes down the road. Early intel from our framework suppliers shows that some have BCM Plans in place and those that do usually review these on an annual basis. However, they might not always be as robust as they should be – of the submissions we have received back from suppliers, the minority have addressed Coronavirus or outbreaks, specifically. We will work with suppliers to ensure this number grows, should we face outbreaks in the future.
No one knows what the full effect of the virus will be yet. Many factories were closed anyway due to Lunar New Year Holidays in China; but enforced, extended closures may mean companies have to deal with worker and production issues, leaving customers exposed to possible supply disruptions.
It is at this point I should declare my main observation; it is vital that procurement professionals remain objective and reasoned in their responses. They should not make things worse by an ill-informed overreaction to possible effects. As a child growing up in the 1970s, I remember the supposed “sugar shortage”, which was created by little more than rumour and gossip. In those pre-social media days, customers stripped supermarket shelves and stores introduced rationing. There was little real substance to the rumours and once sanity prevailed people found themselves with years’ worth of sugar stacked in their cupboards. This informs my claim that procurement professionals must remain objective and abide by the wartime mantra of “keep calm and carry on”.
Nevertheless, the current state reminds me of lessons drawn from my career. While it is not possible to predict unforeseen circumstances, such as the current viral outbreak, procurement teams should expect the unexpected.
Lessons from history
In October 1989, I was a buyer responsible for an airline’s ground handling equipment. I was waiting for a shipment of cargo elevators from a manufacturer in California. Soon after pre-shipment inspection, a severe earthquake disrupted land and sea travel delaying export. After a lengthy delay, the elevators were eventually shipped. Their route to the UK included a trip through the Panama Canal. No sooner were they on their way than the US invaded Panama to oust Manuel Noriega, the then Panamanian dictator. This prompted the closure of the Canal and more delays before the elevators reached the UK.
The operations department at Heathrow was unsympathetic. They felt the delays were due to the purchasing department failing to anticipate earthquakes and invasions. What could I do? In the short term, I had little choice but to deal with the challenges from operations colleagues, and work with the supplier and their shipping agents to provide regular updates. In the longer term, it encouraged me to explore other sourcing for elevators – and indeed other types of equipment.
A key lesson for me was to recognise that some situations and circumstances are genuinely out of our control. We should remain pragmatic and focus on influencing things we are capable of controlling – not waste time or energy on things we can’t.
This anecdote affirms that it is vital that procurement understands and maps potential implications and risks. We must determine those we may be able to affect in the short, mid and long terms. We must maintain constant and open communications with stakeholders and suppliers. Finally, we must manage internal demands and expectations. Here are my recommendations for procurement teams:
1. Understand and Map risks (which can we influence?)
Beyond factory closures, Coronavirus will impact logistics providers, customs clearance, and lead to congestion in alternative shipment routes. Labour movement in China is also constrained. It will be important to work with suppliers, and their supply chains, to understand the location of product manufacture and how factories, labour availability and logistics will be impacted. It may be that products originating in different regions may also be affected. While Wuhan is a hub for automotive and component manufacture in China, Hyundai has advised of shutdowns in their Korean plants due to component shortages.
2. Maintain open communication and manage expectations
The importance of clear and accurate communications is not limited to viral outbreaks, earthquakes or coups. CIPS’ Code of Conduct states that buyers must not provide misleading information in the course of their work. It may be worth reflecting on this obligation in the face of panicky stakeholders who demand you put pressure on suppliers to secure “emergency” supplies. (One more bag of sugar, just in case?)
Don’t encourage or condone speculative behaviours among stakeholders. Shelves have been stripped of medical masks in US and Canada, while medical staff treating patients in China are experiencing shortages. I would prefer that a nurse in Wuhan has access to masks, over a survivalist in Nebraska who wants one more for their doomsday stockroom.
It is also worth reflecting on how minor changes in demand may be magnified further along a supply chain, potentially creating chaos for manufacturers. This “bullwhip effect” refers to increasing fluxes in inventory due to shifts in demand as you move along the supply chain. In other words, if customer demand is the handle of the whip, inventory swings in progressively bigger “waves” in response to customer demand. The largest “wave” of the whip hits the supplier of raw materials, causing them to see the biggest variation due to changing customer demand. We can look to P&G for a real-world example. P&G noted that although sales patterns for Pampers nappies fluctuated in retail stores, the fluxes were not excessive. However, as they examined their distributor’s orders, the degree of variability increased. When they further looked at P&G’s orders of materials to their suppliers, such as 3M, they discovered that the swings were even greater. This did not make sense. While the consumers, in this case, babies, consumed nappies at a steady rate, the demand order variabilities in the supply chain were amplified as they moved up the supply chain.
If we don’t apply sensible procurement policies, we are more likely to trigger this “bullwhip” effect.
3. Determine potential short term responses and actions
If you are likely to be impacted by a shortage of products over the coming weeks, it will be useful to consider whether you can do any of the following:
- Extend the life of current equipment
- Review, eliminate or re-prioritise the underlying demand
- Consider varying specifications to allow using alternatives
- Re-use or re-purpose alternatives
- Review relevant contract terms and KPIs to drive supplier compliance and demand fulfilment.
If we do find ourselves faced with shortages, all customers will be seeking preferential access to available supplies. It is worth reflecting on how you can achieve this. There is little substitute for being polite and courteous in all your dealings with the suppliers’ staff. Make sure that your suppliers consider you a “core” customer.
Remember that coming up with potential solutions is not the sole preserve of procurement. Work with stakeholders and suppliers to discuss and brainstorm the options available.
4. Long Term Considerations
Once you have overcome the immediate challenges, in addition to the options outlined above, you can consider action that is more ambitious:
- Increase stock holdings
- Dual or multi-sourcing; although, it’s important to consider and diversify manufacturing locations
- Eliminate demands
The Coronavirus outbreak should provide a reminder to procurement professionals that:
- Decisions and behaviours should be based on objective and reasoned analysis and not an over-reaction.
- Risks and exposures should be mapped and understood. Alternate sourcing plans should be developed in anticipation of local, national and world events, which might impact supply chains.
While natural disasters and events such as Coronavirus cannot be predicted, procurement teams should develop alternate plans to respond. It is not a matter of if it will happen, but being prepared for when it does happen. Have a Plan B ready to go– just in case.
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