This is a contributed op-ed written by Anne van de Heetkamp, VP of product management GTC at Descartes. Opinions are the author's own.
Surveys of supply chain leaders over the past few months have found as many as 30% are looking for alternative supply chain sourcing options due to COVID-19. And when the Harvard Business Review focuses attention on the issue (particularly in a March article titled, "Coronavirus Is a Wake-up Call for Supply Chain Management"), it becomes even clearer that the pandemic will have more than just a short-term effect on the industry.
Any major disruption, including the current outbreak, will relentlessly expose weaknesses throughout the supply chain. Therefore, it's critical to identify the soft spots before they are found by events that are beyond our control.
Whether it is called (or is part of) supply chain resilience, supply chain disruption, supply chain mapping, or business continuity management, getting ready for future supply chain disruptions is high on the corporate strategy list. With increased economic volatility, having such a strategy will make a huge, possibly decisive, difference when it comes to weathering a major disruption or hoping to survive one.
Building a model
To generate company-wide buy-in on resilience strategies, or at least awareness, use supply chain mapping to properly document the current goods flow, then assess risks and prepare a contingency plan.
Key elements of a mapping process include identifying:
Tradelanes (importing and exporting country).
Routing (i.e., identifying the transit countries).
Manufacturing country (if different from exporting country).
Ideally, for finished goods and key materials, the associated Harmonized System (HS) Codes are included in the data set. The HS code identifies the applicable duty rates (a net cost to business), the difference between regular and preferential rates (if applicable), and the requirements to apply a preferential rate (if those rates are in place).
Even at a glance it is easy to see that identifying and mitigating weaknesses is a cross-functional effort. How do you identify alternative manufacturing locations without Human Resources or Procurement? Without IT, how do you know whether cyber risks are mitigated? Who pays the bills and appreciates local tax and accounting requirements? Finance does! What law governs and how are contracts binding? Legal knows!
After mapping goods and their flow, identify key focus areas by matching them with various risk categories. These vary depending on industry, trade lanes and products, but one way to narrow them down is to zoom in on specific risk elements per category, for example:
- Business: Corruption, compliance, cyber risks, bad actors, counterfeit items. Business risks can be defined as the general exposure of doing business in or with partners from particular countries. What is the likelihood of engaging with actors that are on a denied party list? Is general corruption preventing the normal course of business?
- Labor: Strikes, wage volatility, ethics, workforce compatibility. Plenty of data is available, but it may be challenging to identify what is most relevant. Manufacturing companies, for example, would be concerned with strike risks, the availability of workforce with particular skillsets, and the ability to commit to ethics clauses.
- Global trade: Duty rates, product compliance, clearance facility, documentation facility, duties. Global trade captures the duty, compliance and clearance efficiencies related to the movement of goods. For example, significant delays can occur depending on customs efficiency, and temporary duties or anti-dumping duties would impact the cost of goods to a large extent.
- Nature: Flooding, hurricanes, droughts, landslides, pandemics/epidemics, earthquakes, wildfires. Obviously, there is no shortage of natural disasters and making them part of a risk strategy is critical. It may be hard to predict the next oil spill, but most others are documented and, sometimes, early warning signs are clearly visible.
- Key materials: Scarcity, monopolies, price fluctuations. What are the key materials? Likely the ones that are most expensive, most difficult to come by, customized, or subject to larger and sudden price changes. Identify whether key materials are also used in other manufacturing markets or analyze how large the procurement of a certain material is compared to a specific exporting country’s total export of that material.
Understanding the elements
With the relevant input and risk categories defined, the weaker spots in the supply chain can be exposed. What combination of sourcing countries for key materials and manufacturing country (or countries) has too many natural risks waiting to happen? Which importing country is trigger-happy when it comes to anti-dumping duties? Where is there a significant combination of corruption and business with bad actors that dramatically increases business risk?
Consider whether a weakness is unique in the industry or it’s an industry-wide vulnerability (i.e., will the competition be simultaneously looking to combat the exposure) and whether mending it requires long- or short-term measures.
Note that analysis is only a first stake in the ground. Reference data as well as supply chain mapping are both dynamic, which means vulnerabilities change accordingly — ideally because appropriate action is taken to address them.
With the analysis in hand, it is time for two things: understanding and action.
Ranking supply chain mapping results against alternative options and observable data from competitors yields additional insights and is also important to fully understand potential disruptions. Finding relevant alternatives may seem a daunting task, but options may be easily visible based on three things:
- Data used during the analysis.
- Knowledge available within the company.
- The use of data analytics.
With mitigation options mapped out, two more things come into play: share and try.
It’s like making homemade ice cream. The results of the analysis must continuously be shared. And it can be more than just a contingency plan; it provides the company with confidence that it can overcome external disruptions. That’s not something to limit to a happy few. Plus, given the many business functions that should be involved, sharing the results invites additional feedback to further fortify plans.
In closing, don’t wait for disruptions to occur to find out if the resilience strategy works. It is likely too late at that point. Contacts, if not contracts, should be made at low tide, not when the water is suddenly threatening to sink the ship.
The costs incurred by trying a new route, putting potential suppliers on a retainer or reserving factory space will seem small compared to starting from scratch after a disaster strikes. If not so inclined, however, there's always that other strategy: hoping nothing goes wrong.