Supply Chains Took a Hard Pandemic Hit. These Zurich Execs Offer Advice on Post-COVID-19 Resilience
The COVID-19 crisis hit global supply chains with a series of shocks, the impacts of which could reach farther and last longer than any other event in recent memory.
This has particular relevance for managing supply chain risks.
While things might appear difficult, we believe the challenges are surmountable, and as a global insurer, we believe there is much that companies can do to overcome the risks and emerge from the crisis — more resilient and better equipped to face the future.
At the start of the current crisis, many risk managers and insurers first expected the situation to play out in a fashion similar to disruptions they have encountered and learned from in the past; disruptions caused by tsunamis, floods or tropical cyclones, several of them in Asia.
The first shock caused by the COVID–19 outbreak came in China with a lockdown and interruption in Chinese manufacturing.
This revealed the heightened importance of China’s role in the global supply chain. For example, up to 80% of active pharmaceutical ingredients are produced in China.
Nonetheless, at the outset, things seemed to be relatively easy to manage, even though the impact on consumer demand was clearly already being felt. China’s car sales in April, for example, were less than one-fifth of normal levels. This already made it clear that COVID-19 was becoming a different beast.
Then we entered a new dimension of global COVID-19, including propagation along globalized supply chains.
Country lockdowns ensued, and with that, many services we rely on daily were brought to a halt.
Although these steps were necessary to reduce the risk of contagion, manufacturing and global supply chains suffered, creating disruption while unemployment surged.
The evolving health and supply chain crises triggered what might best be described as a veritable demand shock. Governments intervened on hitherto unprecedented scale.
This, however, increases debt burdens and widens the gap between more and less financially resilient countries, setting the stage for more entrenched problems. The global financial system, too, may feel the ripple effects if a prolonged economic downturn ensues and credit defaults rise.
The situation continues to play out amid numerous uncertainties.
As dire as the situation may seem, it is not hopeless. As attention shifts from the initial phase of managing the crisis, the focus must now be on recovering business operations and surviving in a changing market environment.
A key component of business recovery will be to foster resilience.
Global supply chains to date, were built to be cost efficient and innovative, but not necessarily resilient. While businesses produce in global supply chains, they typically manage risks on-site.
A Strategic Approach
Companies must take a strategic approach to protecting key value creation of their end–to–end supply chains to the greatest extent possible.
To achieve that on a broader strategic level, Zurich recommends:
- First and foremost, ensuring senior management is involved on a continuous basis, and make available a cross-functional crisis team as part of a structured framework — from understanding potential impact, during planning and prioritizing, to implementing the actions.
- Enable ongoing monitoring of the impact on your critical markets of the measures taken as part of your policy: Having an automated solution — as Zurich provides through its collaboration with riskmethods Inc., for example — is key to adequately monitoring such a sizeable risk.
- Understand and manage the potential impacts to your end–to–end supply chain — start with the key exposures, i.e., the ‘crown jewels’ of your value creation: Identify relevant hazards, determine how much of your business is at risk, for example, with each critical supplier. Stabilize inflow, and your own operations and delivery; address changes in demand and help business operations to recover.
- Conduct scenario planning according to markets and regions to allow for a recovery that anticipates what is expected, while providing organizational resilience to respond to the unexpected.
- Consider a phased approach to recovering production: in the short-term, focus on getting back to business; mid-term on coping with the outbreak in different markets; and long-term on embracing the changes resulting from the outbreak to reposition in a changed market environment.
Short Term Tactics
Looking ahead, as idled operations and services return to life, the chances to recover and overcome obstacles improve if adequate provisions are established, and a strategy is in place to confront potential risks.
This makes it possible to manage risk exposures along the supply chain, create a business better equipped to adapt to changes in an evolving market environment, and make your business more resilient.
Zurich recommends several short-term tactical measures to support recovery of business operations to achieve these aims:
- Establish regular but intensified communication throughout your organization to promote transparency around changes and ensure that your employees can easily stick to changes introduced, even in periods of uncertainty.
- Gradually increase the number of employees returning to work and stagger employee work hours to reduce the possibility of spread of the virus within the site and position your company to be able to respond to operations as these are increased.
- Intensify communication with your suppliers to identify potential risks, keep informed of increased requirements to maintain operations, categorize the impacts and develop a mitigation plan.
- Ensure early and continuous communication with customers to deepen customer loyalty, inform on your increased production capabilities and allow better understanding of customer expectations once restrictions are lifted; then develop a customer prioritization schedule. Promote a sense of how products or business will be recovered once production restarts.
A Note on Strains on Suppliers
Suppliers may face strains e.g. due to a sudden surge in demand from new and existing customers once markets begin to reopen. Businesses should consider proactive measures to accommodate any potential constraints by gradually purchasing materials now, in small increments, to develop reserves on critical inventory.
A note on sites where production has been altered due to the outbreak
For sites that have changed their business operations to produce equipment required during the COVID-19 outbreak, businesses need to verify if there is a government contract in place before returning to their original operations.
They should consider the duration of the government contract in place, the time required to return to their original operations and their capability to return to producing for the outbreak again if needed later on.
For volunteered sites with no government contract in place, companies should think about whether it would be morally right to return to original operations as regions begin to open and if consider the potential impact on their company brand.
Adopting a proactive approach as outlined, focusing on core areas that create most of the value along the supply chain, while not forgetting ancillary services such as IT or utilities, will help put businesses in a better position to manage changes and drive the overall success of their business recovery.
Companies that are well prepared, agile and proactive will have better a chance of enduring the economic shocks that we are likely to see continuing due to COVID-19, and other shocks that may arise along the way. &
The article represents the authors’ personal views and does not necessarily reflect the view of Zurich Insurance Group.