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Supply chain disruption causes and how to respond to them

December 2, 2021

There is no question that the COVID-19 pandemic has made a massive impact on the global economy. No industry or business has not felt chaos and confusion in one way or another as its disrupted global supply chains worldwide. Supply chain disruptions became an all too real scenario for many industries and organisations as businesses scrambled to avoid sourcing problems and impending shortages, especially with essential medical supplies, food, and other necessities.


The challenges of the coronavirus

With countries and governments making efforts to bring their economies back on track through mass vaccination programmes providing support to affected businesses and industries and slowly reopening their borders, many nations continue to be cautious.


The pandemic has also proven to test the risk management strategies and supply chain planning for businesses and their corporate values. Governments, investors, communities, and consumers will have seen and experienced by now how these companies have responded to the crisis and the resulting trade-offs.


Most recently, news has emerged of a new COVID-19 variant "of concern" of the coronavirus, called Omicron.


As enterprises take stock of the lessons they learned from the beginning of the pandemic to the present, what can be done to minimise the risks to global supply chains? How can companies ensure that they stay resilient enough to weather a new crisis should it occur again?


The differences between short-term and long-term disruptions 

Supply chain disruptions can come in any form, but most can be categorised based on two factors: severity and probability of occurrence. Severity can also be classified into three levels: low, medium, and high. On the other hand, probability can be categorised as likely to happen versus unlikely to happen.


Low severity events typically have a short-term impact on time, money and have a lower downstream effect. An example of the time factor would be weather-induced delays for logistics. Outside of that time frame, the supply chain should run normally. A supply chain disruption case study for a low-severity event would be the buying and hoarding toilet paper during the early days of the COVID-19 crisis. Manufacturers, suppliers, and retailers scrambled to meet the spike in demand, yet the disruption's overall impact remained low despite public perception.


Medium severity events are those that have an impact ranging from a few weeks to months. A fire to a warehouse counts as medium-level severity. In such cases, these events will lead to losses reflected in the quarterly financial statements of companies. While there will be some downstream effects, the impact would be moderate, such as a longer product fulfilment time for e-commerce due to the damage to a warehouse facility.


High severity events are the most challenging, as these would have a long-term impact on time, monetary costs, or its downstream effect on the supply chain. It could be any of these or a combination of all three. Highly severe disruptions can certainly cause sustained damage for an extended period, which will undoubtedly be reflected in the annual report. The impact of COVID-19 on all world economies would be the best example, and one of the long-term and best solutions to such a hugely disruptive event is for a business to develop resilience


Impact on supply chains 

With many nations still implementing lockdowns on a national or regional scale, it cannot be denied that supply chain disruption continues to be severe, more so now that there is another virus mutation that is a cause for concern and other economic, socio-political factors at work.


An example of supply chain disruption was Brexit which officially commenced on 31 January 2020, and one year later, when new national laws replaced previous EU laws. This was further complicated by the COVID-19 pandemic, with the UK newspaper the Guardian reporting in August 2021 that the UK had been "plunged into a supply chain crisis" as a result of staff shortages in key industries and transport disruption caused by COVID-19 and Brexit, even as the country had started lifting lockdowns.


Current supply chains may need to be repurposed and reshaped to respond and adapt more quickly to significant supply disruptions such as the COVID-19 pandemic as we advance. Resilience and responsibility are key characteristics that may help businesses and supply chain partners weather and manage the short-term crisis, and thus enable the company to build around their customers and help economies rebound.


How then can supply chain and procurement professionals respond to this challenge?


What is the role of the supply chain in ensuring business continuity?

The scale of the crisis brought on by COVID-19 has not only upturned business practices but has also made many fundamental changes to consumer behaviour. Resilience no longer became a buzzword and instead became a reality, as was agility, adaptiveness, and acceleration.


Planning for continuity in the supply chain involves close collaboration with suppliers and other key business partners. Continuous end-to-end assessment, optimisation and monitoring need to be done immediately and constantly. Businesses need to rapidly and confidently respond to the need to create supply chain strategies to protect human resources and ensure that their global supply chains continue to function.



But even before such collaboration can occur, companies should take a closer look at their requirements by creating a business impact analysis, identifying, and prioritising their supply chain processes, and determining the recovery time goals.


What should be done to reduce or minimise the risk of supply chain disruptions?

Every business should do a thorough risk assessment based on these metrics, considering all these recent and current events:


1. Evaluate sourcing strategies and consider supply chain diversity. 

The disaster that was the Tohoku earthquake and tsunami that struck the northern part of the island of Honshu in March 2011 caused considerable damage to Japan and affected supply chains in many global industries. Japan is a crucial and significant contributor to the technology industry. Many companies suddenly found themselves without backup strategies for alternative sources due to their dependency on one country alone.


Therefore, it is critical to ensure solid and reliable secondary and tertiary options along the supply lines should the primary supplier be compromised. It is also equally important to ensure that these secondary and tertiary suppliers do not rely on the same sub-component companies. Do these alternative suppliers also have reliable backup strategies?


Diversity should thus be a crucial contractual element when negotiating with suppliers. Maintaining geographically diverse supply chain partners may require additional assessments, higher costs, and consistent oversight, but it also serves as a necessary contingency plan.


2. Reallocate capital if needed. 

Certain supply chains may need to be ramped up in a crisis, such as Brexit or the coronavirus pandemic, as these produce critical resources necessary to mitigate the emergency. On the other hand, other companies need to know how to redirect their supply chain because of vulnerability to disruption.


Capital work in progress is what every chief financial officer (CFO) of a business knows and tracks as an indicator of where the money is tied up. It's marked as an asset account and serves to record current costs related to long-term projects. Finance chiefs can conduct cash flow forecasting to redistribute funding from areas where it's not yet needed to those experiencing delays in receiving raw materials or equipment, especially for enterprises that rely heavily on service providers or human capital.


3. Implement Visibility to counter the lack of transparency. 

Serai Visibility Solution

A significant supply chain disruption such as Brexit and COVID-19 can expose the lack of transparency in a company's supply chain. Many recent studies point to the many organisations that have poor Visibility when thoroughly evaluating their suppliers' business practices. Some companies cite the lack of automation and have continued their dependency on manual processes that lead to incomplete or inaccurate data entry as a critical cause.


Visibility is essential as it allows business leaders to make timely decisions in getting the right components into the right hands to save time or at least keep to a critical timeline. Lack of Visibility into the supply chain prevents flexibility under these circumstances and can cause bottlenecks that can tie up cash flow considerably for months or years.


Platform solutions like Serai's Visibility can help companies re-evaluate their entire supply chain point by point and each supply base, providing a clearer picture and a viable plan to get from Point A to Point B, no matter what happens. It provides an automated and comprehensive map view of global disruptions using applied analytics and artificial intelligence, among others, on how these can affect one's supply chains.


Implementing end-to-end Visibility throughout the supply chain process enables businesses to track the condition of products and provide intervention before a problem occurs. It also allows companies to quickly adapt to changing situations by shifting resources in real-time, preparing, and having enough lead time for decision-making.


Actions that can be taken to minimise supply chain disruption risks

Supply chain professionals are all too aware that implementing supply chain risk management is not easy. There is an infinite number of factors at play in supply chain disruptions that may affect the cost, timing or risk of the supply chain and any point along with it at any given time. While total and complete supply chain risk prevention is not guaranteed, the goal of supply chain risk management will always be to reduce the impact of supply chain disruption.


This article has mentioned that businesses need to assess constantly and thoroughly just how resilient their supply network is against disruptions, whether low, medium or high severity.


The creation of a mitigation plan is more effective than simply responding to every disruption as it happens. After all, the goal is not to protect but to diminish the resulting fallout from supply chain disruptions on the business and its supply partners.


Companies can employ several tactics to counteract the disruption.


1. Natural disasters

Volcanic eruptions, flooding, earthquakes, wildfire – these are only a few of the natural disasters that can cause catastrophic damage to both man and nature. The year 2011 was a year of natural disasters, with the Magnitude 9 earthquake and the resulting tsunami in Japan, which was then bookended by some of the worst floods to hit Thailand in decades. Both incidents caused massive disruptions to global supply chains, especially in the automotive, technology and semiconductor industries.


Aside from being unpredictable and beyond human control, such events cause so much devastation that full recovery may take years. In the case of many small businesses, around 40 to 60 per cent of these cannot recover following a disaster. If these small businesses that are forced to close are part of a bigger company's supply chain, how would it impact the larger business?  


Solution: Global Diversity

Diversifying suppliers is one of the critical steps mentioned previously on how businesses can be more resilient. As industries across the globe become more interconnected and symbiotic thanks to technology and cross-border relations, it has become easier to expand the supply chain ecosystem to become more diverse. Tapping into a bigger supplier network and choosing potential backup suppliers ensures contingency and continuity of the business.


2. Transportation failure

Logistics and distribution are an integral part of supply chain resilience. However, it is impossible to rule out disruption in this area. Cargo theft, shipping damages, regulation changes, weather and traffic delays are only a few examples of potential supply chain disruptions that affect transportation. Even with the introduction of new logistics and transport service providers each year, and the resulting increased competitiveness driving down costs, it also comes with increased risks.


Solution: Cargo Carrier Assessments

Before signing a contract with a logistics partner, businesses should do a thorough analysis. Companies should follow a framework where each potential transportation partner is thoroughly researched, analysed, contracted, sourced, monitored, managed, and recorded.


3. Geopolitical instability

A region or locale that experiences civil unrest can put a company's supply chain at risk. Aside from the security issues that it may cause to employees or staff living or working in that location, there are also other possible risks to contend with, such as loss of communications, travel hazards, and general time delays. An example would be the trade war between China and the United States which increases the vulnerability to future disruption of supply chains going through China.


Solution: Cultural Research

With human capital playing a significant role in such issues, businesses should make supply chain decisions via thorough research about the socio-political concerns that may affect a company directly. It pays to conduct due diligence about the geographic region's history and political background to find possible risks and map out contingency measures for worst-case scenarios.


4. Price Increases

Markets are hard to predict, and prices of raw goods set the baseline cost of every component in the supply chain. Price hikes can seriously cause disruption and result in serious supply chain risk.


Solution: Market Exploitation

Mitigating against market risks not only protects against supply chain disruption but also have competitive advantages. How? By understanding the market trends and taking advantage of these, certain risks are reduced. Suppose thorough research and analysis of the price of an essential commodity suggest that its price may go up. In that case, a company can opt to buy futures or work with its suppliers to purchase extra quantities of those commodities before the price changes. Should the price go down, lowering the inventory may help until the cost of the raw materials drops.

 

5. Cyber-attacks

Data leaks, ransomware, computer and server hackings are becoming more frequent and have become one of the most severe risks to supply chains in recent years. The issue is a growing concern across all industries because of the vast amounts of data involved through the supply chains ranging from financial to personal information. Should this data be compromised, the consequences would be enormous. The rapid progress in information technology also makes it more challenging to combat.


Solution: Employee Training

The best tactic to prevent cyber-attacks is to educate employees on best practices to safeguard company data. While phishing primarily uses fraudulent emails, it has also given rise to smishing which uses SMS, and vishing which works through fake phone calls. There are also password breaches and personal computer theft, the easiest methods for hackers to gain entry into a company's data. By regularly orienting employees on how to recognise suspicious activity on their work computers and even on their phones, their awareness creates another safeguard. It minimises the risk of these events happening. It also pays to invest in security tools that can enhance these safety measures.


The benefits of a resilient supply chain

Surviving in an increasingly competitive market may sometimes make finding a good balance between supply and demand difficult. Companies that cut corners on diversification, technology and other resilience measures may suffer dearly for these decisions.


  • Operations are more efficient. A resilient business will spend less on addressing risks and have the greater ability to invest in growth and innovation.


  • Productivity is improved. By investing in and using resilient supply chain technologies, productivity can be maintained or operated at a higher capacity, leading to an overall productivity rise.


  • Risks are reduced. Supply chain operations are often seen as the most vulnerable point for risk and loss in many businesses. By employing resilient supply chain technologies like Visibility, companies are given a clear and comprehensive view of all operations across the supply chain network. The result? An empowered business that can optimise and adapt in real-time and in real situations

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