No room for manoeuvre in lean supply chains

13 March 2020

The firms set to be worst hit by Covid-19 are those with a focus on financials and no contingency plan. Reviewing sourcing strategies is key.

Long, lean supply chains that rely on sole sourcing strategies are a cost-effective solution – until something goes wrong. The coronavirus (Covid-19) is causing major disruption in supply chains on a large scale and unless contained, the impact on the global economy is a major concern. 

As governments and businesses struggle to contain the virus, stock shortages could lead to it spreading further. World Health Organization (WHO) warned that a shortage of protective equipment will inevitably hamper the response to the virus. WHO Director-General Tedros Adhanom Ghebreyesus estimates that about 89 million medical masks, 76 million examination gloves and 1.6 million goggles will be required each month for healthcare workers to respond to the outbreak.

Many businesses have already been affected by parts shortages. The automotive sector has been hit with factories shutting down or reducing production. According to DHL’s Resilience 360, an estimated 50% of all manufacturing in Wuhan is related to the automotive industry and 25% are technology suppliers. Jaguar Land Rover flew parts from China in suitcases to keep production going, JCB has cut production and Nissan closed a factory in Japan and is temporarily halting production in Serbia.  

Other sectors affected include electronics, with Apple announcing the impact on the supply of iPhones – 290 of its 800 suppliers are based in China – and India has announced it will be limiting the export of certain medicines, due to shortages from China.

The over-reliance on China’s supply chains is leaving procurement and supply professionals in a vulnerable position. As efforts to contain the virus are ramping up, maintaining the flow of goods and services in global supply chains feels like a leaky bucket – when one issue is resolved, another appears.

It may already be too late for supply chain managers to build stocks of essential components and to minimise further impact as the window of opportunity from China closes rapidly. This is likely to happen in other regions too. Mitigation strategies require forward planning and time to be enacted. For some businesses, it appears it is already too late to put those mitigation strategies in place.

We must look at our sourcing strategies and review what can change. For some firms there has been an excessive financial focus for too long – such as holding the minimum amount of stock from single-source, low-cost, suppliers.

When I held strategic sourcing roles, I sometimes had to hold several months of stock of high-risk items and this wasn’t really questioned due to the negative financial impact on production, sales and profit if we ran out of key inputs.

There are always choices to reduce risk. Opting for the absolute minimum working capital means events like this will have a greater impact on supply chain continuity as stocks dry up and suppliers are unable to fulfil obligations. It is the responsibility of the supply chain manager to build in resilience through multi-sourcing or investing in other, and perhaps local, suppliers to deliver best value for their business. 

Not everyone has the luxury of managing large volumes of stock from either a warehousing or working capital perspective. There seem to be far too many items that are only available in certain regions and, where possible, procurement professionals should be looking to develop new markets and sources of supply – or even considering a ‘make rather than buy’ decision.

Whether it is the economic uncertainty, threat of tariffs and trade barriers or political unrest, many supply chains are cumbersome when it comes to adapting to change. The latest CIPS Brexit survey reported that 40% of UK businesses that use EU suppliers are looking for UK replacements. It’s time to invest in alternative sources of supply and work with suppliers locally to ease the burden. China will inevitably remain the go-to source for the majority of some items, but if only 5% or 10% can be sourced elsewhere, this could help short-term disruptions.

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