Coronavirus may affect your company’s health

Health organizations are taking protective measures against the new coronavirus. Likewise, companies must make their supply chains resilient to what might become the new normal. At the moment, it’s unclear when Chinese factories will be back up to full operation. So, mitigating the risk of a potential supply disruption is of utmost urgency.

Chinese authorities have extended the New Year holiday in an effort to get the deadly coronavirus under control. Factories are suspending their operations, as workers might not get back to work due to restricted travel, or they will stay at home because schools remain closed. Some cities have been effectively quarantined. During the holiday, Chinese industrial production is about one-fifth of its normal potential. An extension of this reduced production rate may disrupt incoming supply from China. Furthermore, uncertainty about transport operations makes it hard to predict when – and in what quantities – the imported goods will arrive. The resulting stockouts may result in unfinished products waiting to be assembled with components from China, or they can lead to missed sales. And this effect might continue long after the disruption is over.

Chinese supply is popular because of its low labour costs and efficient production. Relying on a single offshore source, however, puts a company at risk. Classical risk management theories distinguish between expected and unexpected risks. Expected risks are relatively easy to treat in the short-term by, for instance, increasing or decreasing stock levels. Unexpected risks, like the coronavirus, are more difficult to treat and require long-term protocols and procedures.

One such risk mitigation measure is to have alternative sources of supply. The so-called ‘dual sourcing’ strategy mitigates the supply risk as it allows a company to switch gears swiftly and compensate for the reduced output from China. Additional sources of supply, potentially even closer to home, may initially entail an increased setup and even higher sourcing cost. However, just like a flu vaccination, its value becomes apparent when the virus actually materializes.

The real impact of the coronavirus will only be felt a few months from now, when it becomes clear whether or not Tier 2 suppliers (i.e., the suppliers of suppliers) have been disrupted. After Japan’s largest tsunami in 2011, Ford Motor Co. suspended orders for certain black and red vehicles because one of their Tier 2 Japanese suppliers could no longer make a certain metallic paint pigment. The lack of supply chain transparency makes the recovery much more difficult.

The current coronavirus situation shows that global risks – which were once considered to be extremes – are becoming the new normal. A few weeks ago, the World Economic Forum released its latest Global Risk Report. WEF defines a global risk as “an uncertain event or condition that, if it occurs, can cause significant negative impact for several countries or industries within the next 10 years.” Among the 30 identified global risks, an infectious disease is among the least likely but in the top 10 in terms of impact. Environmental risks are in the top 5, in terms of both impact and likelihood, followed by water crisis and technological risks. It is clear that companies need to invest in processes and procedures to make their supply chains resilient to high-impact events, as they are becoming more likely.

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