The coronavirus, known as COVID-19, is wreaking havoc on global supply chains woefully unprepared for the massive scale of the emerging disruption. Large corporations such as Ikea, Starbucks, Amazon, Microsoft, Google and Tesla are closing or slowing operations close to the epicenter in China. Mattel expects product delays due to factory closures, while Apple expects to ship 5%-10% fewer iPhones this quarter. The complexity of global supply, coupled with “just-in-time” inventory practices and narrowing sources of supply, have created vulnerabilities for virtually all enterprises.
Exacerbating the problem is that the spread of COVID-19 is a moving target. Although COVID-19 originated in China it is now spreading quickly across continents and is already in countries such as South Korea, Australia, Japan, Iran, and others. With China comprising 17% of the global economy the stoppage in production will have a cascading affect. Considering China’s significantly larger global footprint than during the SARS 2003 epidemic, coupled with rapid global spread of the virus and the long incubation period, any comparisons between the two epidemics are misleading. Global supply chains should prepare for the “coronavirus downturn.”
All businesses across all sectors will be affected, at least to some degree. A heavy impact is expected on the tech industry. From batteries, to ink cartridges to sponges, consumers can expect coronavirus shortages. Smartphone production, for example, is projected to decline 12% year-on-year this quarter due lack of labor and shortages of upstream components such as camera modules. Segments of the pharmaceutical industry may be impacted especially in regions such as India, which produces 20% of the world’s drug supply. The heavy impact on tourism and airline travel is already being experienced with the International Air Transport Association (IATA) estimating $ 30 B in losses for the industry. Even Facebook is canceling its Global Marketing Summit slated to take place in San Francisco citing coronavirus concerns.
Small- and medium-size firms will also be affected. As coronavirus spreads, small business owners who import from China are increasingly on edge. For small business owners, for example, who sell products on Amazon, prolonged factory closures threaten supply. Firms with a broader supply network will fare better, such as those sourcing from U.S., U.K., Germany, India, Israel and others. However, many small entrepreneurs rely on a narrow supply base. Running out of stock can mean losing customers as well as dropping in website ranking.
What should companies do?
All companies, large and small, need to activate their crisis management plans. Some industries will be impacted harder than others, but regardless, the impact will have cascading affects. The CDC is already making preparations for a pandemic and all enterprises need to as well, preparing for some level of imminent disruption. There are two aspects: developing an immediate response to the threat and preparation for possible larger scale disruption as the situation evolves. Here are some steps.
First, reassure everyone – from shareholders to customers – that the company is in control and has a plan, and continue to do so on a regular basis. Crisis management can have a lasting impact on a company’s reputation, profitability and operating ability. It can make or break a company. As media coverage escalates, confusion and panic set in, and various analysts and pundits continue prognostications, it is imperative for a company to be in front of the message. Continuing with a message of reassurance at a time of increasing uncertainty cannot be overstated. Effective crisis management can actually improve a firm’s reputation. The right messaging to the right media outlets is critical. See this as an opportunity.
Second, leadership needs to activate crisis management plans and procedures. These need to specify the ‘who’, ‘what,’ ‘when’ and ‘how’ of the crisis management plan. It is up to leadership to assign responsibilities and specify how ameliorative action will be taken, leading a command and control center. Chain of command needs to be clear, as well as roles, duties, and messaging.
Third, carefully segment the entire product and customer portfolio based on margins, lead times, and criticality. Not all are of equal importance or vulnerability. Create a matrix based on these two dimensions identifying customers, products, and sources of supply that are most critical and most vulnerable within each quadrant. Set priorities. Which customers get served first? Which suppliers are critical? Which components have longest lead times?
Fourth, evaluate all risks on sources of supply, production capacity, delivery, and demand. Consider all options and analyze possible outcomes. Scenario planning is an excellent tool here.
Fifth, identify segments that have easy access to substitutes and alternative sources of supply. For example, the Polish fashion retailer LPP is talking with factories in Turkey, Bangladesh and Vietnam as a backup plan if Chinese production delays continue. Also, consider slight product modifications that may allow substitution in components and where there are good sources of supply. Design engineers can be an excellent source and often slight modifications go unnoticed.
Sixth, evaluate possibility of gearing up capacity or switching production processes to more lucrative but similar lines. When the SARS epidemic broke in 2003 a Toronto based lotion manufacturer quickly switched production from lotion to hand sanitizer. Currently, Dupont has revved up production of protective suits, such as hazmat suits, at its Richmond facility. The factory is working at full capacity to meet this surge in demand. This requires just a little flexibility in operations.
The global economy is quickly moving into a crisis of a global pandemic – a “coronavirus downturn” - but this may be an opportunity for firms to actually improve their standing depending on how they handle the challenge. There is also still time for a plan if they act immediately.
Nada R. Sanders, Ph.D., is an internationally recognized thought leader and expert in forecasting, analytics, global supply chain intelligence, and sustainability. She is a distinguished professor at D’Amore-McKim School of Business at Northeastern University, the 2019 president of the Production and Operations Management Society, and a fellow of the Decision Sciences Institute. She is coauthor of the new book The Humachine: Humankind, Machines, and the Future of Enterprise.