With the new Coronavirus disease (COVID-19) impacting global supply chains, supply chain leaders should focus on three impact areas for their initial crisis management, according to Gartner, Inc.
“As COVID-19 spreads globally, we are seeing increased supply chain disruption, but also changes in consumer spending habits,” says Sarah Watt, senior director analyst with the Gartner Supply Chain practice. “Supply has been impacted in three primary ways: limited access to employees due to quarantines, factory closures or manufacturing slowdowns and limited access to logistics to move goods. Most supply chain organizations are in crisis management, assessing impacts and response on a daily, if not hourly basis.”
Gartner recommends that supply chain leaders focus their efforts on three main areas.
In order to limit the impact of COVID-19, many employees have been instructed by local governments or advised by their employers to stay at home. Employers have put in place controls around travel and site visitors. For factories, this resulted in goods not being produced and exported to dependent markets or other factories. As long as this situation continues, supply chains won’t work as intended.
“As the virus extends globally, supply chain leaders need to think about how to protect the health of workers, and support individuals who are ill. Providing clear and consistent communication through human resources and travel security is essential,” Watt says. “As this crisis is ongoing, the risk is that crisis management teams become fatigued and make poor decisions.”
COVID-19 has the potential to change the competitive landscape. Suppliers for commoditized products are at risk to lose market share, as clients will look into substitute suppliers when they don’t receive their products on time. Products associated with a higher degree of brand loyalty are likely to be less impacted in the short term because customers are more willing to wait. As the virus progresses, consumers might adopt more conservative spending patterns, focusing on essential goods.
When forced to make trade-off decisions, supply chain leaders must analyze and forecast the impact of the new coronavirus on customer demand and product availability. Prioritization and trade off can be made based on high-revenue or high-profit margin products that are in demand.
“Supply chain organizations need to frequently reassess their supply and demand plans based on the evolution of the virus and consumer sentiment,” Watt adds. “Supply chains may also experience sharp increases in demand for products or unexpected consequences from the event, such as panic buying for essential items.”
There is a variety of financial impacts to organizations with increased costs for shipping, and more broadly concern about companies meeting their financial objectives.
“Even contractually agreed prices and quantities of materials might no longer be valid. Suppliers could invoke Force Majeure clauses or otherwise look to pass on additional costs up through the supply chain,” Watt says.
Any additional cost related to the coronavirus should be treated as an issue that concerns the whole organization rather than a single department. This makes it easier to assess the costs against the organization’s ability to achieve its strategic objectives and manage stakeholder expectations.
“It’s also a good idea to sit together with the legal department and analyze all supplier contracts. When the time renewal comes, make sure that the organization is financially protected against similar situations that might occur in the future. Supply chains will not be the same after this event. There will be an increased focus on resilience, risk exposure and business continuity plans going forward,” Watt says.