Time to Consider the Coronavirus, Economic Risk and the Supply Chain

Economic risk is challenging to predict and anticipate, but there are steps companies can take to help protect their supply chain and business.

Stock Financial Photo
Getty Images

The short-term economic impact of the Coronavirus disease (COVID-19) pandemic is proving to be far worse than the 2008 financial crisis. The International Labor Organization (ILO) estimates global cutbacks equivalent to nearly 200 million full-time workers in the next three months.

The International Monetary Fund (IMF) anticipates negative per capita income for over 170 countries.

Shelter-in-place orders, massive consumer behavior changes and unprecedented manufacturing slowdowns are causing widespread supplier financial distress. And, a spike in “force majeure” declarations, where unforeseeable circumstances prevent contract fulfillment, has companies scrambling.

The question is: How much worse will this get? And, how long will it last?

Economic risk is challenging to predict and anticipate, but there are steps companies can take to help protect their supply chain and business.

Know which third parties and suppliers are most at risk

Speed-to-insight is everything. Move quickly to assess – or reassess -- third-party risk. Determine which partners are business-critical, which operate in highly affected regions, and the likely impact on your organization if one or more of these companies becomes unable to deliver on contract obligations.

Request that key vendors and partners complete questionnaires that detail how they’re affected by the pandemic and the steps they’ve taken to mitigate and respond to risks. Many third parties will need to be re-classified due to pandemic impacts. A supplier historically considered low risk – a category not always closely monitored -- may now be in the high-risk category. Make sure you have complete business continuity and pandemic plans from any vendor classified as high risk or above. Crisis-based reassessment enables you to keep tabs on the current risk status of suppliers across your entire base, which is crucial for understanding your exposure.

With insight about if, where and how third-party suppliers are impacted, you can quickly act as the situation evolves.

Drive nimbleness and faster decision times with centralized data

As huge sections of the economy remain shut down, many organizations are facing a sudden cash crunch. While some industries – restaurant, leisure, airlines and hospitality – are harder hit, no organization is immune. The fact that your partners’ vulnerabilities can quickly become your own is exacerbated by the pandemic.

A company is only as strong as its weakest point, and a supplier or vendor with liquidity issues can create risk events that directly impact your bottom line or ability to operate. Assess supplier and third-party risk across all domains, categorize those risks by type and severity and house that information in a central location that is accessible to all stakeholders.

Having all data in one place gives you the ability to see the full impact of each supplier across the organization. If a supplier is struggling with their own supply chain, for instance, you can quickly see your total exposure and make data-driven decisions on mitigating actions. The ability to be nimble is especially critical amid a crisis when there is no time for bureaucracy.

Plan for recovery and a New Normal

Start to prepare now for when the pandemic slows, and the economy begins to recover. Regularly take inventory of all business risks and monitor changes in your exposures. And, do what you can to lay the groundwork needed to ramp up quickly once conditions improve.

Take the time to document lessons learned from this crisis, and make appropriate changes to improve resiliency in advance of future surprises.

The speed and severity of this pandemic caught many off guard, and this dynamic situation will continue to impact financial outcomes, supply constraints, and operational capacity for the foreseeable future. The organizations that seem to be best weathering the COVID-19 pandemic already had an unwavering commitment to enterprise-wide risk visibility, insight and collaboration. This should be a top priority for all supply chain and enterprise risk leaders moving forward.