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KNOWLEDGE HUB

As governments scramble to slow the spread of the coronavirus, industries and economies around the world are already feeling the strain of this global pandemic. Manufacturers in the majority of industries are among those struggling, hindered by a supply crisis that stems from sourcing strategies that should have been updated long ago, according to experts.

Many manufacturers around the world rely on imports from China to continue their production and as a result, they are experiencing production and distribution slowdowns due to the shutdown across the country. This is because supply chains are not as linear as you might expect. Production networks consist of complex interrelationships that cross borders, often several times as manufacturers source components from an ever-changing list of factories. For example, in 2018, more than 1,000 facilities were involved in the making of Apple products alone.

Data released by Resilinc, a supply-chain-mapping and risk-monitoring company that tracks more than three million components around the world, has found that about 1,800 manufactured parts originate in the quarantined areas of China centred around Hubei province, and many of these are central to making end products. Their analysis shows that the world’s largest 1000 companies or their suppliers own more than 12,000 facilities in China including factories and warehouses in Covid-19 quarantined areas. That includes 2,730 automotive or industrial facilities and 3,238 high tech, semiconductor or consumer electronic facilities that are no longer operating. The reverberations of this shutdown are now reaching consumers on the other side of the world as supply issues begin to emerge.

Bindiya Vakil, Resilinc’s chief executive, warned that many companies are in for a shock as shortages emerge for inexpensive but critical components such as capacitors and resistors, preventing the production of even the simplest electronic device.

Yet the coronavirus is not unique in its ability to acutely disrupt global production. The earthquake and tsunami in Fukushima, Japan in March 2011 served as a stress test for the global supply chain and the results were not good.

Many multinationals learned painful lessons about hidden weaknesses in their supply chains that resulted in loss of revenue. For example, although many manufacturers around the world were able to quickly analyse the impact the environmental disaster had on direct suppliers, many were caught off-guard by the impact on second and third-tier suppliers that resided in the affected region. And yet the influence this stoppage to production had globally, was significant. As Peter Hasenkamp, Head of Purchasing at electric car start-up Lucid Motors, explains: “It takes 2,500 parts to build a car, but only one not to.”

Whilst at the time, there was industry-wide consensus for the need to consider how to make global supply chains more resilient, almost a decade later and companies worldwide are now scrambling to identify which of their lower-tier suppliers are based in affected regions. As Lora Cecere, founder of Supply Chain Insights explains, “two-thirds of businesses do not even know the locations of their second and third-tier suppliers, let alone the factory names and critical details needed to make a solid assessment on supply levels”.

The experts at Resilinc are therefore, once again, urging members of global value chains to consider the risk levels at every tier of supply, explaining that; “Risk management principles should be applied, at a minimum, to tiers one and two in company supply chains and beyond tier two, the risks should at least be understood.” Ignorance of where components comes from leads to potentially catastrophic consequences, as manufacturers are currently finding out.

 As a result, to protect supply chains in the future and to ensure that the lessons learned over the past decade finally hit home, it is advised that as a minimum, companies should invest in mechanisms and systems to monitor their global suppliers throughout the year. New technologies that have emerged as a result of the fourth industrial revolution (4IR), can assist in this regard. For example, artificial intelligence and natural-language processing allow extensive supplier monitoring to be affordable and accessible for a wide range of organisations in the manufacturing sector. These systems are capable of distilling news rapidly identifying a potential event that could disrupt the supply chain, quickly and efficiently. Companies such as SAP which, through its SCM-related software, serves 378,000 customers and generated revenue of $2.93bn last year, or Oracle, which provides a platform for manufacturers to monitor data, supporting 430,000 customers in 175 locations around the world are just two examples of supply chain monitoring platforms. Whilst Infor Global Solutions helps over 90,000 organisations with digital transformation, including within their supply chains. The technology is available and yet often, it remains ignored yet those deploying supply chain monitoring and mapping are seeing the benefits.

For example, General Motors, have spent many years extensively mapping their supply chains, engaging suppliers to understand their sites and subcontractors, to map which part originates and transfers through which site. By understanding how each element is interlinked, the company is better protected from supply chain shocks during disruption because they are able to react rapidly, buying up inventory or booking capacity at alternate sites or controlling inventory allocations, immediately.

Naturally, there are difficulties in assembling this level of detail when considering global supply chains – for example, multiple sourcing requires qualifying suppliers and sites in different countries and this also comes at a cost – but the advantages to being able to rapidly shift production among suppliers, factories, and countries is likely to deliver significant return on investment. For example, as news of the virus and severity broke, companies that had mapped their supply chain already knew which parts and raw materials were originating in the Wuhan and Hubei areas and were consequently able to fast-track their response.

The effects of the coronavirus on the world’s economies is likely to be felt for decades. Whilst we remain in the midst of the crisis, it is difficult to consider the lessons we will have learnt, but what it has taught us so far is that the ability to mobilise supply of any specific product could be the difference in preventing such significant losses to the global economy, or saving millions of lives. If the coronavirus epidemic teaches anything, it is that once again, a robust supplier-monitoring system that maps dependencies at every tier, is a basic requirement for today’s global value chains.

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