The COVID-19, or coronavirus, outbreak is causing significant disruption to global supply chains.
According to a report from Dun & Bradstreet, 938 of the Fortune 1000 companies have a tier 1 or tier 2 supplier that has been affected by the virus. Tradeshift saw Chinese trade activity drop 56 percent in just a single week in February. And we’ve heard publicly from brands like Apple, Microsoft, Nissan and JCB about the disruption they’ve felt as their factories in China closed or operated at limited capacity.
While there are some signs that exports from China are beginning to move again, there is a growing likelihood that things will get worse before they get better. This is as the outbreak spreads around the world, resulting in labour shortages and travel restrictions which are further disrupting the supply chains of global enterprises.
Different disruption, same supply chain impact
While nobody could have predicted the scale, speed, severity, or timing of the outbreak, could businesses be better prepared to deal with the consequences? This isn’t the first time they’ve faced supply chain disruption. In the last year alone, we’ve had the trade war, protests in Hong Kong, and various climate events which created unforeseen problems.
The COVID-19 outbreak is arguably more impactful than all these events combined because it hasn’t just created hurdles, it’s completely stopped production, something many supply chains can’t absorb. But the reasons businesses are struggling to deal with the fallout are the same: supply chains are fragile.
There are five key reasons for this:
Reduced inventory levels: just-in-time manufacturing allows companies to increase efficiency and lower the cost of their supply chain, but it also leaves supply chains less resilient to sudden shocks and supply shortages.
Rigid supply chains: This wouldn't be a problem if businesses operated flexible supply chains. That way they could switch order volumes to alternative suppliers in times of stress. However, very few companies don’t do this, leaving them unable to identify and connect with alternative suppliers when there are sudden shocks to their supply chain resulting in a tangible impact on production.
Manual supply chain management: A key reason that supply chains are rigid is because they’re managed manually. Making changes to orders or shifting suppliers is a lengthy and complex process and in times of stress is a luxury few companies have.
Lack of supply chain transparency: Businesses are often unaware of what’s happening across their supply chain beyond the first tier, so they’re unable to know where threats to production capacity exist. And this makes it near-impossible to proactively manage a situation like the COVID-19 outbreak.
Consolidated centers of production: The globalization of supply chains has led to the development of specialist production zones—cities or countries specialize in the production of a few key products. These have helped ensure there is a plentiful supply of key supply chain components and lowered the overall cost of supply. Yet while this is beneficial when times are good, it can cause issues when there is disruption. That’s because there isn’t the capacity in other parts of the world to plug the gap in supply.
Solving for disruption with anti-fragile supply chains
So how can businesses better prepare for periods of supply chain disruption? I believe the solution is to build supply chains based around Nassim Nicholas Taleb’s concept of anti-fragility.
There is a lot of talk about robust supply chains. Anti-fragility takes this a step further. Anti-fragile supply chains aren’t just strong, they’re malleable to ensure they continue working no matter the disruption. But, most crucially, they don’t just survive the disruption—they improve because of it.
To get there, businesses need to go digital. It sounds elementary saying this in 2020. But the fact is paper and manual process power most supply chains. And there is zero chance of building a robust supply chain, let alone one that’s anti-fragile, when buyers and sellers aren’t digitally connected.
Making this digital connection is the foundational element for building an anti-fragile supply chain. Once this happens, all parties can benefit from increased access to data. This will illuminate what’s happening across the supply chain. Decision makers can spot single points of failure and make informed choices about how to manage any disruption. And the enhanced ability to collaborate with sellers and other parties in the supply chain ecosystem means these decisions, including finding new suppliers, can be implemented quicker, which is critical at times of stress.
Establishing this digital foundation is also the prerequisite to applying the tools that bring the theory of an antifragile supply chain to life. Take AI, for example. It can analyse data from an array of public and proprietary sources to learn from previous periods of disruption and suggest what supply chain leaders can do to meet oncoming challenges. At the next level, it could even automatically pivot to alternative suppliers when it notices that the businesses’ regular suppliers are likely to face some disruption.
This is what it really means to move from reactive supply chain management to proactive supply chain management. And it’s what will truly turn the supply chain into a competitive advantage for the business.
Is it time to rethink the structure of global supply chains?
When COVID-19 is brought under control we can all breathe a collective sigh of relief, but we mustn't be naïve about the fact that something similar will happen again. In our globalized world, the next disruption is just around the corner so it’s imperative that businesses don’t rest on their laurels.
The supply chain becomes a company’s biggest risk during times of disruption. But by making it antifragile it can become its biggest strength.
Away from what businesses can do, there is also a question around whether global supply chains need a rethink more broadly. Are consolidated centers of production a good idea? Is there still a need for the same widget to cross the Pacific multiple times before arriving to the end consumer? And does technology create an opportunity to build an alternative, more sustainable global supply structure?
There are no easy answers to these questions. But as businesses look at adjusting their own supply chains, it might also be worth everybody coming together to see if there is a better way to structure the global supply chain to make it antifragile as well.
By Mikkel Hippe Brun, Co-Founder & SVP, China, Tradeshift