Coronavirus is Revealing the Hidden Faults in our Supply Chain. Here’s What We Need to Do.
As many of the metro areas in the US enter the third week of stay-at-home orders, the initial shocks to industry and daily life have solidified. The restaurant industry, the arts, and airlines are all deep in the red, but essential services have so far been able to keep the nation coasting while the rest of us hunker down and attempt to alleviate the damage. But those essential services are not immune to the sustained disruption, either.
COVID-19 presents a novel challenge to global systems — it first affected international sourcing before impacting every other area of supply chains in short order, and has still yet to reach its peak worldwide. Traditionally, disruptions are planned for as localized events, where a particular link in the supply chain is broken but the other elements continue to function unhindered and with the ability to adapt to the problem. However, virus-mitigating actions are now so wide-spread and long-lasting that distribution systems are starting to show strain in unexpected ways.
The first of these are already appearing. In the UK, stoppage of recycling pick-ups has critically lowered the supply of material needed to produce new cardboard. In Italy, some companies do not have the cashflow to unload inbound containers causing port crowding and delays in outbound freight. In California, the crops are still growing but 90% of the workforce required to harvest them travels across a border that now may or may not let them through. And in the Democratic Republic of Congo, lockdown measures have halted the mining of 70% of the world’s cobalt, which is a key component in batteries.
Certainly a number of these vulnerabilities were unavoidable, or only preventable by exceedingly expensive and time-intensive changes. However it is likely that quite a few issues that we will see appear in the coming days were avoidable, but not addressed due to their low perceived probability. Nassim Taleb, author of the famous ‘black swan theory’, may have been dramatic in calling the gaussian normal distribution a “great intellectual fraud”, but he was correct in identifying that occurrences dismissed as outliers on a graph often have a much greater impact on systems than their pure probability indicates. And in the highly connected world that we live in, outliers are even further magnified by hidden interdependencies created by well-intentioned efforts to increase efficiency.
Obviously it is impossible for any supply chain department to address every one of the immense number of low-probability ‘black swan’ catastrophes that could impact their operations, so how could one be expected to prepare for them?
The answer is to re-examine the supplier network with an eye for distributing risk, regardless of source. Some companies that were already diversifying their manufacturing locations have accelerated their plans to reduce dependence on China even as COVID-19 disrupts their current operations. Others, with no prepared alternatives, have been left to scramble for alternate suppliers in the face of fierce competition. This is only one such possible measure, although it is the most straightforward and visible option.
It is worth bringing back Taleb to make another critical point: just as these outlying catastrophes are under-valued before they happen, they are over-valued in any decisions made in the aftermath. The probability of another pandemic will not fundamentally change because of COVID-19. For example, the appearance of SARS in 2003 did not accelerate or delay the outbreaks of H1N1, MERS, or ebola in the years following. One could say that we will be more alert, but multiple dire warnings of pandemic risk from reputable sources went entirely unheeded until the current crisis began.
So, it will be a good idea to re-assess supplier networks in the aftermath of COVID-19, but a bad idea to address only the vulnerabilities that it brought to the surface. Perhaps something didn’t go wrong, but was only successful through coincidence. More than a few businesses were probably spared the early brunt of COVID-19 related shortages because they stockpiled product before Chinese suppliers shut down for Lunar New Year — a shutdown from which they are still re-opening. These companies’ supply strategies weren’t more resilient or successful, they were merely beneficiaries of chance. Alternatively, suppliers may have intensified problems that were not otherwise impactful, and it is up to the buyer to determine whether that was that by chance or by design.
The answers to these questions most likely will not be simple, nor will identifying alternate suppliers to address those vulnerabilities be, either. It requires deep analysis of suppliers using information that they may be either unwilling to provide, or metrics that they are unaware even exist. However as the dust from 2020 settles, innovative programs will rise to the challenge and forward thinking companies should be on the lookout for fresh ideas.