Risk managers must heed COVID supply chain lessons

A thought piece from Vince Shiers, managing director of RQA Group, addresses the impact of COVID on supply chain risks and the longer term impact on sourcing and supply chain management. ”It has exposed the vulnerabilities of many organisations, especially those who have a high dependence on lengthy and complex supply chains to fulfil their need for raw materials or finished goods,” it observes.

RQA refers to a recent report from the Business Continuity Institute (BCI) three out of four businesses which have reported that their supply chains have been adversely affected. This is as a result of large industrial areas, such as Wuhan in China, where the outbreak originated, closing down to try to contain the spread of the disease. 

In such cases, only those businesses deemed essential by local government have been allowed to continue to operate. The widespread grounding of aircraft and significant international interruption to cargo shipping means that even if stock can be obtained, there are still challenges in getting it transported. This has led to many businesses re-assessing their supply chain risks, according to RQA.

The pandemic has hit companies hard and has shown how ill-prepared many are to deal with these significant supply chain disruptions. The speed of the spread of the disease and the global lockdowns has left many businesses realising that their business continuity plans are inadequate for this situation. 

Inventory is fundamentally evil

Many years of focus on supply chain optimisation to minimise costs and reduce inventories has removed the safety buffers that would otherwise absorb some of the disruption resulting from COVID-19.

The phrase “Inventory is fundamentally evil”, has been attributed to Tim Cook, CEO of Apple Inc.

This widely-adopted approach was meant to ensure that profits would be increased if money is not tied up in components or products that are sitting on shelves.  Combining this with just in time production and localised production hubs resulted in what appeared to be more streamlined supply chains.

However, it has been shown that when the system is under extreme stress as in this pandemic, changes need to be made to how supply chains are organised and risk assessed.

Switching suppliers?

The rapid and large-scale disruption to supply chains has resulted in many companies urgently seeking new sources of supply, often at very short notice. The “approval” of a new vendor in such a pressurised situation can inevitably lead to short-cuts being taken in the normal procurement approval process. 

Given that the pandemic also resulted in on-site approval audits being cancelled, this resulted in a double hit where new suppliers had to be selected quickly and without full verification. 

Procurement and supply chain professionals had to resort to putting greater emphasis on the review of documentation from suppliers which doesn’t provide the same level of assurance as actually visiting the facility. Even worse, it is possible that the documentation review was also not as thorough as normal due to reductions in skilled staff, who had been furloughed or were off sick as a result of the pandemic. 

So, whilst in many cases, the continuity of supply may have been secured, at least in the short-term, businesses might be exposing themselves to other risks which in “normal” times would have been considered completely unacceptable, notes RQA. 

For example if ingredients and components are manufactured by suppliers who aren’t fully approved, there may be future product safety risks, there may be concerns over employee welfare and ethical trading in suppliers who are not fully assessed and this may all result in consumer safety concerns, significant financial loss and adverse publicity.

Lessons from COVID

Among the key lessons from the crisis, RQA calls for shorter, more localised supply chains.

The report by the BCI suggests that companies have rapidly learnt from the pandemic and are looking at making improvements. This includes less total reliance on the Far East, with 66% planning to change to more locally-sourced product, which also makes on-site verification more possible.

Applying technology to supplier approval

Approval of suppliers is now evolving to include a hybrid of document review and remote video auditing, where the auditor is remote from the site but “touring” the production facility and interrogating operators and management via video link.  Whilst not replacing full on-site supplier approval audits, this is likely to be used for lower risk suppliers after the pandemic has passed because of its flexibility and lower financial and environmental cost.

Supply Chain Mapping

Another area for improvement relates to due diligence of the supply chain, ie understanding where products and materials are actually coming from. Whilst this Supply Chain Mapping sounds straightforward, companies now understand that continued and intense effort is needed to ensure the supply chain map is always accurate.

For many businesses, an understanding of the full supply chain for some materials might not be realised until an issue such as the pandemic occurs, concludes RQA. Particularly for raw materials purchased through an unapproved agent and where the product is actually produced is often not known.

The BCI Supply Chain Resilience Report 2019 showed that most supply chain incidents are caused by disruptions in organisations’ tier 2 and tier 3 supplier base. With the widespread global lockdowns that have been seen, knowing the geographical location of suppliers is crucial.  Many businesses have now embraced technology such as AI and supply chain mapping software to assist them in this task.

Suppliers’ resilience and business continuity

Of course, understanding where the materials are being produced is the first step. Then, those suppliers need to be challenged as to whether they have a suitable business continuity plan in place. However, knowing that a supplier has a business continuity plan in place is not enough to ensure that supplier will be able to continue to deliver through a serious disruption such as a major pandemic. So, many organisations now actively seek to determine how effective plans are by scrutinising documents and rehearsing the continuity plans with their suppliers.