COVID-19: Supply Chain Risks Lessons
Companies are struggling. Many have shut down. Some are surviving from a remote workforce. Some critical businesses – healthcare providers, food, pharmacies and essential services (e.g. utilities) – are continuing to operate. Employers have given large numbers of raises and have to adapt to a new marketplace with COVID-19 risks and regulatory requirements. Certain businesses are hiring large numbers of employees – Amazon, drug stores and grocery stores.
Grocery stores are managing their supply chains as best they can to meet consumer demand. Consumers are hoarding certain products (e.g. the panic products, toilet paper, paper towels and milk). In a stable economy, grocery stores operate with thin margins and large volume. For now, grocery stores are experiencing significant growth in volume because consumers are not going to restaurants or other outside meal sources.
Companies are learning serious supply chain lessons from this devastating pandemic. Some important principles have been underscored. Companies that maintain a supply chain that relies on a sole supplier or a limited number of alternative suppliers may be suffering real and significant harm. A company has to maintain a supply chain that incorporates risk protection through identifying multiple, alternative suppliers.
In building a strong supply chain to incorporate risk planning, procurement officers have to examine potential significant scenarios – weather events (e.g. hurricanes, earthquakes), pandemics – that assess geographic, resource and logistic risks from such events. In response to each scenario, companies have to develop alternative plans that can be implemented to mitigate harm and maintain operations. In some cases where the impact is devastating, companies may turn to contractual defenses such as force majure. That is a last alternative.
In this current pandemic, there is a significant risk from business continuity. Supply chain risks in the current pandemic need to focus on business continuity. Many businesses are shutting down and supply chains are being tested because these businesses may be essential providers of supplies.
Third-party risk management has to incorporate a flexible and expedited analysis of each third party for business continuity in response to the pandemic. Companies cannot rely on established financial analysts because the situation is changing daily.
Businesses that aggressively manage their inventories to reduce costs by relying on “inventory in time” are suffering harms from the current pandemic. While it is hard to justify inventory cost minimization strategies in a stable economy, COVID-19 has punished businesses that relied on such strategies without any quick solutions to address a national emergency.
Procurement officers have to re-examine their risk management process with the support and assistance of management, compliance and related functions. No one could have predicted the harm caused by COVID-19 and the impact it has had on our society and our economy. Enterprise risk management, however, is a process that should have included appropriate weighing of such a risk, especially given our historical experience with Ebola, H1N1, and SARs viruses. In fairness, COVID-19’s scale and impact was unforeseen and devastating in scope.