Posted: 24 Apr. 2020 5 min. read

Shoring Up Supply Chains as Virus Spreads

The continued escalation of the outbreak globally and in the United States suggests organisations may face new or continuing disruptions in operations.

Turmoil in global supply chains stemming from COVID-19 has caused many organisations to dig into and activate contingency plans. A growing number of organisations are dealing with the curtailed movement of people, raw materials, and finished goods as factory operations have slowed and halted in certain jurisdictions.

Organisations that have considered and developed contingency plans as part of an extended enterprise risk management strategy are generally better positioned to manage and continue operations through adverse events than those that have not taken a proactive approach. Black swan events can be challenging, but disruption may be manageable where organisations have taken steps to assess and optimise their business ecosystems.

While some organisations experienced little or no change in business as a result of events initially concentrated in China, a growing number of organisations are triaging and working through supply chain breakdowns. As often is the case with crises, the COVID-19 outbreak may become a catalyst for companies to revisit their global supply chain strategy and accelerate the adoption of digital network models and capabilities, but short-term actions may be more important to respond to immediate challenges. Those actions might include:

Reinforce screening protocols. Organisations might consider encouraging precautionary measures, where possible, supported by flexible sick leave policies. Lost productivity from the absence of several employees due to sick leave can be significantly less expensive than a possible downtime from closing an office site, entire plant, or distribution facility.

Prepare for increased absenteeism. Absenteeism may increase as health screening protocols are enforced and employees with symptoms remain at home. Local containment policies may also contribute to absenteeism, labor shortages, and interruptions. This may range from quarantines for those who may have been exposed to the virus but are not yet showing symptoms to travel restrictions and school closures, which may impact parents of young families who don’t have alternate care options.

‘Ecosystems are growing across organisations at a rate of about 15% year over year, both in number of relationships and in volume of transactions, suggesting the risk arising from extended business relationships is growing over time.’

Develop a back-up plan to address leadership absenteeism. As the Coronavirus spreads globally, risk is increasing that employees, including senior executives, may fall ill or become quarantined, especially if traveling globally. Organisations may want to consider short-term and long-term alternatives for continuing operations should leaders with critical roles become unable to carry out their duties.

Restrict non-essential travel and promote flexible working arrangements. Many companies have already implemented policies to restrict non-essential travel to protect employees. Where possible, remote and flexible working arrangements are being deployed, which are more applicable for back-office staff than production line or distribution center workers.

Align IT systems and support to evolving work requirements. As companies consider increasing remote work policies and flexible workforce arrangements, IT systems and support may need realignment. A sudden increase in online activity can have implications for system stability, network robustness, and data security, especially in parts of the world where telecom and systems infrastructure may not be as developed. Organisations may need to act quickly to establish systems and support staff placement, facilitating smooth operation as the workplace and workforce evolves.

Focus on cash flow. Companies may need to develop a treasury plan for cash management. A focus on collections and reducing aged accounts receivable is likely an early priority. Extending payables where possible to conserve cash may also important. The Federal Reserve reduced the federal fund rates range to 0 to 0.25% in the United States, which may reduce borrowing costs and emphasize the importance of cash flow management during volatility.

Beyond these high-level measures that apply broadly across many types and sizes of organisations, additional issues may be important to consider depending on an entity’s business model and its interdependencies with other geographies. The issues may differ, for example, for a company that sources products or materials from an affected region compared to others that sell into such regions.

In some cases, organisations may need to consider enhancing their focus on workforce or labor planning, or working through tier one and extended supply networks, to better understand their supply-side risks and to take action to keep supply chains flowing. They may need to activate alternative supply sources, update inventory policy and planning parameters, and prepare for plant closures. For other organisations, it may be more important to focus on the impact on demand for products and consider ways to shift channels or find alternative sources of revenue to keep cash flowing.

Global scenario planning is likely important for organisations going forward, as some geographies have experienced more adverse consequences than others. Such planning can help companies address global risks and bolster resiliency.

According to a Deloitte analysis of several years of data, ecosystems are growing across organisations at a rate of about 15% year over year, both in number of relationships and in volume of transactions. That suggests the risk arising from extended business relationships is growing over time as well. Deloitte’s analysis has shown empirically that organisations taking a more proactive approach to extended enterprise risk management may record improvements to their bottom line of as much as 2% to 3%.

This article was published in the WSJ on March 23, 2020 by Dan Kinsella, Partner, and Bryan Goshorn, Senior Manager, Deloitte Risk & Financial Advisory, Deloitte & Touche LLP; Jim Kilpatrick, Deloitte Inc. Global Supply Chain & Network Operations Leader; and Lee Barter, Deloitte Inc. in Canada SCNO Partner, Innovation & Eminence Leader

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John O’Connor

John O’Connor

APAC Sourcing and Procurement Lead

John has over 25 years of experience leading and delivering complex, multi-stream programs of work across a diverse portfolio of organisations in Australia, Europe, North Asia and Africa. He has deep operational expertise in supply chain and procurement improvement particularly in the resources, healthcare and manufacturing sectors.