Even as the immediate toll on human health from COVID-19’s spread mounts, the economic effects of the crisis—and the livelihoods at stake—are coming into sharp focus. “Businesses must respond on multiple fronts at once,” McKinsey & Company states in “Supply-chain recovery in coronavirus times—plan for now and the future,” “at the same time that they work to protect their workers’ safety, they must also safeguard their operational viability, now increasingly under strain from a historic supply-chain shock.”
The question is, how can supply chain leaders also prepare for the medium and long terms while building the resilience that will see them through the other side? In light of this unprecedented, worldwide event, no one really has all the answers right now. Knowing this, McKinsey suggests these six steps as a good starting point:
- Create transparency on multi-tier supply chains, establishing a list of critical components, determining the origin of supply and identifying alternative sources. This begins with determining the critical components for your operations. “Working with operations and production teams to review your bills of materials (BOMs) and catalog components will identify the ones that are sourced from high-risk areas and lack ready substitutes,” McKinsey advises. “A risk index for each BOM commodity, based on uniqueness and location of suppliers, will help identify those parts at highest risk.”
- Estimate available inventory along the value chain—including spare parts and after-sales stock—for use as a bridge to keep production running and enable delivery to customers. “This exercise should be completed during the supply-chain-transparency exercise previously described,” it says. “Estimating all inventory along the value chain aids capacity planning during a ramp-up period.”
- Assess realistic final-customer demand and respond to (or, where possible, contain) shortage-buying behavior of customers. “Businesses should question whether demand signals they are receiving from their immediate customers, both short and medium term, are realistic and reflect underlying uncertainties in the forecast,” McKinsey states.
- Optimize production and distribution capacity to ensure employee safety. Do this by supplying personal protective equipment (PPE), for example, and by engaging with communication teams to share infection-risk levels and work-from-home options. “These steps will enable leaders to understand current and projected capacity levels in both workforce and materials,” McKinsey states.
- Identify and secure logistics capacity, estimating capacity and accelerating, where possible, and being flexible on transportation mode, when required. Even as companies look to ramp up production and make up time in their value chains, they should pre-book logistics capacity to minimize exposure to potential cost increases. “Collaborating with partners can be an effective strategy to gain priority and increase capacity on more favorable terms,” it adds.
- Manage cash and net working capital by running stress tests to understand where supply-chain issues will start to cause a financial impact. “Businesses have a habit of projecting optimism; now they will need a strong dose of realism so that they can free up cash,” McKinsey advises. “Companies will need all available internal forecasting capabilities to stress test their capital requirements on weekly and monthly bases.”
Designing for Risk
To design resilient supply chains for the future, companies should implement good risk management strategies focused on assessing risk; continually update risk-impact estimates and remediation strategies; and oversee risk governance.
“Processes and tools created during the crisis-management period should be codified into formal documentation, and the nerve center should become a permanent fixture to monitor supply-chain vulnerabilities continuously and reliably,” McKinsey points out. “Over time, stronger supplier collaboration can likewise reinforce an entire supplier ecosystem for greater resilience.”
