How the Covid-19 pandemic put a spotlight on the fragmented and opaque nature of global supply chains

The Covid-19 pandemic has had an impact on global trade and investments at an unprecedented speed and scale. International companies with previously comfortable operations strategies have fluctuated between supply and demand problems due to government lockdown orders. These enterprises have found themselves struggling with the straightforward procurement of products and materials, forcing them to look at the fragile nature of current supply chains. 

 

If the Covid-19 situation has taught enterprises nothing else, they will now be aware of an urgent need for more robust and diverse supply chains. 

 

Recent data from Tradeshift, a global supply chain management platform, presents the impact of the pandemic on trade and demand for goods. 

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Source: Tradeshift 

 

All regions show a drop-off in trade, with the trend set to continue for at least the remainder of 2020. The report points to two side-effects, where it comes to supply chain management.

 

Settling invoices

When it comes to invoicing settlement, in the first quarter of 2020, the average payment terms have risen to 37.4 days, from 36.7 days in 2019. 

 

Lack of orders
Suppliers saw a lack of new orders with invoices dropping off. As income from orders before lockdown dried up, the suppliers found themselves in difficult times.  SMEs tend to have enough cash in reserve to keep them solvent for 27 days. A drying up cash flow and increasing payment terms could be devastating for supply chains and take some time to recover. The key for companies is to have better visibility of their supplier network, allowing them to be more agile.

 

Supply chain agility

Covid-19 exposes global supply chains that are built on lean manufacturing principles. For example, in healthcare, there is an almighty scramble for protective equipment where companies have single supplier sources, based on cost. Manufacturers do not have the flexibility in their supplier base to operate with a lockdown. For example, many rely on China as a supplier base, but with factories closing, they were not able to act quickly and diversify strategies. As the adage goes, companies should not “put all their eggs in one basket.” 

Governments are also signalling intent to tighten regulations to protect important sectors from future disruptions. The US and China have long been at “trade war,” with sanctions being a significant barrier to supply chains. The Covid-19 pandemic opens the door to applying sanctions on the grounds of health and safety. The US Congress will look to become less reliant on China for trade. In itself, this could be an opportunity for better supplier risk management and agility. 

 

Companies that are scrambling have not taken the time pre-Covid-19 to gain visibility of their extended supply chain network. Due to this, they cannot see any potential risks, understand their inventory status, or optimise production. 

 

Gaining access to supplier data can help alleviate the risks that Covid-19 highlights in existing supply chain frameworks. Urt Jakimaviciute, MSc, senior director of Market Research at GlobalData says that with the complex nature of pharmaceutical, and medical supply chains, a lack of efficiency, transparency, and authenticity is an ongoing issue. Although companies will have risk management strategies in place, they are built for typical events, which Covid-19 is not. 

 

Understanding your suppliers

Craft can help companies to optimise and de-risk their supplier ecosystem. Using up-to-date, validated and comprehensive intelligence, it is possible to know the suppliers you are working with. For example, the platform provides real-time data for notifications about the health of your supplier base. The alerts include operating metrics, human capital, financials, the market landscape, and other data such as cybersecurity breaches, and their technology stack. In an event such as Covid-19, supplier data can enable a company to be proactive. 

 

Focus on Tier 1 supplier risk

Using information across 300+ data points from Craft, you can access previously untracked insights and signals across your supplier ecosystem. Using the data, it is possible to identify and understand the ability of suppliers to meet supply requirements and any potential risks. For example, achieving visibility of inventory, production, and purchase order fulfilment status will help guide the need for shifting production. Proactively formulating plans with Tier 1 suppliers can mitigate supply chain issues that are so prevalent during Covid-19. 

A study from the start of the pandemic found that 938 of the Fortune 1000 companies had a tier-one or tier, two suppliers, in China impacted by the virus. They may be keeping costs down, but the strategy is not robust. Supplier data can help provide the information companies need to create “antifragile” networks. 

 

Multi-tier supply chain risk (more about this coming in a future post)

Your tier 1 supplier relationships will be the top of a stack; underneath this will be a complex set of relationships and partnerships which will play fundamental roles in ensuring interrupted supply for you. Visibility into this multi-tier set-up will be extremely low, but the risk can be incredibly high. 

 

When there is more than one tier of manufacturers producing a product or service, the visibility of those relationships is integral to success. For example, imagine Covid-19 creates a shortage of components; the other levels of the chain need to be aware to negate widespread effects. Data should be shared with each tier so that every level can adjust to the market demand accordingly. 

 

During the pandemic, communication of data is pivotal between suppliers for effective risk management. Craft can help companies plan the entire lifecycle, thinking beyond Tier 1 and 2 suppliers, but granularly through all levels. 

 

Alternative sources of supply

Using data, companies can highlight potential secondary supplier relationships. In the case of events like Covid-19, they can quickly shift production and work with new suppliers to secure any crucial inventory and capacity needs. In the case of the pandemic, it would make sense to identify alternative suppliers that are in non-impacted regions of the world. 

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Source: https://enterprise.craft.co/solutions/supply-chain

 

Inbound visibility

It is essential to gain better visibility of the status of your inventory at supplier locations and how it fits with supplier production schedules. Such data will enable you to predict potential shortages and respond proactively. Supplier intelligence dashboards, like the Craft Intelligence Portal, can help to support reacting to frequent changes, due diligence and decision-making. 

 

Prioritising production

Supplier data can help to ensure companies prioritize the products they produce in the event of a shortage. In a case study from a Fortune 100 manufacturer, the client was able to use Craft’s way of identifying the capabilities of their suppliers. They discovered that 10% of their supplier-list was either out of business, merged, acquired, or out-of-date.   


Knowing the capability and capacity of suppliers will help you to refine production schedules based on the available inventories. Focus on those that ensure the most critical products remain in stock as a way of optimising revenues. Without a full understanding of the supplier network, this will prove incredibly difficult to achieve. 

 

Summary

What we do know is that Covid-19 will have a lasting impact on global supply chain operations. CIPs research found that 46% of businesses think it will take 12 months or more before productivity levels normalise. Businesses are looking for new ways of working and diversification of supply bases is also a key part of this process with CIPs finding out that 62% of supply chain managers are preparing for alternative suppliers and 67% of them seeing price impactful price fluctuations which means agility to change supply will be increasingly important.

As a response to Covid-19, companies need to focus on improving the visibility of their supply chain risk. Without access to the data, it is impossible to try to mitigate potentially disastrous supplier network issues. To ascertain this kind of overview requires the digitization of operations. Leveraging artificial intelligence and machine learning solutions like that of Craft, illuminates supply networks more quickly at a previously impossible level. 

 

If a company can see supply chain issues, it is much easier to achieve greater flexibility, collaboration, and control. Following Covid-19, this degree of agility in supply chain management needs to become the “new normal.” The pandemic shows that companies must appreciate how vulnerable supply chains are to global events and plan accordingly. 

Of course, realigning supply chains in itself is not a simple process. The US does not have the capacity in terms of technology and workforce for it to happen quickly. Similarly, in the UK, supply chains are particularly vulnerable to problems with labour, inputs, and access to services. For example, there are points where UK food supply chains rely heavily on ferry services between Dover and Calais, or the Channel Tunnel. There are few alternatives to disruption through any of those routes. Covid-19 exposes these single points of failure. Table 1 below shows the UK reliance on the Dover Strait for EU imports. Companies need to use data to plan how they construct new supply chains carefully. Location is not nearly as crucial as resilience and agility at this time. 

 

If you have any questions regarding the topics discussed in this post, please reach out to me directly at seb@craft.co.

 

Table 1 – UK reliance on the Dover Strait highlighting the vulnerability of the supply chain (Source: https://www.nature.com/articles/s43016-020-0097-7/tables/1)

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