How to Approach Supply Chain Risk During Pandemics and Disasters

A male construction worker wearing a neon yellow vest analyzes supply chain demands during a pandemic disaster.

Presented by: Brandon J.E. Ferrera, Southern California Market Executive, Middle Market Banking, Fifth Third Bank, ACG LA Board Member

The COVID-19 pandemic brought to the forefront what a disaster can do to a business’s supply chain. With most, if not all, supply chains impacted, many companies are scrambling to mitigate disruptions. Items manufactured abroad may be in short supply as some manufacturers closed down temporarily for their workers’ health or to keep supplies for themselves. That decreases the supply and could create stock shortages down the line. Manufacturing abroad and domestically may not be set up to handle increased demands for some items, whether that’s a lack of availability of raw materials and parts, changes needed for manufacturing in greater quantities, or packaging issues for potential diversion to different markets.

Items produced domestically may arrive more quickly. However, with the pandemic hitting some U.S. suppliers as well, workers falling ill or sheltering at home can impact production. Trucking and delivery services are running at full capacity, with more consumers ordering online instead of shopping in person. UPS and FedEx are suspending delivery guarantees, which may cause further delays.

Identifying and managing supply chain risks isn’t just for pandemics, however. These risks can also originate from tariffs, natural disasters, wars, financial instability, supplier bankruptcy and cyberattacks. Companies running lean or relying on just-in-time sourcing to optimize their supply chains may get hit the hardest, but all companies should see this pandemic as a wake-up call to revisit their supply chain.

That’s why preparing for supply chain disruption is key, and now is the time to review or create your business’s disaster plan. That way, the next time a global crisis or other unforeseen circumstance hits, you’re as prepared as you can be.

Key Stakeholders and Process for Disaster Mitigation

To start, a business disaster plan should include a command center that assembles during crises like the current pandemic, including representatives from procurement, manufacturing, logistics, forecasting, finance, sales and communications.

Both the disaster plan and the command team should initially focus on short-term supply issues, moving to medium and long-term views when the crisis is under control. Using a single source of data, if possible, allows the team to operate nimbly and with the best information to make accurate and quick decisions.

Map Your Supply Chain By Supplier and Location

Next, critical to fully understanding the situation is mapping the entire supply chain by geography and supplier. Identify the critical components needed to run the business. Look at the supplier tiers: tier 1, tier 2 and tier 3. Develop a profile for each, noting their location, but also the likelihood of partial or complete interruption from various factors ranging from weather events, to geopolitical unrest, to a shortage in raw materials, to vendor bankruptcy.

Reviewing the suppliers' disaster plans can also help a business understand how well they are prepared for an emergency. Score the suppliers on their various risks, in order to gauge their resiliency at a glance.

This mapping should also be done for any new supplier and in some cases, you may need to use outside information to build the profile. This can be a time-consuming and difficult exercise, as companies are often proprietary about their own suppliers. But when executed thoughtfully, it can go a long way toward ensuring your business is prepared for the unexpected.

Diversifying Your Supply Chain

Your suppliers’ risks are your risks. This is especially true if you are using a single source for any critical components. Diversifying your supply chain, so you have back-up options if one link breaks, can go a long way toward mitigating your risk.

That said, bringing in a second supplier may not be an option if no other company produces the item, or if it’s cost-prohibitive to source from elsewhere because of retooling requirements or labor costs. In that case, businesses can consider adjusting their days-in-stock, to ensure they have a greater supply in case of a problem. That buys more time to resolve the issue, though it can cost more.

It can also be unclear where individual tiers within the supply chain are sourcing from, themselves. In this global environment, a manufacturer may source components from other countries before building one product. For example, specific electronic parts may all come from the same Chinese factory even if they’re assembled into another part in Vietnam and added into a larger product in Thailand. That causes a problem if there’s a shortage or disaster in any of those locations.

With commodity items, it’s easier to source from multiple suppliers in different regions, creating redundancy. Even if it costs more, you ensure a stronger supply chain.

Develop a Plan for Demand and Inventory Needs

Working with your sales and forecasting departments, nail down current and forecasted customer demand for products, and consider how much buffer stock you retain in both parts and finished products. Develop a risk calendar showing potential disruptions during the year. Your company should be monitoring the risks identified for your suppliers, whether it's checking weather reports for key markets or monitoring the political situation where your major manufactured goods are made. For businesses sourcing from Asia, Chinese New Year might slow down shipping. This can help you modify your operations in anticipation of scheduling kinks. Acting on early warning signs of a pending storm or political unrest can prompt you to ship items earlier or place orders with vendors in another country.

Your disaster plan should have scenarios for what might happen and how it would be addressed in operations, manufacturing and logistics. With an anticipated port strike, for example, supplies can be rerouted to a different port, or flown instead of shipped by ocean carrier.

Evaluate the Financials

Part of the disaster plan should include the financial implications of potential risks as well. Understand how a delay or shortage of a certain product would affect your operations. Do you have the wherewithal to sustain that risk? Can you purchase additional supplies to mitigate a potential shortage, or does that harm your balance sheet in other ways?

Pinpointing your most important products, and knowing what customers are essential to retain, can help with decision-making, should you need to prioritize one product over another. What products have the highest strategic value and earning potential? Which clients are make-or-break relationships for costs?

Evaluating your clients’ financial abilities to weather a storm, so to speak, is important too. If they are not able to handle the stress of a short term shut-down, a natural disaster or other curveballs, consider whether you’re equipped to help them out, or if you have a back-up plan.

Communication Is Key

Communication—with both vendors and customers—before, during and after a disaster is vital. In some cases, you may get wind of a pending problem if you see orders spiking from your customers. With COVID-19, that spike came from increased PPE orders. That kind of anomaly could be indicative of a larger trend.

Maintaining solid relationships with your suppliers can also mean they’ll be willing to share their disaster plans and any early warning signs of future disruptions. That can help ensure that if disaster does strike, your business isn’t caught by surprise, and can and begin problem-solving sooner.

Communication within your company is vital too. Empowering your employees to share mistakes made or concerning news about the supply chain, without fear of reprisal, can strengthen the supply chain overall and help anticipate problems or mitigate them.

Lastly, insurance is a necessary mitigation tool to protect against unanticipated losses. That includes disaster insurance, cargo insurance, business interruption insurance and cyber insurance. Paying for policies you hopefully never need is good business. An event that hits you or your supplier, interrupting your business and causing financial harm, can deeply wound the business. Just as health insurance protects people in case of medical needs, various business insurance policies can protect a business from disaster.

The onset of the COVID-19 pandemic has exposed the dramatic risks inherent in global supply chains. To help prevent a supply chain breakdown from having an irreversible impact on your business, it’s necessary to take the time to evaluate and plan for the worst. By doing so, you can ensure enterprise continuity the next time the unexpected occurs.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association, or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, National Association. Member FDIC