As a result of the growing coronavirus outbreak, corporate executives the world over are dealing with disruptions in their supply chains that have them reeling in the short term and deeply concerned about long-term survival.
The newly emerged coronavirus that causes COVID-19, which was first detected late last year in the business and industrial hub of China’s Wuhan city, has killed more than 4,000 worldwide to date, and is present in more than 100 countries.
The global effect on supply chains is very real, with factories and commerce coming to a screeching halt in government-backed closures to attempt to slow or stop the virus’s spread. Dun & Bradstreet wrote in a mid-February report that at least 51,000 companies have Tier 1 suppliers, which provide components and parts directly to a parent company for manufacturing, in the affected regions of China. An additional 5 million companies have Tier 2 suppliers, which provide parts to other suppliers, in the areas. Meanwhile, there have been consumer runs in China, the US, Italy, and other countries for items such as hand sanitiser, medical face masks, and shelf-stable food. In Malaysia, for example, Nielsen tracked hand-sanitiser sales of RM1 million ($237,176) in a week’s time in late January, 800% above the weekly average.
The World Health Organization has warned of a shortage of medical supplies due to hoarding and panic buying that could put medical responders at risk, and there have been calls around the world to jump-start production of these needed supplies.
The current crisis has tested supply chains in a way not seen previously, said Koray Köse, a supply chain expert with the global research and advisory firm Gartner. During the 2003 emergence of SARS, a contagion cousin of the current coronavirus that also emerged in China, the country played a different role in the global economy. Then, China still served more as a producer of raw materials and less as the integral link it is today on both the supply and the demand side of the world’s consumer products, Köse said.
“Now we’re talking truly global, and there may be an impact in one end of the world, and it will cascade,” he said.
He expects disruptions to last through the second quarter, at the earliest, and possibly further into 2020 and 2021, depending on the virus’s spread and whether the medical community can find vaccines or other measures to stamp it out. It has the potential to trigger a global recession, Köse said.
But there are things that finance managers and executives can do now to strengthen their company’s position on the other side of this outbreak.
Assess your supply chains. Every corporation should already have a clear idea of where their goods are coming from. But dig in even deeper, and find out who supplies your suppliers, and their suppliers, Köse said. That way, you’ll have a fuller sense of how to respond if, for instance, the Italian factory that produces a particular product line ends up going offline for weeks. Undergoing this process also exposes the very real need for diverse supply chains, he said.
“Think about the ability to continue your business if those [trade] channels are maybe limited or even closed,” Köse said. “You need to find substitute products as soon as possible.”
Sitting back is not an option. Companies facing disruptions currently need to be making plans to adjust their purchasing and product lines now, Köse said. Waiting a week or two to see how the scenarios play out will leave a company in a competitive market behind the curve. If things are dire enough, it may not be an obstacle the business can overcome.
While your company was figuring out next moves, “your market share was up for grabs, and now you have to fight for it”, he said.
Don’t rely on insurance to bail you out. When assessing risk, many corporate leaders will say they’ve covered their risk through purchasing insurance for interruptions to business events that seem beyond anyone’s control. But that’s a false assurance, and the fine print may exclude help in scenarios like global pandemics, Köse said. Business interruption or contingent business interruption insurance, which applies when suppliers are affected, excludes epidemics, and the policies often contain clauses requiring physical damage, such as what results from natural disasters like typhoons or earthquakes, according to The New York Times.
“Having a policy for peace of mind that is not executable in a time of need is an investment with no ROI,” Köse said. He suggests going over any policies now to know what is and is not covered.
Embrace dynamic risk management. Köse said the current coronavirus outbreak emphasises the need to embrace dynamic risk management, a more comprehensive approach to risk. Too many companies are focused on results in the short term, leaving their long-term viability at risk because investments were not made in good times to strengthen alternate supply chains, he said.
Diversify those supply chains. On that note, if a company doesn’t already have multiple sources for products or components, start looking now, he said. The current coronavirus crisis shows how quickly events can take over and take something that was concerning to devastating. Yes, that may mean you pay a new supplier more per item than in the contract locked down with a long-time supplier. But it also means that you’ll have options if a problem pops up.
No company should ever have just one source for a vital component in its supply chain, Köse said. This can be a hard sell in calmer times when there’s not a global crisis such as the current coronavirus outbreak to point to, Köse said.
“The finance people are not necessarily listening to that because they can’t see it in the numbers,” he said.
However, even if it costs more in the short term, either seeking out other sources or finding design solutions that work better will leave a corporation on more solid ground for whatever worst-case scenarios may hit a supply chain.
In addition to working to diversify supply chains moving forward, finance offices should also keep close track of the costs caused by any disruptions in the supply chain. Use those numbers to make the case for diverse supply chains and to prompt more comprehensive discussions about risk, Köse said. Being able to show actual losses will drive home the point that having a robust risk management strategy pays off.
Being prepared also means that if your competitors falter in a similar scenario, you'll be there to pick up the slack.
“If there is a turn and you are prepared for it, you can pick up things that others left on the table,” he said.
For more news and reporting on the coronavirus and how management accountants can handle challenges related to the outbreak, visit FM’s coronavirus resources page.
— Sarah Ovaska is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Chris Baysden, an FM magazine associate director, at Chris.Baysden@aicpa-cima.com.