While it is impossible to predict which companies or industries will be disrupted by the coronavirus and how they will be impacted, we can identify which industries may be at risk based upon various supply chain factors. Our experiences is that those with low levels of inventory on hand and, in particular, smaller companies will be at the highest risk.
Based on our analysis the industries with the highest risk exposure include tools & hardware, electronics & appliances, auto parts OEM, building products, diversified chemicals, and industrial specialties. Though the telecom, automobile, computer peripherals, and industrial conglomerates have less inventory in their supply chain the firms in these industries typically have the scale and resources to reduce supply chain risks.
When searching for lessons learned from other disruptions, a good place to start is to look at what happened after the Fukushima nuclear disaster in 2011. Some companies discovered that they had a single point of failure in their supply chain, including Apple, which was using lithium ion batteries that required polymers from a plant near Fukushima. Another example was the automobile companies, who could not get the oxygen sensors they needed for truck engines.
Since then, many companies have learned from their mistakes, and focus more heavily on assessing and addressing potential supply chain risks; eliminating cases where there is a single point of failure. Some, but not all, companies have even gone beyond their first-tier suppliers, to develop visibility into second and third-tier suppliers. The companies that supply their suppliers, so to speak. This is critical, because there can be hidden problems there that companies would not otherwise be aware of. Fortunately, tools for supply chain visibility have improved dramatically in the past few years, which makes it easier to address this issue.
Another issue is likely to be capacity. Even if companies have multiple suppliers, their secondary suppliers may not be able to fully satisfy demand. Travel bans and shutdowns – like China’s decision to extend the Lunar New Year holiday by an extra week — can cause supply shortages, or require companies to expedite shipments.
The best thing that companies can do is simply know their supply chain risks, and preemptively develop mitigation approaches. It can also be helpful to consider increasing the levels of buffer inventory.
For now, if your company or its key suppliers carries limited raw material inventory and relies heavily on Asian sources of supply, you are at high risk of disruption. Those that are currently in this predicament are actively evaluating inventory and production levels of critical components and developing alternative plans. As in other areas of business, those companies who identify specific supply risks and actively manage it, will find solutions or at least mitigate the impact.
Those that don’t are at the mercy of the virus and the public response.
Article by Josh Nelson, Supply Chain Principal, The Hackett Group’s Strategy and Business Transformation Practice.