The global COVID-19 pandemic is having mixed impacts on the manufacturing industry. Some manufacturers aren’t seeing coronavirus’s impact on their supply chain or demand, some are losing enough demand to scale back their operations, and still others are experiencing a business boom. Regardless of their current situation, this crisis has a lot of industry leaders strategizing against major supply chain disruption – whether that’s this one or the next.
In early March, the Institute for Supply Management (ISM) reported that 75% of companies were experiencing COVID-19-related supply chain disruption, and that 44% did not have a plan in place for the impacts of this crisis.
Here’s a look at the challenges arising from this crisis, the current and potential costs, and steps manufacturers can take to mitigate the impacts on business.
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Challenges manufacturers face due to massive disruption
Many of the challenges presented by the COVID-19 pandemic are unique because of the nature of the crisis. However, there are inherent vulnerabilities in the way manufacturers operate that could trigger challenges in any disruption. These include the structure of the global supply chain and inadequate mapping, business tactics that prioritize cost savings and a lack of business continuity planning.
Dependence on Chinese imports
Manufacturers who source from Chinese factories, or whose suppliers do so, may already be facing challenges in getting the materials they need. This is a substantial issue, as China had around 16 percent of world GDP before the crisis hit and many manufacturers rely on them in one form or another to provide raw materials and goods at a lower cost. However, any such dependence is a vulnerability in the face of disruption. According to the Harvard Business Review, most companies only have up to five weeks’ worth of inventory on hand to help them meet demands.
If one or two of your parts are sourced from Chinese factories that have stopped production, what impact will that have on your business? And do you have enough visibility over your supply chain to identify such a vulnerability?
If you can’t be sure that your organization is secure against disruption, chances are you don’t have enough visibility into your supply chain. You’re not alone. This is a major challenge facing manufacturers today. According to the Business Continuity Institute’s 2019 Supply Chain Resilience Report, just a fifth of organizations are using technology to map their supply chains to identify potential for disruption. The rest don’t know what’s used, or they are using another method. Without a comprehensive map of your supply chain, it’s difficult to know how you’ll be impacted and what you can do about it. It’s nearly impossible to be proactive.
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Lack of Emergency Preparedness
Another challenge for manufacturers is a lack of response planning. Though the COVID-19 crisis is a more extreme disruptor than one would typically account for in emergency planning, many manufacturers don’t even have basic response strategies in place. The National Association of Manufacturers (NAM) reports that only half of manufacturers (50.8%) have emergency response plans.
High Cost of Reactionary Processes
For manufacturers who cut costs in procurement, rely on now-vulnerable suppliers and don’t have an emergency plan in place, it’s hard to gain control of the high cost of reactionary spending amid disruption. In fact, NAM is already reporting that manufacturers are seeing additional costs associated with late parts and deliveries.
If your parts are late, will you pay for expedited shipping to move it forward? If one of your essential suppliers stops producing, how much more will you pay to source materials elsewhere?
What manufacturers can do
Where should you begin in assessing this fast-changing situation and mitigating its impacts on your business? Here are the strategies that manufacturers can implement to strengthen themselves against disruption, even as it’s happening:
Start mapping your suppliers
Mapping your suppliers is tedious, but it is more often worth the investment of time and resources than not. It can help you to prevent even minor disruptions, let alone mitigate the effects of major ones. Trace your supply chain as far as you can to discover potential weaknesses right now and into the future. Learn where your suppliers source their supplies and keep careful documentation of your supplier map. You may find vulnerabilities that you should address immediately, like a fourth-tier supplier that is temporarily closed.
As you build out your map, consult with your tier-one suppliers and ask for their help in the process. Every company along the chain can benefit from greater visibility. Going forward, make such efforts an integral part of your relationships – and contracts – with suppliers. Do they have business continuity plans? Can they map their own suppliers and provide that information to you regularly?
Financial modeling can help you understand the impact of various scenarios on critical business components, like cash flow.
Ask yourself “what if?” again and again
To prepare yourself for anything, even in this moment, walk through as many possible scenarios as you can and document your potential response for each. That response should outline key players and their responsibilities, as well as how you’ll communicate changes when it’s time to deploy a strategy.
As an example, if a supplier runs out of X product and can’t provide your next shipment, what will you do? Do you have alternative resources? Or will you have to get strategic with the supply you have on hand? What will you do if you run out of that product entirely?
Use this as your launching point for developing a stronger business continuity plan.
Implement daily roundtables and communications
Communication and information are important at an hour-by-hour level right now. You need to be able to round up key players in and around your company daily to strategize and re-strategize as conditions change. You should also be able to quickly communicate with your workforce and relevant parties, like suppliers. And don’t forget to reach out to your customer base and keep them updated. If you anticipate a shortcoming, let them hear it from you first instead of the media.
Who are those key players for you? What structure is in place for responding to in-the-moment changes? How will you communicate those changes?
Show support for every person in your network
As you navigate through these challenging times, do not forget about your most valuable resource: your employees. Beyond communicating your needs and actions as a company to them, be sure to acknowledge their value and address their needs on an individual level. Consider the challenges that they are facing and how you can be a part of their solution. Give them a forum to voice their concerns and don’t turn your back on them.
According to the Harvard Business Review, “the companies that recovered the fastest after Hurricane Katrina in 2005 were those that tracked down all their employees who dispersed across the southeastern United States.” This is a potent fact that every manufacturer should keep in mind when facing disruption.
Diversify and localize more of your supply
To create a more secure supply chain, spread your procurement out in such a way that you’re not tied to just a few companies – especially for your most vital products and processes. You can have multiple suppliers of the same raw material so that, in a time of disruption, you can lean more on one than another. As part of your diversification strategy, establish relationships and regular transactions with local suppliers. You don’t need to source the majority of your materials from those suppliers, especially if they add significant cost, but having those relationships can make all of the difference in a pinch.
Once you’ve established who these suppliers might be, have a plan for how you’ll go about tapping those resources in a moment of need so you can respond quickly and effectively.
Deploy operational analytics
Moving forward, it will help tremendously to have a better understanding of the health and performance of your manufacturing business, even as the market fluctuates. This will help you to get a grasp on your leading indicators, as opposed to just focusing on lagging indicators like revenue and purchase amounts. These numbers can only reflect a one-to two-dimensional view of your operations. If you base your business decisions solely on these numbers, you won’t be able to achieve the flexibility necessary to grow and innovate with the market. Operational analytics can help you map out where you’re going and optimize your processes in order to meet future goals.
The impact of COVID-19 on manufacturers
COVID-19’s impact is far reaching and it’s affecting every industry. Manufacturers have the potential to be hit especially hard, given the many intricacies and moving parts in their operation. It’s important to stay on top of your operations, model various scenarios and plan for continuity. Many manufacturing entities can also potentially benefit from relief provisions available.
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