The rapid spread of the coronavirus presents significant challenges around the world. In addition to the human impact, there is also a considerable commercial effect being felt. Given the nature of the pandemic and our increasingly interconnected global economy, the impact is likely to be widespread.
The impact can be more severe and immediate for corporates in the B2C space and small and medium enterprises who may already be dealing with liquidity management. Overall decline in economic activity is evident from the drop in global demand for oil, which has seen its sharpest fall since 2008. Hence, there is little immunity for even large corporates.
Globally, businesses with extensive presence in — or direct ties to — hard-hit areas are taking immediate action to assess organisational exposure, with the intention of appropriately supporting key stakeholders, employees and customers. Governments have adopted a wide range of containment measures, some of which have resulted in the shutdown of manufacturing, as well as labour disruption through enforced isolation, travel bans and border controls across the world.
There is potential for a significant dent to global consumption as well as the wider economic prospects.
Reset alliances with suppliers
Against this backdrop, many organisations are looking to develop collaborative and resilient relationships with critical suppliers in order to minimise disruption. Durable corporate relationships and agile operating models can strengthen overall preparedness in the face of any disruption.
In the same way that some restaurants responded to declining walk-in traffic by focusing on takeaway clientele and corporate delivery lunch packages, the triggers of this challenge may enable organisations to spot opportunities within their current operating models. Organisations that understand their exposure to Covid-19 will be able to position their supply chain to be more resilient in the face of future threats and disruption.
Priority areas include:
* Safeguarding people
Leverage HR expertise to maintain employees’ physical and mental well-being, providing guidance to those located in impacted regions and reassessing organisation-wide travel policies.
Exercise best-in-practice corporate social responsibility (CSR) regarding employee stability, environment, wider society and economy, and pursuing ways to support response efforts. In addition, develop a backup plan for affected staff that may include increased automation, remote-working arrangements, or other flexible resourcing in response to constraints.
* Assessing supplier risk
Create a response team to facilitate open and consistent flow of accurate information between key stakeholders, maintaining stakeholder confidence and informing customers who will be impacted. Establish a team to focus on supply-chain assessment and risk management.
Team responsibilities could potentially include reconfiguring global and regional supply-chain flows, where possible, utilising alternative modes of transportation and conducting trade-offs according to the needs, cost, service and risk scenario analysis.
Review contracts with key customers and suppliers to understand liability in the event of supply shortage and conduct a value chain assessment of other risk factors that may escalate costs.
* Managing working capital and business plans
Revise cash flow, working capital management and inventory forecasts alongside supply and demand predictions. Understand how financial stability may be impacted from further stock market declines and restrictions in access to funding.
Review organisation-wide sales and operations planning and integrated business strategies to ensure tactical and strategic business planning is synchronised among all business functions. Businesses with data rich environments can harness capabilities in procurement, operations and research and development (R&D), using advanced simulations to identify optimum performance trade-offs.
* Micro supply chains
Supply chains’ historic focus on reducing costs has led to the creation of large, integrated, global networks that gain economies of scale through outsourcing manufacturing to emerging economies, backed by long-term contracts.
However, the impact of events such as the Covid-19 pandemic and increasing trade tensions are encouraging organisations to question if this is the best operating model. Alternatively, many organisations may benefit from shifting their operating model toward micro supply chains.
* Collaborative supplier relationships
For companies fulfilling mass demand from Chinese-based operations, it is perhaps unrealistic to completely exit the market due to the existing scale and quality of supplier ecosystems. However, this situation can be used as a platform, with time and investment, to build a foundation of trust and transparency that leads to more collaborative relationships with critical suppliers.
By developing a shared vision of goals, motivations and limitations of partnerships that organisational resilience can be further developed.
Beyond the above actions, Covid-19 can provide organisations and individuals with an opportunity to reflect on their ability to navigate a crisis: to consider actions to increase agility and resilience in the future.
— Raajeev B. Batra is Partner — Head of Risk Management, KPMG Lower Gulf.