Home / Opinion / Views /  Opinion | An action plan for companies at risk of supply chain disruptions

In less than 10 weeks, Covid-19 has become a national crisis in countries that together account for more than one-third of global gross domestic product (GDP), infected more than 100,000 people and killed 3,800. Though South Korea, Iran, and Italy are all severely affected, China, and especially its central province of Hubei, remains its epicentre, accounting for more than 70% of total reported infections so far.

China responded on a war footing to the outbreak, virtually hitting pause on its economy, suspending all non-essential internal movement, building hospitals from scratch in less than two weeks, and quarantining more than 60 million people in Hubei—a region where 300 of the world’s top 500 companies have a presence and which boasts of a booming automotive industry.

While Beijing’s aggressive response has prevented the situation from flaring up further within its borders, with China now reporting fewer new cases than the rest of the world combined, it has also disrupted the world’s essential supply chains and upended entire sectors. The global logistics industry, considered the backbone of the world’s economy, is projected to lose 1.7 million TEU (twenty-foot equivalent unit) in global container volumes by the end of March, more than the industry’s entire growth in 2019.

That China’s measures have resulted in such large-scale disruption, significantly greater than the impact of its actions during the SARS outbreak in early 2000s, is not surprising. In the intervening years, China’s share of the global trade and GDP have shot up by two and four times, respectively. The Asian giant now has the world’s largest economy after the US, accounts for 11% of global exports and is home to seven of the world’s nine busiest container ports.

So, what does the future looks like? New cases in China are progressively decreasing and economic activity slowly reviving. Four provinces that account for $4.5 trillion of the country’s GDP, Jiangsu, Guangdong, Zhejiang, and Shandong, have restarted more than half of their large enterprises. Yet, as of mid-February, the country’s overall manufacturing activity was still less than 30% of 2019 levels. This is not good news for China-dependent manufacturers in India whose 4-to-6-week buffer of both at-hand and in-transit stock is drying up. With the future fraught with uncertainty, these manufacturers are caught in a limbo.

We suggest four things that they can do to weather the ongoing storm.

First, understand the true extent of exposure to China and other countries with community transmissions. The bill of materials would be their first port of call, but it is unlikely to give them the complete picture, as it does not contain data beyond assembly levels and tier 2 suppliers. To gather this data, manufacturers could sign information-sharing agreements with direct suppliers (tier 1), their suppliers’ suppliers (tier 2), and all tiers further along.

Using the collected data, they could conduct scenario-planning to understand the financial and operational implications in a situation of prolonged slowdown and project supply over the next three to six months. When their suppliers are in a position to restart operations in full swing, they could also consider providing them financial support (through low-interest loans, for instance) to expedite the ramp-up of production.

Second, Indian manufacturers could take actions to address anticipated shortages. This could be accomplished at three levels: taking stock of all inventory sources (including spare, re-manufactured, re-qualified and substitute stock), pre-booking freight capacity across modes (air, sea, truck, rail), as logistics demand would surge when the crisis abates, and optimizing existing production capacities using an integrated margin-management approach, which entails prioritizing products that have the greatest impact on overall end-to-end margins, instead of those products that are individually most profitable.

Third, companies could diversify their supply chains and make them more resilient. We suggest that manufacturers identify alternative regions for sourcing and create a list of potential suppliers in these regions. Establishing an expedited qualification process for these suppliers would also help them in case an emergency hits, requiring an immediate response.

Finally, establish a “nerve centre" to get a clear view of resources and operational performance across the supply chain. Usually a war room with team members from across functions, such a nerve centre can create forward-looking transparency and drive preventive cross-functional problem-solving. It can help manufacturers identify bottlenecks, manage short-term exceptions, rapidly implement and monitor mitigating measures, and plan for exigencies. The most effective nerve centres are also usually empowered with high decision-making authority—this reduces the time it takes for them to kick into action mode.

There is no doubt that the Covid-19 outbreak is first and foremost a public-health emergency and is exacting a toll on families and communities worldwide. While governments and healthcare systems go all out to combat it, businesses also have a pivotal role to play in curbing its long-term economic impact. The clock is ticking, and they must act fast and act now.

Neelesh Mundra & Knut Alicke are partners at McKinsey & Company’s offices\ in Mumbai and Stuttgart and co-leads in the firm’s manufacturing and supply chain practices in Asia and Europe, respectively.

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