Coronavirus Is a Wake-Up Call for Supply

Chain Management

anucha sirivisansuwan/Getty Images

In these difficult times, we’ve made a number of our coronavirus articles free for all readers. To
get all of HBR’s content delivered to your inbox, sign up for the Daily Alert newsletter.

As procurement teams struggle to cope with the Covid-19 global pandemic, most have been trying
to keep up with the news about global response measures and have been working diligently to
secure raw materials and components and protect supply lines. However, vital information is often
not available or accessible across their global teams. As a result, their response to the disruption
has been reactive and uncoordinated, and the impact of the crisis is hitting many of their companies
full force.

In contrast, a small minority of companies that invested in mapping their supply networks before
the pandemic emerged better prepared. They have better visibility into the structure of their supply
chains. Instead of scrambling at the last minute, they have a lot of information at their fingertips
within minutes of a potential disruption. They know exactly which suppliers, sites, parts, and
products are at risk, which allows them to put themselves first in line to secure constrained
inventory and capacity at alternate sites.

Despite numerous supply-chain upheavals inflicted by disasters in the last decade — including the
eruption of a volcano in Iceland, the Japanese earthquake and tsunami, Thailand floods, and
Hurricanes Maria and Harvey — most companies still found themselves unprepared for the Covid-
19 pandemic. Seventy percent of 300 respondents to a survey conducted by Resilinc in late January
and early February, immediately following the Covid-19 outbreak in China, said they were still in
data collection and assessment mode, manually trying to identify which of their suppliers had a site
in the specific locked-down regions of China. There are a number of reasons for this problem —
and potential solutions.

The required resources for supply network mapping are expensive.

Many companies and leaders talk about the need to do supply network mapping as a risk-
mitigation strategy, but they have not done so because of the perceived large amount of labor and
time required. Executives of a Japanese semiconductor manufacturer told us that it took a team of
100 people more than a year to map the company’s supply networks deep into the sub-tiers
following the earthquake and tsunami in 2011. This explains why most companies are like a major
South Korean consumer goods company, which recently told us it had known that it should have
mapped its supply networks but has not done so because of the difficulties involved.

Consequently, many companies continue to rely on human intelligence from top-tier and a select
few lower-tier suppliers. But the information collected via personal relationships is typically
anecdotal and often mere conjecture, and when procurement personnel leave, change roles, or
retire, their knowledge leaves with them. It can take new employees years to get to know
immediate suppliers, let alone the suppliers’ suppliers and their global footprint.

Yes, supply network mapping can be resource intensive and difficult. However, there is no way
around it. Companies will discover the value of the map is greater than the cost and time to
develop it.

The most common approach is to use the bill of materials and focus on key components. It
typically starts with the top five products by revenue and goes down to their component suppliers,
and their suppliers, ideally, all the way down to raw materials suppliers. The goal should be to go
down as many tiers as possible, because there may be hidden critical suppliers the buying firm is
not aware of. The map should also include information about which activities a primary site
performs, the alternate sites the supplier has that could perform the same activity, and how long it
would take the supplier to begin shipping from the alternate site.

A new breed of services companies can help acquire and analyze supply network data and organize
the results in a user-friendly way. Their services typically do not map the supply networks all the
way down to raw materials, but they may provide a start. A few of the companies operating in this
space include Elementum, Llamasoft, and Resilinc. (Disclosure: One of us, Bindiya Vakil, is the
founder and CEO of Resilinc.)

The procurement function is measured by cost savings, not revenue-assurance.

Most of procurement’s activities are centered around cost savings, which means obtaining supplies
at the lowest cost possible, provided they fall within specified quality parameters.
When the procurement function has to resort to extraordinary measures to secure supplies on time
(e.g., by expediting shipments or purchasing parts or materials at a premium), the higher costs are
assigned to other parts of the organization (the logistics function in the case of expedited
shipments, and the finance function in the case in the case of premium prices for raw materials and
parts). Often, no one asks: Why was expediting or paying a premium necessary in the first place?

People from procurement, logistics, and supply-chain financing need to come together to talk about
what key gaps (tools, information, people, processes, etc.) need to be fixed to protect the company
from disruptive events in the future and how to align the goals of procurement with the overall
business objectives.

Supply chain disruption is often not part of supplier performance metrics.

When a disaster strikes, everyone suffers: buyers and suppliers alike. Therefore, it only makes
sense that firms should incorporate disruption-related metrics in their evaluations of suppliers.

For example, when selecting a supplier and writing the initial contract, many leading companies
include language that requires the supplier to participate annually in its supply-chain mapping
efforts. When force majeure events like the current pandemic strike, those supply maps can be used
as a roadmap to solutions to the crisis.  (Suppliers in China made more than 3,000 force majeure
declarations during the first few months of the Covid-19 crisis.) Contracts should also spell out
expected recovery times and methods during such events.

After the Covid-19 crisis dissipates, we will see companies fall into one of two categories. There
will be those that don’t do anything, hoping such a disruption won’t ever happen again. These
companies will be taking a highly risky gamble. And there will be firms that heed the lessons of
this crisis and make investments in mapping their supply networks so they do not have to operate
blind when the next crisis strikes and rewrite their contracts so they can quickly figure out
solutions when disruptions occur. These companies will be the winners in the long term.