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Re-thinking supply chain risks in the face of COVID-19

Within the UK retail and leisure and hospitality sector.

Rådgivning om selskapsrisiko
COVID 19 Coronavirus

By Frederick Gentile | May 14, 2020

Following our recent webinar on 21 April, this insights talks through the impact of COVID-19 on supply chains.

For businesses, the COVID-19 crisis has re-emphasised the critical importance of business resilience. Despite being on many risk registers across the globe, the pandemic has caught nearly every country off-guard, and has seen businesses and national economies go into survival mode.

Now that we’re well into that first survival phase, it’s also time to think about what might come next and actions to take in the short, medium and longer term.

What we’ve learnt so far

Business and governments were underprepared

When the Institute for Supply and Management carried out its regular survey for the first quarter of the year, they found that 44% of respondents didn’t have a plan in place to address supply chain disruption from China.1

Yet we know that China is a global production powerhouse, with many sectors, including automotive, electronic, pharmaceutical and medical, relying on China for supplies, components and products.

Perhaps the most visible sign of this reliance during the current crisis has been shortages in Personal Protective Equipment (PPE). Over half of all global supplies of PPE comes from China.2

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Complex supply chains are at great risk

You may have various third parties involved in your supply chain, such as storage solutions and logistics providers, without even realising this. Supply chains are becoming more intertwined and complicated, as well as becoming increasingly dependent on technology which can be just as complex. Generally, the more multifaceted things are, the greater the risk of things going wrong.

We’ve already seen evidence of supply chains suffering. For example, in the automotive sector, Aston Martin and Jaguar have reported their supply chains being affected.3 And there have been reports from the electronics and textiles sectors as well.

COVID-19 will produce winners and losers

Food retailers, technology conferencing, logistic and delivery companies and home entertainment are likely to come off well from the crisis. Aviation, hospitality, SMEs and high street shops are likely to struggle.

What could happen next – new risks

Transport hauliers are key to supply chain but could also be a single point of failure

In the USA for example, some drivers have been refusing to drive for a number of reasons, including a lack of rest stops, no PPE, and no revised procedures on arrival. There have been rumblings of a similar situation in the UK.

We can’t rely on China to resume normal service

We’re being told that normal service is resuming in China as they come out of the pandemic. However, Wuhan Province, with a presence of 200 of the Fortune 500 companies, is slowing its production in line with reduced demand from the USA.4 So, we can’t assume that China will be returning to full production or that all businesses will be receiving their supplies as expected.

Suppliers further down the chain may suffer more

In terms of the economic fallout from the crisis, your first line suppliers may have enough economic resilience to survive the crisis, but what about suppliers at tiers two and three? As an example, in 2001, following the 9/11 attack, air travel was temporary closed in the USA. In 2007, orders to Boeing were starting to recover, however they discovered because of the earlier shutdown their supplier of specialist nuts and bolts had reportedly laid off up to 60% of its workforce and were struggling to keep up with orders.5

Will there be a second wave? How bad will it be?

Pandemic modelling tends to foresee a second wave – and end even a third wave in extreme circumstances. Reports on this have been fairly quiet until recently but now we are hearing more references to the threat of a second wave. The extent of the second wave is unknown, but modelling based on previous pandemics suggest that it’s unlikely to be as severe as the first. However, further disruption seems likely.

Willis Towers Watson has produced separate guidance on this which can be accessed here.

What about government restrictions?

The government is cautious about lifting restrictions. When it comes to lives versus livelihoods, lives must clearly take priority. However, this is likely to mean the economy will suffer.

How will consumers behave going forward?

We saw panic buying at the start of the pandemic, but this now seems to have calmed down. However, there is always a risk that this could happen again if there is further news that panics consumers.

Recession

A global recessions appears almost certain as jobs and businesses suffer. The International Monetary Fund anticipates that the global economy could shrink by up to 3%.6

Responding to ongoing supply chain risks

Businesses need to take action to ensure immediate, medium and long term supply chain resilience.

Immediate-term measures

  • Identify the weak links in your current supply chain and develop mitigation

    Prioritise and focus on the most critical links in your supply chain – those that, if they fail, will have a serious impact on your business. Assess the impact in both monetary and operational terms and develop solutions to work around them.

  • Don’t underestimate your tier two and three suppliers

    Consider alternatives for suppliers lower down the chain that might not be able to deliver.

  • Identify and activate alternative sources of supply

    Your business continuity plan should have considered alternative suppliers, but if that hasn’t been done, now is the time to do it. Think about people, logistics and technology and spread the risk as much as you can.

  • Ensure you have real time inventory visibility and planning parameters

    How well do you know your stock levels in their various locations, and can they be moved from one location to another? Do you know how much stock is in transit? And how flexible are your supply chain planning capabilities?

  • Ensure you have a management structure for supply continuity during the crisis

    In these times, decisions need to be made very quickly. If you can, streamline this process by having a dedicated and empowered supply crisis management group that are able to make tactical operational decisions.

  • Make sure your technology is robust and flexible

    Use IT, analytics and modelling to look at impacts and mitigation.

  • Talk to your suppliers constantly

    The most important thing is to be in constant communication with your suppliers and understand their position and the challenges they may be facing to deliver to you.

Medium-term measures

  • Build agility and flexibility into your supply chain

    Make a list of pre-approved substitutions for suppliers, parts or raw materials.

    Work with suppliers to develop combined resilience levels such as joint supply crisis response exercises.

  • Buy ahead

    Buy supplies ahead in areas that are most likely to be impacted.

  • Consider and prepare for using alternative parts and raw materials

    Think about alternatives that could be used in your products if your usual supply is not available. Start any certification or redesign processes that will allow these new materials to be used.

  • Consider whether you can shape demand

    Consider marketing those products that you’re able to source rather than those you would normally market that may be harder to obtain at times of supply chain crisis.

Long term measures

  • Review your overall supply chain strategy.

    The last few months have underlined the importance of resilience over cost and the ability to continue business in the face of adversity.

  • Create more visibility in your supply chain using analytics and predictive tools.

    The better you understand your supply chain, how it’s mapped out and the weaknesses in it, the better you can cope with unexpected situations. You can then apply that insight to align your continuity plans through modelling, testing, and mitigation.

For further information on the above please contact your Willis Towers Watson reprensentative.

Disclaimer:

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage.

The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.

COVID-19 is a rapidly evolving situation and changes are occurring frequently. The information given in this publication is believed to be accurate at the date of publication shown at the top of this document. This information may have subsequently changed or have been superseded, and should not be relied upon to be accurate or suitable after this date.

1 https://www.instituteforsupplymanagement.org/news/NewsRoomDetail.cfm?ItemNumber=31171&SSO=1
2 https://www.theguardian.com/world/2020/apr/28/face-masks-coveted-commodity-coronavirus-pandemic
3 https://www.theguardian.com/business/2020/feb/18/uk-car-factories-running-out-of-parts-due-to-coronavirus-warns-jaguar
4 Coronavirus: US stocks notch biggest drop since October – as it happened, 24 January 2020, https://www.ft.com/content/11e019c2-fbdb-3c50-a7fe-d15cec8648c7
5 https://www.reuters.com/article/us-boeing-alcoa/boeing-ceo-blames-industry-for-787-bolt-shortage-idUSN1141086620070911
6 https://www.imf.org/en/Publications/WEO/Issues/2020/01/20/weo-update-january2020

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Kelvyn Sampson
GB Industry Practice Leader – Retail and Leisure & Hospitality

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