Mid-Market Banking

Supply Chain Security: Building Resilience

Supply chain security after COVID-19

COVID-19 showed how over-reliance on a small handful of sourcing partners could create a cascading effect on a business’ supply chain. Most Chinese factories closed as part of Beijing’s public health response to the outbreak. This meant that many companies across the globe did not have raw materials and manufactured products that comprise the backbone of their commercial operations.

The pandemic has created unprecedented challenges for many businesses, ranging from factory closures to material shortages and even packing problems. Slowing the spread meant getting people to stay at home and limit unnecessary contact with one another: this made it all but impossible to run factories at full capacity for the first few months of COVID-19’s outbreak.

Supply chain vulnerabilities go far beyond an unforeseen pandemic, however. Reliance on a single vendor for goods, a single country’s manufacturing hub, or even a lack of redundancies on the domestic end of the fulfillment process can all create bottlenecks that are capable of bringing a supply chain to a halt. The same can be said for suppliers: relying on parts from one supplier can create a manufacturing bind, and over-reliance on a single client may create a liquidity crunch.

Building resilience throughout a company’s supply chain takes many forms, each of which helps keep business running smoothly despite major and minor challenges alike.

Avoiding over-reliance on one manufacturer

Relying on a sole manufacturer, or manufacturing region, caused cascading supply chain issues for many businesses in the wake of COVID-19. Beijing’s efforts to curb the spread meant shuttering most non-essential businesses, including most companies involved in shipping and logistics. Factories switched from fulfilling orders to manufacturing personal protective equipment like masks, ventilator parts, and other medical gear.

Most businesses that rely on China for manufacturing found their goods to be stuck in port (either in China or in the United States as well), or had purchase orders that went unfulfilled for a significant amount of time. Businesses that neglected to build in redundancies within their production plans had a single source for goods—a source that was mostly unable to get these goods to their customers.

Supply chain experts touched upon the importance of diversifying suppliers and nations of origin to create goods. An over-reliance on one country for manufacturing, as seen in China during the early stages of the pandemic, could bottleneck orders and bring a company’s supply chain to a grinding halt. Building redundancy in other countries can help safeguard a company’s steady supply of goods and materials and is becoming increasingly popular. India and Vietnam have recently risen in prominence as additional (or primary) manufacturing hubs, and they offer incentives for businesses to establish relationships with local businesses.

Setting a robust domestic strategy

COVID-19 didn’t just impact the manufacturing side of supply chain security. The pandemic has also laid bare the pitfalls of keeping an inventory, or even domestic manufacturing, in one centralized location.

The virus has ping-ponged across the country, meaning that regions have felt the brunt of its impact in different ways and at different times. Every state has taken various measures to contain the spread of the virus, which has compounded uncertainties for businesses looking to reopen safely. For example, a warehouse in one state under severe restrictions could bring a company’s supply chain to a standstill; another, in a state with lax public health laws, may open too soon and find its workforce getting sick.

Businesses should incorporate broader redundancies into the domestic side of their supply chain as well. Keeping inventory at multiple warehouses in different parts of the country can help combat local issues—be they public health emergencies or natural disasters. This may cost more than maintaining one warehouse (and can take more coordination), but can help ensure that orders are still fulfilled in the wake of the unexpected.

The benefits outweigh the costs in keeping a business running and making money, versus having a supply chain grind to a halt when a warehouse cannot fulfill orders.

Supply chain stress-testing

COVID-19 served as a wake-up call for many businesses that may not have paid much attention to their supply chain’s specifics. As the gears of the global economy begin to get back up to speed, it is now a good time to examine what went wrong in a business’ supply chain. Even if there were few (or no) disruptions, it’s still best to examine the health of a supply chain to forestall any future issues that could cause challenges.

Every business should conduct a stress test of its supply chain—ideally sooner rather than later. A robust stress test should examine how long it would take for a supply chain to recover if one node (e.g., a manufacturer, warehouse, or logistics partner) were to halt operations. Next, it should determine how long a supply chain could meet demand with its supplies in the event of a node disruption. A strong supply chain stress test should examine how long it would take to get back up to speed if any crucial component were to go down, and how long the business could keep fulfilling orders in the interim.

If the results of this stress test suggest that a company couldn’t fulfill orders for longer than it takes for a node to go back to normal operations, it’s time to reconsider the current setup. Incorporating additional vendors at these nodes can help extend the period of time in which a business can continue fulfillment at regular speed, for example.

From a supplier’s perspective, COVID-19-related disruptions to supply chains (as well as product demand) may create a liquidity crunch, as the pandemic has impacted the ability for many manufacturers to get their goods to clients, due to manufacturing or delivery issues, among others. This may make it difficult to wait 60 to 90 days for payments to come in per usual terms. Suppliers can overcome this challenge through supply-chain finance programs, which allows them to sell receivables to a financing partner in exchange for immediate cash.

As the old saying goes, finding opportunity in crisis can be an excellent way for businesses to see how robust their supply chain is during a period in which it might be more exposed to disruptions. COVID-19 created challenges for many businesses, especially those that rely on China for manufacturing and singular warehouses closer to home in the United States. Building a more resilient supply chain has become more critical than ever; doing so doesn’t have to pose a significant challenge.

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