Supply chain disruption caused by the spread of COVID-19 has highlighted the reactive nature of business continuity plans. How can enterprises ensure they are better prepared for future challenges?
- Enterprises should seize the opportunity to revisit their business continuity plans in the wake of COVID-19 supply chain disruption.
- It is vital to know where supply chain disruption is most likely to occur, how governments will react, and whether alternative suppliers are available at a moment’s notice.
- Due diligence can help map the jurisdictions of vendors, apply a country risk rating, and identify the potential risk of each vendor commensurate with their criticality to enterprise operations, fostering a continued understanding of exposure and the means to mitigate it.
The response of enterprises to the spread of coronavirus (COVID-19) has focused on securing their personnel and reviewing supply chains in an attempt to achieve some kind of business continuity.
The ever-growing interconnectivity of markets has resulted in complex supply chains spanning jurisdictions and industries, which are currently being savaged by the residual effects of the virus.
And as the markets are demonstrating, the economic effects are just beginning.
Considering SARS was over a decade ago, business continuity plans have been most recently challenged by geopolitical tensions in the form of tariffs and natural disasters. The sudden escalation of COVID-19 has demonstrated the cross-border vulnerability of supply chains, and reactive nature of business continuity plans.
COVID-19 supply chain disruption
Even the most valuable, seemingly forward-thinking, companies in their industries — ranging from technology to automotive to toys — have reported impeded or entirely shut down production due to supply chain links within COVID-19-affected areas.
The pandemic is an unfolding story, with companies of varying industries providing mixed messaging in terms of continued production, while most consumers have no idea what the implications may or may not be in the coming days, weeks, and months.
Clearly, supply chain disruption ranges on the scale of predictability.
However, each and every disruption is an opportunity to revise an enterprise’s business continuity plans and supply chain vetting process in order to ensure the reasonable continuity of operations.
By taking into account high-level considerations such as the jurisdiction and criticality of supply chain links, along with the commensurate scope of due diligence to further understand risk, enterprises can start building the foundation for a dynamic supply chain in order to counteract possible disruption.
Jurisdictional supply chain risk exposure
The COVID-19 pandemic, as well as the geopolitical and natural disaster disruption, have demonstrated the debilitating potential based on supply chain concentration risk by jurisdiction.
In building a new and/or revisiting an existing supply chain due diligence vetting program, enterprises should begin with mapping the jurisdictions of their vendors and applying a country risk rating, internally or externally, to each entity in the chain.
A jurisdiction’s transparency, or lack thereof, is paramount in terms of enterprises understanding their supply chain risk in the context of disruption, and how a government may or may not mitigate the situation.
For business continuity plans and supply chain purposes specifically, a country risk rating should take into consideration the transparency of a government.
This often entails the robustness of their regulatory regime, known fraud, corruption, bribery and regulatory breaches, as well as additional matters (IP violations, human rights and labor, social accountability) that should be regulated by the government to ensure a fair and productive business environment for all commercial interests.
This first step will help enterprises understand their supply chain disruption exposure in terms of jurisdictional risk, its potential amplification due to the concentration of key suppliers there, and where to consider alternative suppliers in order to mitigate disruption.
Knowing your supply chain starts with knowing where they are located, what disruption risks are most likely to occur, how the government will react, and being ready to activate alternative suppliers at a moment’s notice.
Criticality supply chain risk exposure
Secondly, enterprises should assign criticality ratings to each link in the supply chain by their function and identify the obvious single points of failure.
Dependent upon the type of enterprise, suppliers should be assessed and assigned ratings based on their jurisdiction, criticality, financial viability, and potential alternative suppliers, or lack thereof.
Considering the volatility of markets during a disruption, due diligence concerning financial viability may warrant more frequent refreshes.
Once the most critical suppliers have been determined, enterprises should start building out rosters of alternative links to mitigate disruption perpetuated by jurisdiction and criticality issues.
Further, enterprises should leverage due diligence commensurate with the criticality of the supplier and decide upon a schedule to reassess suppliers and refresh diligence to maintain a continued understanding of their risk, and potential means to mitigate it.
The world is getting smaller and more complicated, raising new, previously incomprehensible risk to commercial enterprises. Nevertheless, as demonstrated by COVID-19 and prior disruptions, these instances provide an opportunity to better prepare for the next challenge.
Developing a dynamic supply chain, supported by commensurate, targeted due diligence and monitoring, will give an enterprise an edge on disruption and the competition alike.
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- Watch our unique series of video insights covering various sectors and asset classes. entitled the #CoronaCorrection Series, jointly produced with Real Vision.
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- Listen and review the webcast recording of our client webinar with Dr. Richard Peterson, MarketPysch’s CEO and Refinitiv’s Richard Goldman Market Development Director, Quant and Feeds, who presented Refinitiv’s research and insights on the current pandemic; reviewing the impact across different sectors in APAC.
- For more Refinitiv insights on the impact of Covid-19, go to refinitiv.com/covid
- Read about how the Coronavirus is impacting financial markets
- Find out why Refinitiv CEO, David Craig, believes that the Corona Correction is driven by data and not blind panic