There’s no doubt that the novel coronavirus, Covid-19, is front of mind for many people and businesses. Now with 780 million people in China affected by travel or quarantine restrictions, significant outbreaks occurring in Italy, Iran, Japan and South Korea, and global financial markets plummeting, many are starting to question what the full economic, social and human impact of the coronavirus will be. And will it be worse than originally thought?
There are growing concerns for multinational and Australian businesses that have key operations and suppliers overseas that depend on the smooth movement of people and trade in order to conduct business. However, the implications of the coronavirus reach beyond those with overseas activities or suppliers. Even if a business doesn’t have direct suppliers globally, it’s likely that some of the raw materials or goods needed in their production are sourced outside of Australia and therefore may be subject to delays. Many more businesses will be affected as the impacts of the virus continues to grow.
It is this vulnerability that is the number one issue for businesses with global – and often-complex – supply chains. Regardless of your position in the chain, the risks of your suppliers and those you supply are inherent risks to your business. For businesses facing the threat of the coronavirus right now, this could mean lower revenue and the possibility of financial losses due to supply chain disruptions as well as increased scrutiny from tax authorities as they determine which entity in the supply chain should bear – or share - in these economic losses.
China as a case study
In China, the lockdown of major cities and manufacturing hubs has left many Australian businesses that rely on Chinese goods/inputs in a lurch. The forced extended closure of many Chinese factories and quarantine coupled with domestic travel restrictions are impacting employees ability to attend work. This means that many critical manufacturers are both behind in production as well as unable to operate at full capacity. A critical concern as China is the world’s largest exporter and an important source of growth for world trade.
In addition, other types of business (logistics and transportation) who play an integral role in global supply chains also are unable to operate as normal. The result? Significant supply shortages and delays for businesses around the globe who depend on these goods/inputs with no end date to this disruption in clear view.
For Australian businesses, this is leading to substantial loss of revenue as businesses struggle to obtain vital goods/inputs. Businesses within industries such as advanced manufacturing and real estate and construction are expecting significant project delays resulting in substantial costs to stakeholders, and cash flow difficulties due to covering regular operational expenses including wages and rent while faced with less or no revenue. There are also significant implications for small businesses and retailers who face difficulties in obtaining consumer products such as guitar parts, bike accessories and hardware and tools.
Therefore, as the risk that the coronavirus will continue to spread and impact more countries how can Australian businesses effectively manage and mitigate the impacts of disruption within their supply chain? Additionally, as fears of the outbreak worsening grows, what should Australian businesses do to detect vulnerabilities early and effectively manage risk?
Understanding and mitigating risk on the supply chain
Generally speaking, the supply chain consists of four parts, the business, its suppliers, customers and the external environment (often global). While businesses normally have control over their internal risks, when it comes to their suppliers, customers and external environment this control diminish at each level - a business has some influence over their suppliers, less over their customers and none at all over the external environment. Therefore, it’s important that businesses have the tools and people in place to detect vulnerabilities and potential disruption, estimate its impact and respond and mitigate negative effects quickly.
– 'Do I know where there are existing/potential vulnerabilities in my supply chain?’
Understanding the areas where your business may be vulnerable is critical for managing your supply chain risks. Being aware of the areas where your business is most at risk, you can not only take the steps to reduce those vulnerabilities but also have the right plans in place to quickly and appropriately address a problem if it arises.
Some of the common supply chain vulnerabilities of businesses:
- Cyber attacks and privacy breaches
- Dependence on a singular supplier or type of supplier
- Complex laws and regulations
- Increased competition
- Failure of vital technology and computer systems
- Unforeseen events including natural disasters, war and political turmoil and pandemics
What are businesses doing to detect risk early?
Historically, monitoring supply chain risks has been a complex, timely and costly endeavour. However, the rise of ‘big data’ and advanced analytics in recent years has opened the doors to new avenues for quickly detecting disruption and estimating its impact. As supply chains are digitised and become more integrated, it is possible to detect small changes within the supply chain indicating potential disruption before it occurs. Businesses can then take action to prepare for and mitigate the disruption as well as use predictive modelling to determine the likelihood of its scale. Some indicators that businesses are using include, changes in supplier production levels, changes in time to receive accounts receivables, equipment maintenance occurrences, changes in weather and staffing, transport delays and even changes in quality control.
To find out more about how we can help you digitise your supply chain and derive critical insights speak with our Technology Advisory Partner, Kamal Prasad.
Identifying and estimating the impact
– ‘What’s the worst-case scenario?’
When an unforeseen event occurs causing disruption to your supply chain, businesses need to determine and assess impact. In the case of coronavirus, many Australian businesses are facing difficulties in accessing critical goods/inputs and need to understand the short and long-term implications for their business. They should ask:
- How critical is this product/input to the business? What are the current inventory levels?
- Are there substitutes available and how quickly are they to access?
- Do they have relationships with other unaffected suppliers that they could source the good/input from?
- If unable to access the good/input, what are the impacts on the profit and cash flow? How long can the business operate without this source of income?
- In the case of project delays, how long will it be delayed? What is the cost of the delay?
Responding and recovering quickly
– ‘What can I do now to mitigate the impact?’
Once you have best determined the impact the disruption will have on your business, you now need to take measures to mitigate the impact and protect your business from further impacts. Some of these activities could include:
- Finding new suppliers, product substitutes or new forms of transport
- Promoting/marketing alternate products/services in stock over those with low/no stock
- Taking measures to effectively monitor and manage cash flow including:
- Collecting on any outstanding invoices
- Reducing/Changing staffing to match lower production levels
- Updating production models to reflect new levels of supply/demand.
Prepare your business
How can your business respond to Coronavirus (COVID-19)?
Find out more
Throughout all of this, it’s vital to ensure you review your responsibilities and liabilities under your existing supply agreements and that you have open lines of communication with your suppliers so you are aware of any disruption as early as possible. At the end of the day, the most important thing to remember when it comes to effectively manage your global supply chain risk is to always take a proactive risk management approach, not a reactive.
Finally, should you have any concerns about how your specific business could be impacted by the outbreak of the coronavirus (Covid-19) please speak to your engagement partner or contact your local office today.
How can we help businesses impacted by the Coronavirus (Covid-19)?
For our business recovery and turnaround specialists, ensuring your business’ continuity is our ultimate goal. We work with you to rescue the situation, minimising loss through financial reconstruction and helping you on your journey through recovery. Our experts have the technical knowledge and industry experience to ensure long-term success across a wide range of sectors as well as having an in-depth understanding of global supply chains and difficulties businesses with international operations face. Contact our business recovery team: Duncan Clubb and Andrew Sallway.