How to handle supply chain bottlenecks in the face of coronavirus

March 13, 2020

Authored by RSM Canada LLP

Kirby W. Houle, CPA, CA shared this article


The coronavirus outbreak – which the World Health Organization on Wednesday, March 10, declared a pandemic – brings uncertainty and even more challenges for businesses already dealing with complex supply chains in today’s global economy. As the number of coronavirus cases has grown worldwide, companies have changed or in some cases halted parts of their operations in hopes of arresting further spread of the disease. Kinks from that stoppage are already showing up in supply chains, but news outlets have reported that deeper effects likely remain to be seen.

Here are some things businesses should evaluate as this situation continues to evolve:

How far can you look ahead? Businesses, understandably, are worried about how to keep operations running smoothly in the short term. But it’s also crucial to prepare for what business will look like in, say, one or two months. Some companies built up extra inventory ahead of the Chinese New Year holiday and as a result have a buffer stock; “It is possible that the Chinese New Year week-long vacation motivated some companies to increase their inventory coverage,” to an article in the Harvard Business Review. For those companies the supply crunch may be yet to come. The impact of the outbreak on manufacturing is expected to hit in “full force” during the second and third weeks of March, according to that article.

What is the demand outlook for your product? It is crucial to determine how vulnerable your business is to a supply chain disruption. Travel and tourism, for instance, are not essential for many people, and as such those industries are feeling pain from the fallout of the outbreak. Evaluate your offerings, how essential they are to your customers, and how long your current product stock will last you. Organizations should develop an understanding of when the supply squeeze may start to show up in operations, so they can answer customer questions as they arise and manage customer expectations.

Which parts of the supply chain deserve most attention? A challenging but crucial task for businesses is to create a map of their suppliers in order to understand their overall risk exposure during a crisis. Such a guide can be helpful in developing backup contingencies for transportation routes, communications, product supply, and cash flow. Questions for organizations to ask include what the logistics path for products from China look like as some factories there come back online, and how container ships and ports are affected. Understanding these key links in the supply chain are critical to forecasting product availability.

Is it time to relocate production?  Because of the outbreak, businesses may now have a renewed focus on reducing supply chain dependence on China, where the outbreak first emerged and where factory stoppages have sent waves through the global market. But it’s hard to say how much such a pivot may help businesses at this point: “China’s shadow has grown so long that even industries that have shifted production beyond the country can’t wriggle free of its grip on supply networks,” the Wall Street Journal reported on March 8.

RSM understands that businesses have many concerns and questions about the effects of the coronavirus outbreak on operations. Visit our firm’s Coronavirus Resource Centre for more helpful information and insights.

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