Publication date: 06/03/2020
Developing a supply chain response to the coronavirus outbreak involves being ready before such a crisis hits. Although the long-term consequences are yet to play out, the coronavirus outbreak already provides some lessons about how you can better prepare your company to deal with future large-scale crises.
Supply shortages and delays: The production and delivery of goods could be at risk. Inventory levels will often not cover short-term material outages, so envisage impact on popular components and materials. One example in history would be when Hurricane Rita struck Houston and western Louisiana, causing widespread shutdowns of oil refining assets in the region. Later that year petroleum-based packaging was in short supply because of the impact on supplies of the raw materials needed to make the packaging. Many firms redesigned packaging using old-style paper and cardboard.
Check certifications: Delays in transportation as a result of backlog in certification approval or shipment disruption may affect documentation needed to accompany the supply chain. It may be available to establish an enforcement position with a regulator who may be sympathetic to unforeseen delays, whereas because these aren’t contractual provisions, reliance on the legal concept of ‘force majeure’ will be difficult. Examples of such certifications and approvals that may be required for transportation of goods from one legal jurisdiction to another are:
- Phytosanitary certificates for forest-related products including crates or pallets, which expire after 14 days.
- Licences for movement of ozone-depleting substances such as HCFCs used for refrigeration, air conditioning, foam blowing fire-fighting or solvents. Licences take time to obtain, for example in the UK the current approximate time taken to obtain a licence is 15 to 29 days, but delays in obtaining licences may occur in the case of disruption to the normal running of the European Commission.
- Certification for movement of food and drinks, for example, export health certificates are required to export certain products of animal origin to specific third countries. Certification is usually required to confirm, as a minimum, that the product is produced in accordance with EU hygiene rules, fit for human consumption and freely available for sale within the EU. Again, the various bodies responsible for issuing such certification may experience a backlog in the event of disruption and staff shortages.
- Consents for movement of waste, for example in order to to export from England, consent must be obtained from the Environment Agency and importing competent authorities. This consent allows for up to 12 months to ship the waste (or potentially up to 3 years if shipping to a destination site with pre-consent status). Care should be taken in particular where authorisations are nearing their end.
- Licences for movement of chemicals, for example, importers or exporters of precursor chemicals must lodge an application for an authorisation with the competent authority in which the importer/exporter is established. Most applications will also be subject to a pre-export notification process, which currently takes up to 15 working days in addition to the standard processing time for applications, with a decision being reached regarding authorisation of the shipment after this process is completed.
Respect competition and consumer protection law principles: Don’t forget that normal competition and consumer protection law principles will apply. Competition authorities are carefully studying current market behaviour and will not hesitate to take action. The Covid-19 outbreak is not a valid reason to form a (crisis) cartel. Authorities have specifically warned producers of healthcare products, such as face masks, to stay away from actions that would restrict competition. Also, with regard to vertical relationships, resale price maintenance is another hot topic for many competition authorities. Thus, be wary not to impose minimum resale prices for your products. If you’re in possession of a dominant market position, be careful not to take measures that could later be explained as abuse of such position, e.g. considerable and inexplicable market price increases. Additionally, be careful not to discriminate against your buyers. In many European countries this is behaviour that could be subject to scrutiny. This also applies to companies with relative market power. Finally, in expected difficult times like these, many companies are likely to ask financial support from their government. This typically raises questions relating to compatibility with State aid rules: specific criteria for public interventions in companies in difficulty may apply.
Have a comprehensive emergency plan: Emergency operations centres should exist at head quarter and at the plant level, with predetermined action plans for communication and coordination, designated roles for functional representatives, protocols for communications and decision making, and emergency action plans that involve customers and suppliers. This should include identifying who is responsible for reviewing and monitoring risks and Government guidance.
Know your suppliers and consider supply chain design: Map your upstream suppliers and develop relationships in advance with key resources — it can be too late after the disruption has fully emerged. So how should companies design their supply chains to operate effectively in the face of widespread supply chain disruption? Each option involves trade-offs between the level of risk that the enterprises can tolerate and the amount of operational flexibility it wants to achieve. Two examples would be:
- Firstly, providing backup capacity for supply, production, and distribution outages which spreads the risk of a disruption across two sources. Although this supply chain design lowers risk levels, it incurs higher administrative, quality monitoring, and unit costs. Also, economies of scale vary according to the amount of supply allocated to each supply source.
- The second model design calls for a company to have production facilities with local sources of supply in each of its major markets. Like the above option, it spreads the risk. Since these sources are dispersed, the economies of scale are lower and the capital costs are higher in general, although the transportation costs will be significantly lower.
Although it is not possible to accurately anticipate global crises such as the coronavirus outbreak, impacts can be mitigated to a certain degree by putting in place strategies for foreseen eventualities. Action can be taken before a disruption occurs with adjustment afterwards when needed.