How to Minimize Disruption to Your Supply Chain by the Coronavirus

Chief Executive Officer

This post was originally published on this site

When phrases like “potential global pandemic” are dominating news and social media headlines, it can feel a little cold to view a serious situation through the lens of CEO.

But it’s clear right now that the coronavirus outbreak is going to have a major effect on global business through the rest of the year. As citizens, we have a responsibility to pitch in where we can to help our leaders, medical professionals, and neighbors stay healthy. As CEOs, we have a responsibility to the people relying on us to keep our businesses operational: customers who still need your products and services; employees who still need their paychecks and benefits.

And we also have a responsibility to learn from what the coronavirus is telling us about global business so that we can lead our companies through the current crisis and better prepare ourselves for the future.

Rattling the Supply Chain

With globalization the typical supply chain for most business has become more complex. With that complexity we have also minimized inventory in the supply chain and our own stock rooms. In addition, we have applied efficiency pressure to deliver improved value with many suppliers running at much higher capacity. As a result, business are much more sensitive to fluctuations in the supply chain.

Companies typically keep their warehouses stocked for 5 reasons:

  • Complete work-in-progress (WIP).
  • Meet the lead time requirements of the customer, which are usually shorter than your order to finished goods lead time.
  • Reduce costs by ordering in bulk.
  • Respond to quick upward changes in your order fulfillment rate.
  • Decouple fluctuations of the supply chain.

This last point is where coronavirus is wreaking some havoc. When most companies look at ways to optimize their supply chains, that additional inventory that safeguards against fluctuations often ends up on the chopping block. Better to invest in the people and infrastructure that will allow you to sell more to a wider — and in some cases, truly global — customer base.

We’re seeing right now how even a small interruption of the supply chain can cause a significant impact on businesses. Also, suppliers who are running at very high capacity rates (>90%) don’t have any additional capacity to catch back up if they experience a significant shutdown. As coronavirus continues to spread, long shutdowns and further disruptions are becoming increasingly likely.

Building Out Your Links 

When you’re running a business, accepting the first and most glaringly obvious answer to a problem is almost always a bad idea. Coronavirus is no different.

Let’s turn to one of my favorite exercises, the classic Toyota “5 Whys.” The idea here is to keep asking questions until you get through superficial answers to the real root issues you need to fix.

So, again, setting aside the very real and concerning human element of this crisis, let’s focus exclusively on the CEO’s responsibilities and ask:

Why is the coronoavirus disrupting your supply chain?

Because my supplier is in China. 

And what about your other suppliers?

Phil Sullivan: What connects the links in your supply chain isn’t just money, it’s the relationships you have up and down the chain.

I don’t have any other suppliers.

See ? That only took one Why, and we’re already past something we can’t control (a virus outbreak) and onto something we should be controlling: your suppliers. Plural.

The more global your business becomes, the more vulnerable your supply chain is going to be if you’re too dependent on one source of materials. Consider having multiple sources of supply, preferably in different regions or countries. Don’t forget that you need to follow the supply chain to the raw material. You may find you have multiple suppliers, but they all may use the same raw material supplier.  Consider that in your decision-making process. Is there a raw material supply risk? If so, look for alternative raw material sources and navigate to find new suppliers from those sources.

If the suppliers you rely on the most are international, try to have them stock some level of inventory locally for you. Ultimately, if you have a high-risk sole source supplier you may be well advised to hold some additional inventory.

Yes, too much inventory is also not ideal. If you have a very short life cycle or a high engineering change rate you could incur high scrap on rework expense. Only you and your understanding of your business can ultimately decide that, but under the correct conditions more inventory is not necessarily a bad thing. And in a global market, it just might be a new necessity that businesses need to start adjusting for, as well as mitigating risk via loss of business insurance and writing penalties into supplier agreements.

Finally, remember that one of the reasons we call it a “supply chain” is that we’re dealing with a series of separate but interconnected entities. What connects those links isn’t just money, it’s the relationships you have up and down the chain. When resources get scarce, prices go up, and everyone starts fighting over the limited supply. You don’t want to be in the middle of those scraps. You want to get an early heads-up phone call from your supplier because of the work you’ve put into that relationship. You don’t want angry customers waving unfulfilled orders at you. You want customers gaining a new appreciation for how attentive you are to their needs, even during a major supply chain disruption. You might lose some short-term revenue refunding some orders or establishing a “food stamp program” that distributes some of what you do have to everyone. But you’ll gain precious long-term loyalty. And if you have invested in a robust supply chain that can withstand shortage events, you won’t only be able to serve your existing customers — you might win new business from competitors who don’t have similar resources.

Look at Zoom. They’ve responded to coronavirus by removing their 40-minute cap for free uses in China. It’s not a special offer they’re promoting, it’s just a service they started giving to their most in-need customers. Most stocks are down right now. But because it’s responded to the coronavirus by finding ways to strengthen its relationships, Zoom’s stock price was up 38% for the month of February, 2020 and growing its user base. That’s not profiteering, that’s the benefit that comes with being a good corporate citizen and following your values towards what your customer needs.

Strengthening Your Bonds

Boeing’s tumultuous two years illustrate how weak leadership can make a crisis even worse. If the coronavirus is making it harder for you to do business, your employees already know it. What they need to see now is decisive leader at work. Stay on top of the numbers that are most affected by coronavirus. Communicate daily with your key team members, suppliers, and customers, especially if they are overseas. And make sure that your employees know everything that you know. The facts, figures, and plans you provide are going to keep internet hysterics out of your break room.

Business boomed during the last decade’s record-breaking bull run. But the coronavirus is a reminder of just how vulnerable even the most successful businesses can be when the whole world is our marketplace. To get through this crisis, and the next one, you’re going to need the best people operating at the height of their abilities. And they’re going to need your vision and leadership to guide them.

Phil Sullivan is a coach at CEO Coaching International. He has over 30 years of experience establishing international operations and delivering dramatic revenue growth in the medical device and semiconductor industries. He has a track record of building highly efficient, technically based, compliant global businesses, from small startups to large multinational conglomerates.

About CEO Coaching International

CEO Coaching International works with the world’s top entrepreneurs, CEOs, and companies to dramatically grow their business, develop their people, and elevate their overall performance. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 500 CEOs and entrepreneurs in more than 25 countries. Every coach at CEO Coaching International is a former CEO or President that has made big happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $1 billion, and many are founders that have led their companies through successful eight and nine figure exits. CEOs and entrepreneurs working with CEO Coaching International for three years or more have experienced an average EBITDA CAGR of 66.4% during their time as a client, more than five times the national average. For more information, please visit: https://www.ceocoachinginternational.com

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