Peter Hacker – COVID-­19: The known unknown shock on global supply chains

The  stakes are high for economies and multinationals. The jolt is not comprehensively visible yet, nor is the timeline and eventual claims, making enterprise risk management, preparation, planning and alternative sourcing even more challenging.

As COVID-­19 spreads from China across the world its impact is magnified.

Corporations around the world are justifiably concerned that potential quarantine, limited transportation capacities, travel bans, employee implications, and sourcing restrictions may well hit their flow of production, goods distribution and ultimately earnings in 2020. The fundamental question is not just for how long, but also to which thresholds of size, growth rate and cross­‐border spread.

Let us play around with a few numbers and assumptions for illustrative purpose in the case of Wuhan. If we triggered a ‘tested’ but sequential crisis management plan for supply chain issues, realistically, an affected not China based company had on average between two to three weeks from the identification of the breakout to the actual lockdown in Wuhan. Finding a sourcing alternative much depends on the original level of sourcing (sole, single, dual or multiple), respective industry demand and available component offering.

In case of an interference or interruption loss companies are  confronted  with  three  phases (event, business impact, business recovery). The core business interference or interruption problem will hugely differ  whether  sourcing  and  financial  planning  is closely aligned and there is  little  dependence  recognized  on  sole/single  source  suppliers. Such circumstances become particularly  visible  when  the  company  enters  from Phase I (event) to Phases II (business impact) and finally Phase III  (business recovery). Past business interruption experience suggests that the differences could well be 3‐6 months and depend a lot on management engagement and business leverage capabilities.  Having  said  that  due  to  the  unparalleled  nature  of  the  COVID‐19  surge, despite some similarities to SARS, and each company’s  individual  circumstances  i(industry, insurance coverage, sourcing strategy and enterprise  risk  management),  it’s  too early to make currently a reliable prediction around the length of  the  respective phases, their impacts or in particular duration of a potential business interruption loss.

In today’s world, real­‐time connectivity in production has become vital.

Perfect examples  are  just  in-­‐time  supply,  order  anticipation,  stock  optimization,  predictive maintenance,   incident   and   accident   forecasting.   This   list   growing   day-­‐by-­‐day   and myriad applications are developed to push  existing  and  new  business  models  forward  but at unparalleled competitive margins. The  focus  is  on  impacts  and  alternatives become apparent in minutes, hours, in exceptional cases days  but  not  weeks. Consequently, any financial and sourcing implications must become much more aligned allowing possibly reducing marginal prediction error, earnings volatility and ultimately business interruption loss.

The interference in the production cycle of so many companies, our daily life routine and most important health have amplified nations crave to control instantly its shock. It becomes already progressively evident that the virus could massively damage global supply chain, causing huge business interference or interruption claims, possibly beyond SARS implications, and costing the global economy profoundly.

Company values are less and less dependent on tangible assets and more dependent on intangible assets such as secured supply chain capabilities, IP, reputation, brand, knowledge  and  customer  data.    The  late  surge  of  COVID-­19  has  rattled  nations,  and threatens companies that depend not just on single or sole source supply. Even beyond, companies are looking at alternative suppliers as facilities in affected cities or nations run into likely production and delivery delays. The unpredictability and scope of the outbreak have certainly massively increased in February.

The  late  surge  of  COVID-­19  has  rattled  nations.

In enterprise risk management we try to plan for natural catastrophe, social and economic deviation, regulatory change and nowadays cyber attacks and pandemic outbreak. However, this event is much more unruly than others. With COVID-‐19 there is much shorter incubation time fostering quicker decisions in a highly contagious environment and interconnected economy. Contagion is not new to the world of enterprise  risk  management,  but  there  are  major  differences  with  COVID­‐19.  It’s  the way this exposure spills across different industries, the global economy and may put many companies including multinationals on the back foot.

At this moment, nobody should any longer underestimate the risk spread of COVID­‐19. It is not a black swan event anymore, rather unparalleled with unprecedented risk nature and challenges. Without a managed risk approach to pandemic risks supply chain, business interruption and liability exposures, economies and corporations could suffer from outlier losses, eventually causing unforeseen financial losses and reputational harm.  COVID­‐19 is truly global exposure and partially manmade.  Due to its nature, risk diversification is much less achievable. These ingredients carry huge potential  for  large  aggregate  losses  as  a  single  event  (outbreak  COVID­‐19)  may  trigger many independent enterprise risk categories and possibly company’s different insurance policies. Some of these policies may also include pandemic exclusions clauses.

Supply chain, business interruption and resilience exposures will most certainly grow due to the increasing vulnerability of our social and economic life.

The importance of supply chain management and crisis management must focus on drivers such as cutting response times, increasing alternative sourcing capabilities, reiterating the importance of visibility across the corporate, divisional and individual managerial responsibility level with its implication on the company’s sourcing and network capabilities.

The driver behind this conclusion is the massive growth of an interconnected society that can be interfered or interrupted (pandemic exposure) or compromised (cyber risks). Initially, connectivity will be a competitive edge but quickly become core to survival. This development does not just serve pure living and business reasoning, but helps   ethical,   environmental   or   resource-­‐saving   ambitions   that   are   of   the   utmost importance in our densely populated world.

We recognize first adverse impacts, for instance on tourism, manufacturing, electronics, aviation, travel, global trade and human beings. The current perceived implications on financial markets and economies are backed by news covering event cancellations, component shortage, travel bans and impacts on human beings (sickness/fatalities) and very much depend on country and geography. The importance and role of enterprise risk management and in particular proper supply chain, crisis and business continuity management has never been more important than now.

Peter Hacker is available for a consultation in times of COVID-19!