Mitigating Pandemic-Driven Supply Chain Risks

April 2020

For many businesses, COVID-19 has already caused significant supply chain disruption. Others are bracing for impact. These disruptions—the extent of which remain to be seen—are likely to last until the outbreak is contained and the global economy starts to rebound.
 
While the novel coronavirus is front and center, it isn’t the only issue plaguing supply chains. Even before the virus became a pandemic, businesses had begun to re-evaluate their supply chains following the U.S. trade tensions of the past year.
 
We’ve summarized the top 4 supply chain issues driven by the recent disruption:
 
  • Supply shortages and increased prices: Factory shutdowns across the globe, and especially in China, have forced many businesses to rely on existing inventory stockpiles. Once affected factories can resume production, well-capitalized companies may get priority of limited supply. Unless alternate sources are secured, many companies will face supply shortages and likely increased prices when the time comes to replenish current inventories.   
  • Demand Shifts – Matching customer demand with supply and inventory investments has become more challenging during this time.   Essential goods and services are seeing demand spikes, packaging associated with takeout and home deliveries, while more discretionary goods and services are often seeing reduced demand in the short term.
  • Heightened transportation costs: Once suppliers are able to resume production, businesses will be eager to make up for lost time. This pent up demand will likely strain the transportation services industry, driving prices up for businesses on top of premiums on limited supply.
  • Reputational impacts: Supplier disruptions, quarantines, travel restrictions, and workforce shortages can make it difficult or impossible for businesses to fulfill obligations to their customers. Failure to deliver—even if that failure is due to forces beyond the company’s control—can seriously harm a company’s reputation and may result in lost customers or even legal consequences. The way companies manage COVID-19 product or service shortages or delays will be an important dimension of longer-term brand preservation.
 
Despite the uncertainty surrounding the intensity and duration of disruption, there are reactive steps companies can take now to minimize the damage of this crisis or better prepare for future disruptions. To address immediate risk, companies should identify which Tier 1 suppliers are experiencing production slowdowns and look for alternatives—especially those that provide critical materials or goods—and likewise evaluate issues with Tier 2 and Tier 3 suppliers.  
 
Companies should also familiarize themselves with their insurance policies and understand the extent of their parametric coverage. For COVID-19 specifically, pay close attention to whether or not insurance coverage contains a Communicable Disease Exclusion.
 
Reactive steps taken now can help contain the damage or prepare companies for future disruptions, which do not generally come with a timetable. Looking ahead, companies should be proactive to guard against supply chain issues that result from ripple effects associated with this pandemic or future unexpected disruptions:  
 
  1. Diversify supplier geographies: If conversations around geographic diversification in supply chains aren’t already underway, now is the time. By shifting supply sources to a variety of countries and minimizing the dependence on a single location, companies have more flexibility when it comes to procurement and manufacturing. When evaluating changes to supply chain operations, it’s important to assess potential exit charges, permanent establishment status and the tax liabilities associated with the movement of functions and assets.
  2. Boost transparency: Implementing technologies such as cargo-tracking, cloud-based GPS and RFID can also help increase visibility into nearly every part of the supply chain. Real-time transparency can help companies more proactively identify specific areas of risk early on, or more quickly notice and respond to disruption that occurs. Use cases today have even revealed supply chain blind spots, or areas where supplies traveled that companies weren’t aware of. Data gleaned from these technologies are also critical as companies reassess their sales and operations planning, including optimizing production and distribution strategies, as well as inventory investments.
  3. Comprehensive risk assessments: The increased connectivity between an entity, its suppliers and customers has introduced risks throughout the supply chain that are exacerbated by disruptions. It’s up to each of these parties to identify, evaluate and address these risks—from security and privacy, to materials availability and quality—in order for the entire ecosystem to be adequately protected.
 
To help organizations and their suppliers, business partners, and distribution companies identify, evaluate, and address supply chain risks, the AICPA recently released a framework—SOC for Supply Chain. Organizations can use this framework to communicate relevant information to stakeholders about their risk management efforts related to the production and delivery of goods. A report that follows this framework can help businesses uncover weaknesses throughout their supply chains and ensure there are controls in place to address them, ultimately building trust with vendors, customers and business partners ahead of disruptions.