Tim Zanni, Global and US Head of Technology, Media, Telecommunications and Technology Sector Leader
Chris Lanman, Managing Director, Strategy, KPMG in the US
COVID-19 may accelerate companies’ search for ways to reduce supply chain risk and the likelihood of future disruption. More than 90% of the Fortune 10001, including many technology companies, have already suffered supply chain disruption.
The nature of the COVID-19 situation has made supply chain planning difficult. China – first impacted in December 2019 – implemented severe restrictions in January to control the spread of the virus. Now, some businesses and manufacturers have begun to reopen. Yet, China recently reported more than 150 new cases. This has raised concerns about the possibility of a second wave of infections in China, potentially disrupting global supply chain operations again.
The spread of COVID-19 has already disrupted supply chains globally in several ways including:
- Weakening demand for some companies
- Skyrocketing demand for select companies
- Creating uncertainty in obtaining raw materials
- Impacting the ability to ship and receive products on time due to shortages and logistics bottlenecks
- Ensuring workforce capacity to assemble and ship products
COVID-19 disruptions are also testing the viability of just-in-time inventory and complementary supply chains designed to minimize working capital tied up in assets in warehouses. The impact elevates the need for companies to ensure their supply chain is diversified with options for secondary sources, incorporates innovation, includes a backup plan to address workforce disruption, and targets logistical bottlenecks.
Before COVID-19, the increase in automation and ongoing trade tensions between the U.S. and China had slowly begun a shift toward geographic diversification among suppliers. For example, one major U.S. technology company moved a key piece of its supply chain back to North America long before we heard of COVID-19. To what degree the spread of COVID-19 has affected this North American plant remains to be seen.
Another company addressing supply chain disruption is Wistron Corp., one of Apple’s suppliers, which told analysts during a recent earnings call that half of its capacity could be located outside China by 2021. The company is now eying India, Vietnam and Mexico.
Samsung, which has plants in its home country of South Korea, previously diversified its smartphone production to Vietnam and India, while maintaining components from China. Yet the pandemic was broad enough to still disrupt Samsung’s smartphone production, The Wall Street Journal reported.
These examples underscore the need to analyze and re-imagine supply chains.
Critical to this re-imagining process is a post-coronavirus debrief where the most important question will be: what could you have done better? Consider a multi-tier assessment of your supply chain to identify any weaknesses and where you might add secondary sources. Also, contemplate overstocking less expensive components. These are just a sampling of the actions that KPMG’s network of member firms recommend organizations should consider now and ahead.
Short-Term Action Considerations
- Scenarios – Understand financial and operational impact across multiple scenarios.
- Supply-Demand Balance – Focus on balancing supply and demand, and building buffer stock as necessary.
- Supplier Financial Health – Evaluate the financial health of your key suppliers to assess the potential impact to your supply chain.
- Micro Supply Chains - Build agility and speed into your supply chain by creating micro-supply chains; finite, decentralized, agile ‘mini-operating models’, with flexible supplier contracts and relationships with manufacturing closer to the point of purchase. Explore strategies to ‘buy where you make, and make where you sell’.
- Supplier Diversification - Assess opportunities to diversify the supplier base. Identify geographically diverse suppliers to onboard in the event of emergency. Consideration should be given to dual-sourcing for critical components.
- Supply Chain Strategies – Move away from an adversarial, short-term approach toward a long-term strategy of driving value. Periodically test and revise your strategy to account for organizational growth and environmental change.
Learn more about managing supply chain strategies (PDF 135 KB).