Boxer Mike Tyson famously once said, “Everyone has a plan until they get punched in the mouth.” But supply chain leaders facing the coronavirus (COVID-19) in China show that an initial blow doesn’t have to be a knockout. Instead, it can trigger a new set of tactics and mindset to face the crisis and emerge stronger.
For regions now seeing the rise of the virus in their communities, the experience in China and the Asia Pacific region illuminates important lessons and advice for managing the challenging months ahead.
Egon Zehnder interviewed a dozen supply chain leaders and executives in Asia in recent days to gain insight into the strategies they have implemented and learnings to date in facing the crisis. We summarize takeaways from these front-line leadership conversations here in the hope that they will be helpful as the impact ripples around the globe.
Impact
The broad economic impact on supply chains in China is significant and lingers even as authorities report progress in taming the spread of the illness. The impact in China has happened, and is now amplifying to overseas. “We’re running at 50% of capacity,” reports one supply chain executive, “Business for Q1 is down by 15%. I don’t know what the impact will be for the full year, but I don’t think I can catch up. I definitely don’t expect a V-shaped rebound.” Japanese auto manufacturers are scrambling to face disruptions in their just-in-time delivery system from slowdowns in their Chinese suppliers. By some estimates, more than 20% of the steering systems China exports to the US originated in Wuhan. In the pharmaceutical industry, China is such a major producer of intermediate chemicals that the availability of drugs in the U.S. and other developed countries is expected to be put under strain soon. The iPhone maker Apple, which is highly dependent on Chinese factories, has warned that its supply of smartphones would be hampered because production was ramping up more slowly than expected as China reopens its factories.
Takeaways
1. Don’t underestimate the impact of staffing disruptions on both you and your suppliers.
Covid-19 hit China as hundreds of millions of workers had returned to their hometowns to celebrate the Lunar New Year. As the contagion spread, restrictions on return journeys to places of work resulted in severe shortages of staffing. Even more importantly, protective measures put additional burdens on operations. An executive at a tech intensive company related that it took him six weeks to get back to 95% staffing. As much as supply chains are about hardware, systems and processes, without people they can move toward breakdown quite quickly.
China was able to impose strict controls on movement and interaction of the general population. We are beginning to see similar controls happen in Northern Italy as of this writing and the knock-on effects have been immediate. Most leaders we spoke with lamented that business contingency plans should have planned for even worst-case scenarios. Moreover, once formed they must be quickly communicated. “Know your business contingency plan—but don’t assume that everyone else knows it too; communicate it loud and clear” said the leader of a global 4PL service provider, “If there’s one thing I would have done differently, it would be to communicate what the crisis plan was earlier. If people know what the plan is, they won’t be out of action for so long.”
This planning must take into consideration broad disruptions and resulting transport and logistics bottlenecks. Illustrating the breath of disruption, a supply chain executive at a specialty chemicals multinational told us “Raw material supply is not sufficient. The major issue is that our raw materials come in in bulk shipping containers. We’re experiencing severe congestion at the port due to customs clearance and lack of workforce at the port itself,” “For urgent orders, we have to use airfreight, which is three or four times more costly.” And with commercial airliners reducing capacity dramatically, even that part of the transport and logistics chain has come under stress.
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2. Move quickly to risk-manage your existing supply chain.
A common theme across most conversations was the acceleration and deepening of risk management and diversification across supply chains. “In addition to logistics providers, we have quite a few single source suppliers within the region,” said one head of supply for a multinational industrial lubricants company. “We definitely need to look for alternatives.” For just-in-time-delivery operations, factors such as financial strength of suppliers, capacity, machining lead-time, and transport proximity have all come to the fore out of necessity. The President of a major industrial manufacturer in China said, “We put too much weight on cost and efficiency, and have many single sourced suppliers. Now definitely we have to move to dual sourcing or multiple sourcing, especially for critical parts.” “The tradeoff on costs will definitely be more evident as reliability and diversification become more important” was how one Sourcing & Operations executive from an appliance manufacturer put it.
“Supply chain diversification is definitely key. The Sino-American trade war has already triggered the migration of supply chain from China to the rest of Asia. This crisis will only speed up the migration,” said one Managing Director for Asia for a U.S. industrial manufacturer.
3. Embrace Innovation and Agility.
Leaders also told us of staff from all ranks in the organization stepping up to provide new ideas for facing the crisis. One manufacturing executive reported a surge of innovative suggestions coming from mid-levels of the organization. With so many sections of the supply chain process imploding, many of these ideas were driven by necessity. What impressed one executive was how “Most of them engaged and took action without long discussions,” he says. “Without their initiatives, we would have ended up similar to other companies and just waiting to be able to start up.” “Many of the ideas will be implemented on a permanent basis,” he says. Still another leader says his company was spared significant impact from the virus thanks to the efforts of managers who stepped up to create an alternate supply chain.
One result of the crisis in China is the success of remote working. With millions under quarantine restrictions, companies were forced to move to remote work options – and many leaders said the strategy was surprisingly successful. “Indirect labor are all working from home with surprisingly good efficiency,” said one executive. “The remote working model will be adopted much faster,” he predicted. Another executive echoed a similar result. “Going forward,” he says, “the company will be embracing more online tools and looking for ways to make its systems more user-friendly.”
Not surprisingly, leaders in Asia found several strategies already in place – supply chain diversification, emphasis on agility and digitalization – to have played a significant role in managing the disruption. “We started a corporate-wide major transformation program 18 months ago,” says one executive. "Lots of efforts and initiatives in digitization, process control and organization changes. Now we feel very lucky.”
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Opportunities & Call to Action
For companies bracing for the full impact of the coronavirus, the experience in Asia offers some guidance:
1. Notice and encourage emerging leaders and ideas.
At Egon Zehnder, one of the assessment tools we use is our Potential Model that focuses on how to predict the development of executive ability. This is useful in a crisis, since past performance and even current capabilities offer do not guarantee that an individual will succeed. Remain tuned to key elements of potential: curiosity, insight, determination and engagement. Individuals displaying these traits may be your best leaders in a crisis, and they very well may arise from surprising places. Our sense from our conversations is that proactive initiative, if not even breaking of norms would be less tolerated in normal periods.
A question to ask is how organizations will adopt these innovations on a permanent basis or revert back to pre-crisis approaches. Keep an eye out for those with an innovation spirit, combined with the additional competencies of strong collaboration and influencing skills. As some of the people we talked to have discovered in Asia, encouraging experimentation, innovation and agile thinking during this period of maximum disruption has yielded surprising results.
2. Look for balance.
In a volatile world, consider a crisis a stress test of your best efforts to create and maintain balance between business-as-usual and disruption. Think of your business in a polarity matrix (see below). Out of necessity we sense that the crisis will move supply chain professionals into the upper right of the matrix. Over the long run, consider a goal to remain above the vertical axis, marrying the proven, reliable and tested efforts of business-as-usual with the invention, innovation and agility prompted by a disruption. Even when you have to take a surprise punch.
3. Be the Disrupter.
Corporate operations systems are suited to the static scenario of “business as usual” – assuming the operating environment is stable, proven, reliable and efficient. The associated “negatives” underlying those assumptions have been exposed during this crisis in Asia, sometimes quite obviously.
Covid-19 will accelerate the oftentimes painful realization of the need to be prepared to act more quickly given increasingly globalized and interconnected operations. Disruptions of varying degree will become a new norm where speed, agility and creativity are needed. Some business leaders have even demonstrated a stronger ambition to take advantage of the increasing disruption – “you either become the disruptor or you will be disrupted”. When companies empower their people and operations to respond more quickly to disruption, they can unlock potential that was previously unreachable.
