As the novel coronavirus spread from its Wuhan origin to Thailand and South Korea in late January of this year, global businesses were right to be worried — mining companies, hotel chains, retailers and airlines were among the first industry casualties of the virus, with investors beginning to exit China-sensitive sectors on the fear that a repeat of the 2003 SARS outbreak might hamper regional growth. With the world now fully in the throes of the COVID-19 pandemic, which has dwarfed the consequences of SARS, the economic costs of the virus are playing out in countless ways: skyrocketing unemployment, plunging revenues and a heavily interdependent global economy grinding to a halt amidst a virtual worldwide lockdown.
Beyond the immense threat it poses to human lives everywhere, the COVID-19 pandemic is disruptive at a scale unrivaled in modern history. This disruption is being acutely felt at global industrial enterprises, where supply chain security is increasingly imperiled by labor shortages, factory shutdowns, and restrictions on movement. And while governments have imposed business-limiting measures to stem the virus’ spread, industry leaders must refrain from being “hunkered down” conceptually. Now more than ever, industry leaders must recognize their roles as pilots, not passengers. Rather than assume the brace position and allow events to unfold, decisionmakers must learn to navigate the turbulence by being cognizant of adaptive solutions that can be leveraged mid-crisis.
Today’s global industrial enterprises are particularly susceptible to COVID-19 disruption because of the characteristics that comprise the modern supply chain; dependence on China, a just-in-time inventory model, and a proclivity to outsource everything but essential processes previously held some advantages but fundamentally discounted core tenets of business resilience.
The Failure of Outsource Contingencies
It became clear during the mounting trade war with China that a China-dominant supply base presented a glaringly problematic single point of failure for global industry players. This was further exacerbated during the early stages of the novel coronavirus outbreak when China was enacting stringent lockdowns. Industrial enterprises with diversified supply chains were able to pivot operations to other locations like Southeast Asia, but many organizations, including Hyundai and Nintendo, experienced setbacks. The resulting supply disruptions worsened as the virus began to spread globally. Businesses maintaining lean inventories—a strategy that worked well prior to COVID-19 by capitalizing on innovations in transport and logistical efficiencies—struggled to adapt. These same businesses are oftentimes left flying blind. Having outsourced much of their processes to third parties, global organizations have less visibility and control over their supply chain than they did in the past.
This “outsource everything” model has fostered an opaque operating environment for global industrial enterprises. Overreliance on third-party vendors creates a “we don’t know what we don’t know” dynamic that complicates an organization’s efforts to develop an effective business impact analysis (BIA) by obscuring processes that may previously have been internal. Critical vendors or suppliers may not meet the same business resilience standards. While larger, more mature organizations may have planned for a pandemic by maintaining a pandemic response plan or conducting training through tabletop exercises, there is broad variability in the readiness of smaller suppliers. Global industrial enterprises tend to have limited insight into their vendors’ business continuity plans, which translates into a little-understood risk landscape—just how exposed an organization is to COVID-related supply chain disruption may not be fully known to leadership until it’s too late.
Unfortunately, these supply chain issues catalyzed by the COVID-19 pandemic will likely get worse before they get better. But global industrial enterprises should enact crisis solutions now that serve near-term interests and position their organizations for future tailwinds.
Address Resiliency Prior to Impact
Successful management of supply chain security during COVID-19 presupposes that an organization has effectively addressed evergreen physical security and cybersecurity risks. Corporate security programs, plans, and procedures should already be in place, up-to-date and include robust personnel training on specific roles and responsibilities. Organizations should understand that long-enduring concerns such as active shooter events and cyberattacks not only persist in the current environment but are elevated risks due to bad actors sensing greater vulnerability amidst the pandemic.
Cybercriminals are actively exploiting the COVID-19 crisis, and as economic conditions worsen, the risk of workplace violence should be top of mind for corporate security professionals. Global industrial enterprises should continuously evaluate the risk profiles of facilities and address existing security exposures. Toward this end, security leadership should review incident response and crisis management plans to ensure readiness for security events during this heightened period of risk.
Addressing the enduring elements that comprise traditional corporate security and business continuity practices will enable industrial organizations to proceed from a position of resilience as they work to manage supplier risk.
Industry stakeholders should seek to resolve the information gaps that arose from greater dependence on third party suppliers. Principally, organizations should take steps to enhance their understanding of the relevant human terrain: how has the COVID-19 pandemic manifested itself in the populations where the organization and its suppliers maintain an operational presence? Beyond the spread of the virus itself, how have the socioeconomic dynamics been affected? Even in developed countries like the United States, social unrest threatens to be a new dimension to the pandemic crisis.
Public resistance to lockdowns, closures, and workplace conditions should be anticipated and organizations in the industrial sector should plan for labor-related protests impacting their suppliers, particularly those located in developing countries. Industry stakeholders should develop contingency planning around various social unrest scenarios, including cyclical lockdowns and degradation of public safety infrastructure as local law enforcement and first responders are strained by illnesses within their ranks.
Situation reports are an effective way to seal off information gaps and heighten situational awareness amidst a dynamic global event. Such assessments should interpret COVID-19 through an operationally relevant lens, working to understand the pandemic’s implications for the industrial supply chain. If a country or city imposes a shutdown of nonessential businesses, does that include or exclude the manufacturing base? How are global border restrictions delaying transport? Is an organization subject to losing a critical vendor due to a pivot toward COVID-related clinical production? Situation reports should also provide a strategic forecast of how future events might unfold. This might involve trying to anticipate future hot spots based on infection rates or government responses based on political systems. Within the organization, risk managers are best positioned to lead these assessments and determine the appropriate cadence and audience.
Transparency Takes Center Stage
Global industrial enterprises should also increase the frequency and extent of their communications with key suppliers and vendors to a level appropriate for the COVID-19 crisis. Industrial organizations should prioritize communication with tier one suppliers and take a relationship-first approach, accepting that near-term disruptions and setbacks are inevitable but manageable. Relationships are more important than transactions in a crisis, and companies should encourage regular status calls with critical vendors to work through issues in a collaborative way.
Depending on the circumstances, it may be mutually beneficial for an industrial organization and its supplier to have their crisis management teams working in parallel. More robust relationships with suppliers and other key vendors also engender better information sharing. For example, a manufacturer that maintains a strong relationship with a tier-one supplier is more likely to receive substantive updates than a manufacturer that takes a more transactional approach.
Strong communication with suppliers begets improved decision-making. Manufacturers should gather information early and often to keep abreast of the changing environment and proactively move operations or pivot to alternate suppliers in areas with less impact. Some of these strategic pivoting was already underway to mitigate the consequences of the trade war with China. But manufacturers should be circumspect about moving their supply chain out of China entirely and instead aim to distribute their risk across a broader region. Since Wuhan was the initial epicenter for the COVID-19 outbreak and lockdowns were instituted early, business activity in China has slowly begun to normalize while elsewhere countries are still locked down for the foreseeable future. Finally, manufacturers should evaluate opportunities to bring back outsourced processes to foster a more controllable environment.
How to Assess Your Organizational Priorities
Establishing key priorities is perhaps the most essential activity that a global industrial organization can perform during the COVID-19 pandemic. Companies should set priorities from a product perspective—Coca Cola is focusing on its sodas and sports drinks—as well as take clear steps to safeguard human capital and articulate to stakeholders its overarching importance. In business continuity, pandemics are classified as “loss of personnel” events, and these tend to be the most challenging for organizations to manage. An organization’s inability or unwillingness to prioritize the safety and security of its personnel jeopardizes the critical applications, core processes, and key vendor relationships that keep the business afloat.
Global industrial enterprises should seek transparency with suppliers regarding labor conditions and ensure that proper infection control protocol has been implemented. Underscoring the importance of workplace safety during the pandemic is also crucial to managing reputational risk. Industrial organizations should explain to suppliers that, in the COVID-19 era, safety assurances are preconditions to continued business. If a supplier relationship fails to meet reasonable expectations, business leaders should strategize an exit from that partnership.
As pockets of the world begin to attempt a cautious return to normalcy, the industry should be responsive to the need for revamped safety protocol and flexible to a variety of political, social and economic outcomes. The return to business, as usual, will likely arrive in phases and be punctuated by periods of additional closures, necessitating organizations to plan inventories, orders and deliveries accordingly. With the COVID-19 pandemic now a widespread global economic crisis, manufacturers may witness an uptick in labor protests and generalized social unrest. Risk managers within industrial organizations should already be contemplating the myriad political risks that are emerging as a result of the pandemic. Prominent risks to keep in mind include changing regulatory environments, evolving travel restrictions, governments adapting their industries to accommodate COVID-19 related logistics and the stability of local political dynamics.
Industrial organizations with global footprints can build resilience for the future while navigating the current COVID-19 landscape. Mature organizations with pre-existing pandemic response plans are learning in real-time the extent to which their plans are actionable and well-conceived. Less mature entities should be taking this opportunity to aggressively document lessons learned and structure the foundation of a pandemic response program, both to effectively manage second and third waves of COVID-19 as well as future pandemics.
Manufacturers should take note of the response efforts of their suppliers and prioritize relationships with those that are proving resilient and conscious of labor conditions. Global industry has entered a new reality that will be governed by the ebb and flow of COVID-19 infections for the foreseeable future. Navigating these vicissitudes will prove an exercise of endurance, but those organizations that proactively build supply chain resilience amidst this crisis will be positioned to manage other perils well in the future.
About the Author: Brendan North serves as an associate with The Chertoff Group’s strategic advisory services practice area. Prior to joining The Chertoff Group, Brendan was a consultant in Control Risks’ crisis and security consulting practice, where he primarily focused on crisis management and business resilience. While at Control Risks, Brendan also served as a senior embedded consultant on the global security team of a major ride-hailing company. On the global security team, Brendan led enterprise-wide crisis communications in the aftermath of a multi-casualty vehicle-based attack in a major metropolitan area and regularly worked with global security leadership on managing incident response, travel security and monitoring regional security dynamics.
Brendan has also authored editorials on security-related topics that have appeared in U.S. News & World Report, The Hill and Asia Times.