When Covid-19 hit us at the start of 2020, few foresaw the pandemic holding us in a captive limbo till now. Global supply chains have been impacted to varying degrees, with medical and food supplies being two notable casualties. What risk management lessons can we learn from our experience?
In order to manage supply chain risks, we need to first assess what we already know and understand what the gaps are in our knowledge. Gaps are akin to chinks in our armour which, if left unmended, can expose our vulnerabilities.
For example, most of us know what goods our suppliers provide and where they are located but few are likely to know what exposure our suppliers have to floods or earthquakes.
This is the first type of knowledge gap – something that we know we do not know. There is a good chance that we can plug this gap by building knowledge, turning it from a ‘known unknown’ to a ‘known known’.
The second type of knowledge gap is more challenging. While building knowledge is viable for what we know exists but have yet to establish, it is not so straightforward for unknown risks.
This is an ‘unknown unknown’ – we do not know that we do not know – the only way for us to manage an unknown unknown is to build resilience into our supply chain.
Many of us will recall the headline-grabbing news on toilet paper running out across supermarkets in some countries, as panicked crowds rushed to stock up on what they perceived to be essentials in anticipation of shortages.
While amusing to some, the situation offers lessons on mitigating supply chain vulnerabilities.
Worldwide, 83 million toilet paper rolls are being produced daily. For context, an average person uses about 0.2 rolls per day and 75 percent of the world’s population do not use toilet rolls.
The raw materials used in production are abundant. The production process is highly automated and there is nothing challenging or unique in the manufacturing process or the supply chain. So why did toilet paper run out in some countries?
Firstly, the demand for toilet paper rolls is typically non-seasonal. Manufacturers know that consumption is stable and have optimised their production and supply chain around this fact.
With any increase in demand, manufacturers have the option to ramp up production. In this case, they were reluctant to do so because it takes time and incurs additional cost.
Moreover, knowing that the demand spike would be temporary, doing this would be counterproductive. As such, they decided to place their customers – retailers like our supermarkets – on allocation.
Secondly, distribution costs influence decisions. Toilet paper itself has low-value density: the cost of transporting it from production locations to distribution centres and retailers is high compared to its value.
The pandemic further limited distribution options and increased costs. Hence, many manufacturers were reluctant to ship them over long distances.
Thirdly, irrational behaviour fuelled the sudden spike in demand. People decided to hoard based on a perception that there would be a shortage. Once people have stockpiles, they are unlikely to replenish beyond their actual level of consumption.
All these resulted in a whiplash effect which contributed to the short-term squeeze in supply. Demand-forecasting was thrown out of the window, batch orderings got messed up, prices fluctuated, rationing took place and eventually, we saw the clean-out of supermarket shelves.
There are many references to Covid-19 being a ‘black swan’ but one characteristic of such an event is that it must lie outside the realm of regular expectations, where nothing in the past can convincingly point to its possibility.
Given our experiences with SARS, H1N1 and other outbreaks, Covid-19 was predictable and is therefore really a ‘grey rhino’. The impact on global movement and commerce is probably beyond what most people would have foreseen but nonetheless, we could have been better prepared for it and turned known unknowns into known knowns.
What could the consumers have done, and what can businesses do when faced with similar situations? Consumers could have plugged their knowledge gaps by learning more about the supply and demand of toilet paper.
If they would have known that empty supermarket shelves were a by-product of the sudden spike in demand, rather than a disruption to the supply, there may have been less hoarding – supermarkets just needed more time to replenish their shelves.
In addition to building more in-depth knowledge about our supply chains, it is equally important for us to build resilience into them. Resilience in our supply chains would help our businesses to cope with genuine black swan events – the unknown unknowns.
One could argue that holding excess toilet paper at all times would be a valid response to the threat of a shortage and, of course, in the past many businesses carried significant buffer stocks.
But the relentless focus on lean supply chains and just-in-time production have reduced these stocks over the years, removing the reliance they provided.
Although having buffer stocks is not the only way to build resilience, a lesson we learnt from Covid-19 is that it is worthwhile to consider all options – the key is to find a balance rather than omitting options altogether.
Building knowledge and building resilience are key to managing our supply chain risks. There are myriad sources available to help us cultivate our gardens of knowledge.
Among these are FM Global’s free access to natural hazard maps where data on flood, earthquake and even hail can be found as well as a global index that ranks the resilience of business environments in 130 countries. Such resources are the seeds we need for our gardens.
Finally, let the lessons we learn in 2020 be etched into our memories. Do not flush them away like toilet paper – someday they may be worth their weight in gold.
Article by Jeffrey Toh, Business Risk Consultant, Asia Pacific, FM Global
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