Supply chain resilience versus robustness
As isolation efforts continue around the world, supply chain disturbances are impacted not only by logistics constraints but also people constraints. With no certainty of how long restrictions may be in place, what steps should you be taking to lower supply chain risk on your projects?
Depending on where your project is located and the lockdown requirements in place, the impact on your supply chain will vary and may change significantly over the coming weeks and months. When we talk about supply chain resilience, we mean the ability of the supply chain to bounce back in the event of unexpected events, even smaller ones in the normal business process.
However, just as important to consider is the supply chain robustness, i.e. its ability to be able to continue to function at some level during these periods.
The crash in oil price on top of COVID-19 has placed many firms in such a vulnerable position that a disaster recovery plan may be needed simply so that they can sustain operations.
Areas of risk
Four priority risk areas have been identified for immediate attention. These are:
- Critical raw materials/equipment with limited global availability are affected, leading to a long period of shortage
Have you assessed the critical items you need to continue to operate? How have delivery times been affected? Can you procure materials/equipment locally, potentially at higher cost but saving time versus delayed imports from Asia? How much can alternative suppliers actually provide and to what amount are they reliant on Asia for their raw materials?
It may be possible to regionalise your supply chain, but it will take a while to be fully able to implement for the longer term. Now that China is returning to business, will orders arrive soon? Consider not only international transport ways, but local as well.
For example in the USA, ports in Louisiana are filling up as China containers are now starting to arrive, but either there are no truckers available to deliver them, or the receiving companies are closed and unable to accept them.
Consider also the goods being transported, as initially there will be a massive change in what is imported, so while China is delivering orders of electronics and fashion ordered before the outbreak, there is potentially no market for these now, adding to the congestion.
- Disrupted access to a critical route, service, terminal or distribution point with limited or no alternative
The question here is how fast and how effectively the major shipping lines can implement new routes or change trading patterns and tonnages to get your materials to you. Have you engaged with your shipping suppliers to understand alternative offerings?
The solution may be smaller, more agile freight services evaluated on a regular basis depending on what stage the transhipment ports are functioning at.
- Commercial distress of your suppliers/contractors
Will they survive the unexpected and rapid fall in revenue? Will government support packages be enough to keep your supply chain afloat? Can you afford to lose them in the long run if they disappear completely?
We are all in this together and finding the win-win solution is essential in the short-term.
However, new ways of working are being implemented fast. Now that everyone can work from home productively, do we need so many offices and overheads in our businesses? Without the need for commuting and travel expenses can we all operate more economically?
There will eventually need to be a correction in the supply chain pricing model and companies that can optimise production and costs will benefit.
- Reduced workforce availability due to COVID-19 restrictions
While it is impossible to determine the size and scale of government-enforced lockdowns in the short term, changing shift patterns have already been instigated and we see optimisation of effort with fewer people achieving the same results.
The supply chain will need to invest in automation and increase optimisation to reduce costs. An example would be the mining industry in South Africa (SA), where the unions have fought automation for years, but with a potentially reduced workforce, they will not have much choice.
This could lead to a long-term reduction in SA mining opex costs, which would make their products more competitive again. The challenge in the longer term is what to do with the workforce who need to be reskilled.
Set up your response team
For the oil and gas industry, the global supply chain is complex and highly interconnected. With the commercial distress that contractors and suppliers are currently under, there is a significant risk to continuity of supply.
While owners may have a good handle on their tier one and two suppliers, they may not know who their tier three, four or five suppliers are. Multiple contracts and relationships mean that spend with each supplier could be unknown.
We have been advising our clients to set up response teams to develop and implement mitigations to supply chain risks. There is no 'one size fits all' answer, and the level of pain your project is under will affect the recommendations given.
Key questions we advise you to address are:
- Do you know in detail what services you are buying, who you are buying them from and under what contract?
- Do you know which parts of your supply chain are potentially affected?
- Are you tracking the status of every potentially impacted part of the supply chain?
- Have you calculated the financial and time impact of every critically affected part of your supply chain on your project?
- Can you develop options to change to a different/local supplier?
- Are you prepared for new parts of the supply chain being affected?
- Are robust reporting structures in place throughout the supply chain e.g sub-contractors report to the main contractor who reports to the project manager who reports to the client?
- Are clear and robust communication protocols in place?
- Are agreed supply chain performance monitoring systems in place?
- Are you able to offer better commercial terms to ensure you sustain your critical suppliers?
With the commercial distress that contractors and suppliers are currently under, there is a significant risk to continuity of supply.
Our procurement health check provides a complete view of your current procurement organisation, processes, spend patterns and performance. Over-complicated processes can be detrimental to the effective management of the supply chain.
Using the results of the health check we can provide owners with a set of practical recommendations to maintain an efficient and sustainable supply chain.
Don’t break the chain
Flexibility and consideration for all members of the supply chain are the two core elements of a robust and effective supply chain. In a time of great uncertainty, ensuring a transparent and mutually beneficial supply chain relationship is the only route for success.
- Build strong relationships. The relationships between owner and suppliers/contractors are a key factor in maintaining a strong supply chain. Effective relationships require transparency on both sides and need to create a win-win outcome.
- Communicate clearly about your needs and goals to your suppliers/contractors.
- Be flexible. Chasing the lowest price will not build a robust supply chain; trying to squeeze immediate rate cuts from suppliers will not mitigate the risk of disruption and is more likely to result in the ceasing of their operations.
- Diversify your supply chain. Keep strong relationships with several suppliers to ensure that you can maintain continuity in your supply chain.
- Keep good data/records. Make sure that the numbers from which you draw your forecasts are accurate.
Clearly there are many influences that may look to break a robust supply chain, but by ensuring expectations, deliverables and relationships are understood and trusted by all – the capacity to break the chain is reduced.
Please remember that every project will be different to some extent, and the best advice we can give is to make sure the specifics are well understood. We encourage you to contact us for support in reviewing your project supply chain risks.
Please visit our COVID-19 response page for all of our resources relating to the impact of COVID-19 on the construction sector.