A black-swan event is considered an incredibly rare event that has far-reaching consequences and cannot be predicted ahead of time, although many may after the fact claim that it could’ve been. Examples like this are the September 11th terror attacks, 2008 financial crisis, the Fukushima Nuclear Disaster and BREXIT. Having a robust system that can remain intact even through volatile situations is the only way industries can prepare for these types of events.[1]
The current situation that we are all living through has been devastating to most sectors of the economy. It has exposed vulnerabilities in supply chains and a lack of preparedness in many companies. In a 2017 report by GEODIS, they found that only 6% of companies surveyed worldwide had achieved full visibility into their supply chain.[3] So don’t feel bad if you haven’t completed a full supply chain analysis. But there’s no better time than now to take advantage of a lull in business to plan and prepare. Because the next “black-swan” event isn’t an if, but a when.
The problem: The modern supply chain
How did we get here? How did we seemingly run out of toilet paper globally and now have no PPE for hospitals, let alone industrial companies?
These problems come from the modern supply chain, which runs on outsourcing and razor thin margins. Outsourcing is a product of living in a modernized economy, where its GDP comes from services not manufacturing and most manufacturing is done by low cost labour in developing economies. Outsourcing also means that when there’s a political, economic, or environmental problem in another country it impacts the entire supply chain. However, this is the price we pay because at the end of the day it’s just not feasible to give consumers low or affordably priced products without outsourcing at least some of the item’s production elsewhere, if not all of it.
The other aspect of the modern supply chain are the razor thin margins. This means companies have been relying on high volume sales, forecasting and costs cutting measures like keeping a low level of inventory. Most manufacturers and wholesalers only have 15 to 30 days’ worth of stock on hand. So, if all of a sudden when customers’ buying patterns change drastically and are buying up all of the stock available, there will be shortages. And on the other hand, if customers aren’t buying the usual amounts of certain products because demand has dropped, these businesses are at risk if they’ve relied on thin margins and high volume.
So, what can you do? How do you protect your company from black-swan events?
Take action. Use this time to plan. While the best laid plans often go awry, that doesn’t mean you shouldn’t make any. Bring everyone together, because different mandates for different departments can cause conflict, resulting in increased spending. If your purchaser has to buy products at the lowest price, you may be caught off guard when the shop needs the product today and your current supplier can’t fill the order or will charge you extra to get it there on time.
Today, more than ever cost-cutting needs to be smart. You can’t cut costs today without thinking about how it might affect you tomorrow. There are more to products than just the price tag. There’s warranty, deliveries, wait-times, set-up, after-sale support and more. All of these things should be considered to have a long-term vision of cost-cutting.
Lack of visibility into supply chains
You may not have great visibility into your current supply chain, meaning you might not know who your supplier’s suppliers and who your customer’s customers are. But even just taking some time to figure out what products and services are essential for your business operations is beneficial. Find out what can be substituted and what has no alternatives. Take a look at where your products are coming from and see if it’s possible to source them from other countries, if needed. This not only protects you during black-swan events, but also through trade wars and changing trade agreements.
Alternative suppliers and/or buffer stock
You may want to take this time to set up buffer or emergency stock on items that are critical, have long lead-times, difficult to source, no substitutes available, or there’s only one place to get it. For your other items find back-up suppliers that are reliable, and you have a good relationship with them.
Prioritizing price over relationships
Relationships are more important now than ever. While you may have signed a contract for special pricing, there was almost certainly a force majeure clause which might now be activated. Contracts are just pieces of paper and can be hard to enforce, especially when courts are closed or only taking essential cases. At the end of the day relationships are more valid than any contract.
Evaluate your suppliers.
Now is the time to evaluate your suppliers. If you were willing to put up with bad and unreliable service for low prices, are you willing to put up with even worse service now? Do your vendors view your relationship as a partnership, or are you just another faceless customer?
Are your vendors willing to take on your problems and help you out? Or are their problems now your problems and they can’t help you? Now might be the time to work closer with some vendors who have really stepped up, and distance yourself from those who have really dropped the ball.
Take advantage of economic downturn – Working Capital and Liquidity
During the 2008 recession McDonalds went on a buying spree. They had enough free capital to leverage the economic downturn to their advantage. While you may not be in a position to go on a spending spree, it is important to keep your cash flow healthy so that when things start to pick up again, you’re in a stable position.
To free up working capital, you want to reduce your operating expenses and grow revenue without increasing selling costs. One way to do that is by leasing equipment that help increase productivity or reduce costs. The savings that are generated can be used to reinvested into improving your business.
What we can do to help – Industry specific advice:
• You are potentially at risk if your welding procedure specifications (W.P.S.) are brand specific rather than product specific. If you require specifically “ESAB 7018” electrode and ESAB products can no longer be shipped to Canada, you have painted yourself into a corner.
• Canada doesn’t make any welding products. They are all shipped from USA, Mexico, China or Europe. So, understanding where your products are being made can help protect yourself.
•If you are looking to buy new products, such as welding machines, it’s important to realize that the Canadian Dollar has been all over the place and prices are likely to change. You may want to ask for a quote in US dollars, leasing options or consider buying used equipment.
•Find yourself a good welding supplier:
• If you’re looking for a specific product and they don’t carry it, they should be the ones on the phone calling around to find that item for you.
• The industry knowledge that a good welding supplier has will save you time, money and headaches. They understand the market, a lot of the global supply chain for most products and can answer tough questions.
Improve foresight
“The Institute for Supply Management, which conducts monthly economic surveys, found that nearly 75 percent of the companies it contacted in late February and early March reported some kind of supply-chain disruption due to the coronavirus. And 44 percent of the companies didn’t have a plan to deal with this kind of disruption. “That is a little surprising in this day and age,” ISM’s CEO, Tom Derry, said in an interview.” [4]
When this crisis ends, there will be two responses from businesses. The first will be to assume that this was a one-off event, hope something like this will never happen again and get back to business as usual. These companies are taking a highly risky gamble. The second response will be to heed the lessons from this crisis and to make investments in planning, mapping out their supply chain and re-evaluate their suppliers. These companies will be the winners in the long-term.
References
[1]https://www.investopedia.com/terms/b/blackswan.asp
[2]https://d1yhils6iwh5l5.cloudfront.net/charts/resized/66803/original/02.26.2020_black_swan_cartoon.png
[3]https://www.supplychaindive.com/news/coronavirus-preparing-supply-chains-next-black-swan-event/576004/
[4]https://www.theatlantic.com/ideas/archive/2020/03/supply-chains-and-coronavirus/608329/
