Reckoning with supply-chain disruptions from COVID-19

COVID-19 is taking a toll on supply chains—from suppliers to end consumers. Survival depends on knowing how to navigate disruptions.

In recent months, the pandemic has severed supply chains, affecting innumerable companies, industries, and goods. Medical devices, which are critical for combating the coronavirus and protecting the lives and livelihoods of workers, have been caught up in this interruption.

In this podcast, McKinsey partners Knut Alicke and Ed Barriball discuss the status of global supply chains and how various regions are faring. On the local level, companies that hope to weather the storm can take measures to increase transparency and finding alternative suppliers.

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Those experiencing a surge in demand can set up a nerve center, whose cross-functional team might take the following actions:

  • Manage decision making on a day-to-day basis
  • Make sure you’re manufacturing products that are in demand—and that they reach customers
  • Update demand forecasts
  • Stand up a control tower to enable end-to-end visibility

By contrast, companies enduring a drop in demand will need to preserve cash, generate liquidity, and keep logistics capacity open.

For more details, please listen to the podcast or read the full transcript below. To learn more about managing supply chains amid COVID-19, please read “Supply-chain recovery in coronavirus times—plan for now and the future.”

Podcast transcript

Amanda Schmitt: Hello, and welcome. You are listening to a podcast by McKinsey & Company focused on COVID-19 response. My name is Amanda Schmitt, and I’m the global risk learning manager at McKinsey & Company. Today, I’ll be speaking with Knut Alicke, a partner in McKinsey’s Stuttgart office, and Ed Barriball, a partner in McKinsey’s Washington, DC, office. Ed and Knut are coleading the firm’s efforts on supply-chain disruptions caused by COVID-19. Today, they will talk to us about strategies to cope with those disruptions. First question for our team: Knut, what kind of supply-chain disruptions are you seeing at clients, and how is this impacting business?

Knut Alicke: Thanks, Amanda. So we see a lot of disruptions. If you just think about our supply-chain structure, then you have your own sites, you have your own manufacturing sites, you have a logistics system that connects all the sites. You have suppliers, and you have customers. And talking to our clients, we basically see disruptions all along the supply chain. It starts with the demand that is, for some sectors, significantly going down. For other sectors, it’s increasing—all kinds of medical devices, all stuff that is required to fight the crisis, is going up.

The plants face a disruption because there might be a local shutdown required. So, kind of, people cannot go to the plant—they cannot work. The logistics system is impacted, as also here, we need to have workforce available. And then we have, also, the suppliers that are affected because they might also need to shut down. So basically, the disruption kind of starts at the supplier and then goes all the way to our plants and to the final customer.

How is this impacting the business is we are seeing a significant reduction in demand. We still want to keep our people, want to keep our factories. So it will have a big impact on our EBIT.

Amanda Schmidt: The level of disruptions and shutdowns seems really daunting. Ed, what would you say clients can possibly do now in the midst of the crisis to help survive?

Ed Barriball: That’s a great question. The first couple of things that you really need to do are get a nerve center set up (if you don’t already have one) that can bring a cross-functional team together and be able to manage, on a day-to-day basis, the decisions that you need to take as a business to keep getting products to market. Make sure you’re producing the stuff that’s in demand, updating demand forecasts, et cetera.

Also, we’d recommend that clients stand up a control tower that will enable them to have end-to-end visibility into things like, “Where do we have our inventory?” and “How much inventory do we have?,” such that you have a real-time picture of your information and informing the decisions that nerve center is making. So any client—a surge in demand, a cut in demand—those are the first steps you should be taking.

Obviously, once you get beyond those initial, basic steps, the actions might be a bit more tailored. So, for those who are experiencing real drops in demand or disruptions in the supply chain, thinking through, “How do we preserve cash?,” “What sort of levers do we have to generate liquidity?” is important. For those who are experiencing a surge in demand, they might actually be out looking for “Who are additional suppliers that we can go to help us meet that demand?” and “How can we keep logistics capacity open?” So how do we keep logistics capacity booked for the products that we do need to get to market?

Clients in different situations are going to face different challenges. I think, as you start getting further on the crisis, starting to think about “How do we revise our demand and supply forecasts as we ramp back up?” is something that, as you get toward recovery, you should think about. And we would say start thinking about that now, even in the midst of the crisis, because it’ll probably come sooner than you think. But those are some of the things that I think, with the scale of disruption, that clients should be doing now.

Amanda Schmitt: For clients with global supply chains, are there certain regions or aspects of the supply chain that they should prioritize to move towards recovery? Knut, do you want to start us off?

Knut Alicke: Sure, happy to do so. So global supply chains are in nature global, right? And that’s why we see that everything is kind of linked. So it’s not that we start in one region. We always need to have the full transparency. But there’s clearly local differences, and there’s local requirements that we need to take into account.

So let me start with Europe. In Europe, we have a lot of the countries on partial shutdown or on shutdown. There is border control now set up again. So what happens is basically that there is a traffic jam at the border. There’s apps where you can monitor this. So we need to understand this and then we need to react fast. We need to put this into our nerve center to be able to say, “When will it hit us, and can we switch to other sites?” Same for the recovery, right? So we need to understand when the plants will be open again. And with this, we can then start to produce more.

If you think about Asia, China is now recovering. So when people go back to the plants, there’s some strict measures in place in terms of temperature control, in terms of checking the employees, in terms of how they need to—how they are able and allowed to interact. How you do a virtual shift head over, for example. In Asia, there’s also countries which are not as much impacted because they have a strong response, like Taiwan, and Singapore, and South Korea. But other countries, like Malaysia, for example, which is on a partial shutdown.

Then, especially, India. In India—every company that has a supplier in India should now clearly look into how long it takes to get out of India, because there’s at the borders—currently, they have about 5 percent of the capacity doing customs clearance and checking stuff out of the country. So this is something that we need to take into account. So it is specific per region and per country. Ed, do you want to give us the US perspective?

Ed Barriball: Absolutely. So I think, Knut, a lot of the things that you said are relevant in the US, too, especially when it comes to Europe. Consumer demand is way down. There are not strict border restrictions between states, but there are, I think, frictions starting to come in, and even movement of some material between states. And generally, with the stay-at-home orders, I think logistics around the United States is going to get more and more difficult over the coming weeks. So for clients that are still trying to get material to market, figuring out how to do that, the situation in the US will be important.

I think the one thing that has been particularly surprising for US companies over the past few weeks and months is everyone, I think, understood that they may not have full transparency in their supply chain. But this crisis has really illustrated how dangerous that lack of knowledge can be. And I don’t think that companies fully understood the risk that they had taken on over the past two or three decades as they globalized their supply chains. And I think the thing that I would think about now as supply chains move towards recovery is, “How do we step back?” and one, really understand where we’re exposed. This is going to be an ongoing crisis.

Some of the press coming out of China already indicates that as Wuhan and Huawei try to open up, they’re shutting some things back down to prevent the risk of reinfection. So this isn’t something that’s going to be one and done. How do we, as we start to recover, think about getting much better transparency into our supply chain, having much better understanding from the US perspective of the type of value chain we’ve created over the past two or three decades?

And stay agile over the coming months and thinking about, “How do we find alternative sources of supply?” and “Is this the time to actually start rethinking how we structure our supply chain as a restart?” Now might actually be the time to do that. So from the US perspective, that’s where I think a lot of clients need to start thinking over the coming weeks and months.

Amanda Schmitt: Ed, to your point about looking forward, what will change in the future? How can clients use this as an opportunity to reimagine the business?

Ed Barriball: That’s a great question. And I think I’d come back to the footprint point that I was talking about a moment ago and supply-chain transparency. So over the past couple of decades, the push has really been for supply-chain efficiency for almost every sector. “How do we go to low-cost countries?,” “How do we get cost out?,” et cetera. And I think that’s led to a lot of unquantified liabilities on balance sheets, more or less, of decisions that have been made that maybe generate earnings, growth, year or quarter over quarter. But when you look over the long term, you actually may be threatening your earnings over the long term versus growing them.

And so we’d really recommend that this is an opportunity for clients to rethink their footprint, starting with getting the supply-chain transparency I was talking about a moment ago, and understanding who’s really in your supply chain and what risks might be there. It can use a combination of both traditional working with their suppliers and outside-in analytics to do this.

And then a really structured vulnerability assessment that covers the full range of what creates vulnerability in your supply chain—not just your supply network, but how you design your product, your financial position, your supplier’s natural position, your organization readiness. And combine that with the probability of different shocks to say, “How big of an unquantified liability would I have when I combine my vulnerabilities with these different shocks?,” and use that as a business case to start fixing some of them—either now, in the middle of the crisis, or over the next couple of years as you get more resilient for the next one.

I think this is one of the biggest opportunities to reimagine business away from the idea it’s all about efficiency and supply chains, and more about risk-adjusted efficiency. And how do we fully quantify the cost of what we’ve done and make sure the decisions we’re making aren’t just best decisions today but best decisions over the next decade?

I think there’s a big opportunity on digital, as well, which I know Knut has been thinking about a lot, too.

Knut Alicke: Yes, thanks, Ed. If you think about digital, there’s a lot of discussion going on over the last years. A lot of companies did start to pilot digital tools, lending transparency, scenario analytics, and they moved from monthly S&OPP [sales and operations planning] to weekly SNLP, or tried to move.

And, as Ed said, the transformation by COVID, it’s a disruption. So as a matter of fact, we are now where we are. And we need to kind of push this digital much more. So that our clients that did work on these topics are doing much better in this crisis than clients that are still kind of standing around in terms of Excel sheets. So what we will see in the future is that there will be a boost to digitize your processes in terms of the interim planning, S&OP, IBP [integrated business planning]. All of the order management will be autonomous.

So there’s a lot of opportunities that we will now implement and that is pushed by the crisis. To have transparency is super important, as Ed explained. We need to be prepared. And then there will be, also—the appetite for supply-chain risk management will be back. We will see that companies will implement these risk functions, and they will equip these risk functions with a new digital tool. There’s a couple of interesting tools out there to make sure that we have the right information in place and can also react.

And we will see that scenario planning or digital twin will increase big time to understand, “What happens if?” So if we expect another black swan, we need to be prepared to do scenario analysis. And then react early, and not as it’s done often today: too late.