How to Create Contingency Plans for Supply Chain Disruptions

While the Coronavirus outbreak has been unexpected in every way, its impact on our global supply chain and local distributors is unprecedented. If your company, or its key suppliers, carries limited raw material inventory and relies heavily on Asian sources of supply, you are at high risk of disruption, according to several new economic analyses.

Risk factors, including the comparison of raw material inventory and size to predict overall risk, contribute to the industries that will be most affected. Those industries that landed in the highest risk category include tools & hardware, electronics & appliances, auto parts OEM, building products, diversified chemical, and industrial specialties.

While other industries will be affected, the telecom, automobile, computer peripherals, and industrial conglomerates have less inventory in their supply chain, the firms in these industries typically have the scale and resources to reduce supply chain risks.

Past supply chain disruptions

Looking at past severe supply chain disruptions to find lessons learned, many analysts have looked to the explosion at Fukashima in 2011. During Fukashima, some companies discovered that they had a single point of failure in their supply chain. One example was Apple, which was using lithium-ion batteries that required polymers from a plant near Fukushima. Another example was the automobile companies, who could not get the oxygen sensors they needed for truck engines. 

The hidden risk of second and third-tier suppliers

Since then, many companies now focus more heavily on assessing and addressing potential supply chain risks, while some companies have not looked beyond their first-tier suppliers.

Doing so is critical, particularly for companies with less reliable reporting capabilities, as there can be several hidden problems in the other tier suppliers that many business owners tend to overlook. Fortunately, tools for supply chain management have improved dramatically in the past several years — many of which we implement at TGG with our small business clients.

Capacity limitations on your supply chain

Capacity is another area of concern. Even if there are multiple suppliers, they might not be able to fill the need. Analyses cite the example of travel bans and shutdowns, which would require companies to expedite shipments. And in other cases, these closures can lead to supply shortages.

The best way to protect your business from present and future supply chain disruptions is to know what risks are present and preemptively develop mitigation approaches. You will need detailed financial reporting and cash flow forecasting, which will help streamline processes to create better contingency plans.

 Contact TGG Accounting for further resources and support.

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