Mitigating the ongoing risk of supply chain disruption during a pandemic

Covid-19 has placed extraordinary pressure on international trade and supply chains: for example, suppliers and ports have shut or run at much-reduced capacity at immediate notice, with just one infection having the potential to close factories of usually reliable producers; shipping has become highly unpredictable due to increased incidence of blank sailings; queues at border crossings have stretched for dozens of kilometres as a result of disagreements over virus testing; the issuance and delivery of documents has become more challenging with authorities closed and air travel reduced; and there is an increasing reluctance to extend credit terms at a time when it is most needed.

While in some countries constraints are being eased gradually, the potential for second outbreaks and accompanying restrictive measures means sudden disruption to supply chains remains highly likely; companies will have to contend with what has become the new normal in international and local trade, and need to prepare accordingly.

With this in mind, several organisations are stressing the importance of introducing supply chain resilience measures: for example the need for continuous assessment, increased digitisation, creating transparency, and optimising distribution capacity. Here we go a step beyond these more thematic suggestions, sharing the most effective practical measures that we have encountered in recent weeks which buyers could take to help mitigate the ongoing supply chain risk immediately.

1. Increase the number of approved suppliers. Interrupted supply of a key input can undermine an entire business. Now is the moment to identify alternative origins and to undertake supplier or quality approval procedures, especially if these take time.

2. Engage suppliers or partners with a presence throughout the physical supply chain. Challenges will undoubtedly arise once goods have left the producer, with restrictions on travel and communication making it harder to resolve these remotely; partner with those who have the necessary presence, networks and willingness to overcome these bottlenecks quickly. 

3. Work with supply chain partners who understand lesser-known international trade protocols. There are unfamiliar steps that can be taken to maintain trade flows – as an example, we recently went through the British Chamber of Commerce to secure Certificates of Origin when an issuing office remained closed – so it is advisable to partner with those who understand and can act on these.

4. Increase communication on forecast demand. With demand so volatile and supply chain planning more important than ever, giving suppliers greater insight into requirements will allow supply chains to be adjusted to avoid unnecessary costs. Most suppliers are more willing to be flexible given the current environment, but they need the correct information in good time.

5. Build local stock to ensure production continuity. With a significant chance of supply chain disruption, higher inventory will allow for production and sales to continue; this will also help to address uncertainties in demand. Engage local warehouses immediately since space is already at a premium.

6. Explore alternative methods of securing credit, such as collateralised warehousing. Suppliers are reducing credit terms even though it is needed more than ever given uncertain demand and the need for increased stocks. However, there are still reliable and affordable options; one of the most effective we have encountered is where suppliers are willing to extend financing if stock is held in local warehousing. In some instances supply chain partners or intermediaries can face suppliers in place of the end consumer, so presenting a lower risk to the supplier and therefore facilitating longer payment terms.

7. Manage price risk. With supply origins at a heightened risk of non-performance, there is an increased likelihood of significant price fluctuation. Strategies need to be agreed upon immediately both to manage this price risk and take advantage of opportunities through short- and long-term hedging. Working with supply chain partners who can embed hedges within physical contracts gives buyers access to derivative markets – within dairy: EEX, CME and NZX – without the need for derivative accounts, margin finance, and the associated costs and complexities of dealing with these.

8. Address uncertainty over container availability by bringing shipments forward to Q3 and configuring local logistics for swift container movement. Unpredictable and reduced demand has resulted in a growing global container stock imbalance and increased incidences of blank sailings. This is likely to peak with higher seasonal demand at the end of the year, meaning that it would be advisable to bring consignments forward to Q3. Furthermore, with fewer containers available, some shipping lines are offering significantly reduced free time; buyers should partner with those who can facilitate faster clearance and internal container movement in order to access all required shipping lines.

Written by Archie Matheson, Head of Consulting, East Africa at Czarnikow.