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Risk in Context

COVID-19: The Impact on the Manufacturing Industry

Thursday, 07 May 2020

The new trading environment created by COVID-19 has left many manufacturers with a number of arising risks. The impact of the COVID-19 outbreak on supply chains will affect the manufacturing industry in several ways. Some of the effects might not have been anticipated, and could leave businesses in more risk than anticipated.

Businesses are constantly monitoring the situation as unpredictable developments continue to arise every day. Supply chains are increasingly at risk of disruption and it can be argued that the greatest risks to business continuity lie in the wider chain of key suppliers and customers rather than within the company itself. Yet for the vast majority of organizations, business continuity planning remains a one-firm focused activity.

As a result of outsourcing, globalization and volatility in the trading environment, supply chain networks increase in complexity and so does disruption.

Supply Chain Risks and Business Interruption

The continuing coronavirus outbreak has demonstrated the double-edged sword that global supply chains can represent for manufacturers. Yes, they can enable just-in-time production. But they can also be highly intricate, leaving little room for resilience in the face of critical disruptions such as those caused by COVID-19.

As countries in MENA look to recover from the spread of COVID-19, the quarantines, and travel restrictions, production of goods could be delayed, as supply may be interrupted on multiple occasions before reaching their final destination because of varied closures or restrictions causing delays in manufacturing and relevant distribution.

As the restrictions continue, manufacturers must identify their key vulnerabilities, take steps to keep supply chains up and running, and plan for their recovery. Furthermore, businesses and their suppliers should be flexible and adaptable against any disruptive event. 

Businesses Feeling the Impact

So far, effects have largely been felt by businesses with very lean supply chains, but deeper systemic disruptions may yet emerge. As different regions go through the pandemic lifecycle at different paces, we are witnessing impacts on other major manufacturing and trading centers, including here in the Middle East, Europe, and North America. It is evidenced that global supply chains and the manufacturing industry may feel a prolonged impact.

Protection and Recovery: Take Measures Now

Most manufacturers already know who their critical suppliers are. But don't necessarily have line of site on the full chain of suppliers involved. That means they still need to map and understand a significant but hidden vulnerability in their supply chains — and that it's difficult to predict the impact of shortages and stoppages on their output.

No company operates in isolation, so it's essential to identify continuity risks, any potential bottlenecks, and any single points of failure. By building a simple, four-step action plan, manufacturers can manage the impact of the COVID-19 outbreak or a similar future event. These four steps include:

  • Prevention: Talk to your critical suppliers to ensure they have plans to respond to the constant changes of the outbreak and to understand what these plans include. But take other measures to protect your interests in case those plans aren't effective — identify alternative suppliers you can use as backups and review any contractual liabilities you could face in the event of delays, cancellations, or quality issues.
  • Response - Where possible and as working capital allows, stockpile critical supplies. Continue to communicate with existing suppliers, encouraging openness about their level of disruption. And modify orders and shipment arrangements as needed if demand for your products increases.
  • Recovery - Find new suppliers if necessary to enable greater resilience. Review lessons learned with critical suppliers to understand how things could be improved during the next disruptive event. Explore and invoke any relevant contract clauses that may help limit costs or accelerate your recovery. And determine whether any failures of contract KPIs constitute a breach worthy of compensation.
  • Rebound - Given the complexity of rebooting companies and supply chains at different speeds in different places, the time to begin preparing a rebound strategy is now. Businesses who have the ability to reimagine the operating models and portfolio of offerings will find opportunities. Those that shape and benefit from the future will be the business that can imagine it and implement the right strategies.

By building robust action plans, manufacturers can better build business resilience plans on short notice, prioritize their people, monitor potential pinch points, and implement other measures to stay resilient during this crisis and the next one. A trusted insurance broker and risk adviser can provide businesses with the necessary guidance and insights to be able navigate through the pandemic with the ability to protect their business, plan for recovery, and plan for future growth.

This article is based on an original by Anthony Monaghan, Marsh UK.

Alaaddin Mukhalalaty

Managing Director, Corporate and Sales Practice – Middle East and North Africa