Supply chain management and resilience

Rowena Morris (RM): Welcome to the latest episode of our COVID-19 Business in Focus podcast, where we explore the business impacts of coronavirus. I’m Rowena Morris, a director at PwC. I help clients prepare and respond to crisis situations, and I’m your host for this series. 

The spread of coronavirus is being felt globally, and it’s impacted many regions that are at the heart of global supply chains. In this episode, we’ll discuss the difficulties businesses are facing in their supply chains at the moment, and we’ll have a look at the challenges that might lie ahead. We’ll also outline some practical ways for you to build resilience in your supply chain, both now and in the future.

I’m delighted to be joined today by my colleague Mark Anderson, a forensics partner at PwC, and Penny Flint, a director in our risk management business, who are working with clients to build their supply chain resilience.

Mark Anderson (MA): Hi Rowena.

Penny Flint (PF): Hi there.

RM: Thanks for joining our virtual studio today both. So first of all, what challenges are businesses experiencing with their supply chains as a result of coronavirus?

MA: So Rowena, I think you’re right when you say that clients are experiencing different challenges, and there are essentially three groups of clients at the moment. There are those who are experiencing extreme demand, so they are facing some of the highest sales growth ever. So you’ve got food retailers, some of the online businesses, some healthcare companies and some financial services companies. And they’re facing issues around coping with that demand, often with staff working from home, so having to rapidly onboard suppliers, distributors, and deal with risks around cybersecurity and challenges around logistics.

Then you’ve got a group in the middle who are, I call the ‘pause and restart’ group, so there’s a lot of manufacturers who have mothballed sites, and they are looking to have better visibility around their financial and operational risks in their supply chain, having to do things like switch sourcing and work on resource planning around the restart of operations.

And then there’s the last group, which is the extreme drop-off in customer demand group, where I think they’re facing some longer-term structural problems in supply chains, so oil and gas has got very low oil price at the moment and also facing challenges around the energy transformation, got the aerospace sector whose customers, airlines in the commercial space, are obviously facing a massive drop-off in customer demand. So I think there, they’re facing potentially bigger interventions in their supply chains.

RM: So clearly a diverse set of challenges there, so Penny, within each group, how should businesses navigate those challenges and strengthen their supply chain as we emerge from COVID lockdown? And also I think it would be really helpful if you had any examples of organisations that are doing this well?

PF: Yeah, sure, I mean I think across all the groups but particularly the extreme demand group, where we’re seeing them performing well is where those organisations spent time previous COVID-19 mapping out their supply chain and identifying their inventory of critical suppliers, you know, they’ve emerged better prepared. Just to give you an example, when India went into lockdown, there were many firms scrambling around trying to understand how they would be impacted and what operations they had in India, and for the demand group in particular, it can make a huge difference just a matter of hours, in terms of responding to it, if you know how you’re being impacted because you can react to that and you can put mechanisms in place to support. 

Again we’ve seen a difference between those companies who responded well, who have invested in digitisation of contracts and can quickly see the right clauses with regards to step-in rights, and sub-optimal performance, they’re able to make data-led decisions and understand their risk exposure across those third parties. We just recently, just at the end of April, digitised the contracts of an insurer, and took contracts that were paper-based, they sat across four systems, and they had absolutely no ability to interrogate those contracts, so we supported them in that process, because otherwise it would have taken them weeks if not months to understand the position where they were with third parties. 

I mean, operational resilience for this group is just so crucial. If you’re handling demand and you’ve also got weakening controls, that’s going to make you come a cropper. I mean to give you an example, we’ve seen many of the financial services firms trying to keep their third-party contact centres operating. Most of these contact centres are not set up for remote working, and they’ve experienced significant demand. Chatting to one bank, it said through their third-party contact centre they’ve received an additional 100,000 calls from customers looking to take mortgage and credit card repayments, and if you think of your responsibilities, you own that responsibility even though you’ve outsourced it through to a third party, and making sure that third parties are still doing the right things by your customers, despite that increase in demand, so making sure they’re treating customers fairly, identifying vulnerable customers, if, you know, to continue with that example of a contact centre, if they are doing bring-your-own with regard to devices, how you make sure that security controls are still being adhered to. What I’d also highlight is that we’ve seen rapid onboarding of new third parties to meet with that demand for that group, and ensuring that you understand if you’ve had to suspend financial or security controls that you would normally check, making sure that you’re working with a third party that is financially viable, making sure that you’re working with a third party that has got robust security controls in place. If you’ve rapidly onboarded them you may not have had time to work through that, so really understanding those controls which you risk accepting essentially ‘now I don’t have time to understand it’ but you retrospectively go back and do it. And that’s important for payments as well, and financial controls around payments. We’ve seen many incidences of firms doing advance payments through to third parties and just understanding what you’ve done during that period is really important. 

I think the ‘pause and restart’ group is an interesting group. They haven’t had the same pressure that the extreme demand group of trying to keep the lights on whilst dealing with a high level of demand, albeit they’ve had their own challenges with regard to the financial effect of this. However that group’s going to have to start thinking about the forward planning and what happens when the demand increases. To give you an example, chatting to a motor insurance supplier at the end of April, they’re expecting an additional 20 percent worth of motor insurance claims as we all head back in to our vehicles, and are hugely reliant on their supply chain to deliver against those claims, so how are they having those conversations now, and working with those garages to make sure they’ve got capacity. And Mark, I’m sure you’ve got some thoughts on this group as well.

MA: Thanks Penny. Yeah, I work with a lot of clients who are actually in that pause and restart group, so a lot of manufacturers, and I think it’s fair to say that no one was anticipating this amount of global disruption, so whatever planning and capacity you had in your supply chain, you’re going to be disruptive. I still think, actually, some of the automotive OEMs have done an amazing job in terms of flexibility, so they’ve shut down and mothballed sites globally one by one, and reopened some of them again, and they’ve had to employ some really innovative alternative logistics. So there was a story in March about shipping in parts from China in suitcases, and while I don’t think that’s something that we’d be recommending, I do think really getting a handle on fully mapping lower tiers of supply chain is going to be really helpful. And some clients have managed to do some of that in the last few weeks, so even if they were not that well prepared going into it, the pause, if you like, has given them an ability to do that. 

So I think exploring alternatives and scenario planning around the restart over the next few weeks in May is going to be really key, and understanding what resource, both human resource and product shortages you may have, so some of it is actually around critical individuals, so operators of heavy machinery for example, some of them have been unwell and unable to work, and there simply isn’t a replacement, so really understanding where those pinch points are in your supply chain. 

And similarly around products, so understanding the critical parts that you need for each part of the manufacturing process is really key. I heard a story from one of my engineering contracting clients in late April around the shortage of cable trolleys on construction sites. I have to say I didn’t really understand what a cable trolley was, but essentially it’s a piece of machinery that helps transport heavy goods around site on wires, and the fact that there were not enough of these was going to cause real problems around the logistics on-site. But because the client had early sight of this, they were obviously able to get parts ahead of some of their competitors. 

I think within that mapping, the overseas dependency restrictions and restrictions on overseas entities is really key, so if you’ve got suppliers who are in different jurisdictions, clearly restrictions are coming off at different times, and therefore understanding how can you source products, and what parts of your supply chain are going to come online earlier, or could you help come online earlier. There was a great example of a healthcare manufacturer, a healthcare products manufacturer, that I heard was actually lacking packaging, so in some parts of Europe, whilst healthcare was deemed to be an essential business, packaging was not, and they worked with one of their suppliers to lobby the Italian government to get the packaging entity determined as a critical supplier and therefore it could start its operations early to get the packaging that they needed to get the products to market. 

I think there’s also some really interesting technology in the market now, which uses data and AI to map and assess both financial and operational risk indicators in a supply chain, so we’ve been working with some energy clients and some E&C clients around using that technology, and better data, and different indicators of data to get a real understanding of financial and operational risk deeper into the supply chain at the moment. And because a lot of data was out of date, when we went down into lockdown in March, some of that is actually data from things like media and social media, as well as clearly some of the indicators around balance sheets and liquidity that they would have used previously.

And I think lastly, communication’s really really important in the current environment. Working with suppliers – the old mantra ‘we are in this together’ – I think that is true, most of our clients are really engaging a supportive environment. For the extreme drop off in demand clients, it’s clearly a bit more difficult and I think some of them are facing some harder decisions around long-term viability of suppliers. So they’re looking at what direct interventions can they take, Penny talked about maybe that’s giving them advance payments, or actually helping them engage and get finance from government, either in the UK or abroad, or in some cases, maybe accelerated M&A or taking equity stakes, or seeing whether certain suppliers might have the opportunity to merge with each other.

And finally, in some extreme circumstances, there is obviously the possibility of claims. We haven’t seen too many of these yet, but certainly in some areas of aerospace and defence, oil and gas, we’ve seen some entities trying to look to enforce force majeure claims. I think in these situations, it’s really important to understand your contractual position. So we’ve seen some clients look to do a contract digitisation review, to go through all of their contracts and look at what claims are immediately available to them, and clearly you need to be prepared, but at the moment most of the conversations we’ve had with clients have been around supporting supply chain. 

RM: Some really interesting examples there, particularly around the new technology available I think. So looking forward now, Mark, maybe even looking to a post-COVID world, what do you think the long-term impacts will be on supply chain management?

MA: So I think longer-term, I think the key word for me is flexibility. I think greater flexibility in the supply chain will be absolutely crucial. So some of that is around visibility through the tiers, but also decreasing the reliance on single-source or single-geography suppliers and having much greater capacity to absorb shocks. I think over the last decade, it’s all been about just-in-time, and now I think given the level of disruption we’ve seen, I think we’ll be looking at ways to be more flexible in order to be able to absorb some of those shocks. I think also, we’ll see even more collaborative ecosystems with key suppliers, so sharing data, working together around resilience models, and I think the relationships that you build now and strengthen now will be with you for a long time, and I think we’ll see that continue, and then I think you’ve hit the nail on the head there Rowena, better use of technology and data, so really modelling, using analytics and using some of these new technology tools to help you do that, and I’m sure Penny I know has some clients who also are doing some things around technology.

PF: Yeah, and I think you’re spot on with that technology point. As mentioned above, those firms who’ve invested in mapping their supply chains, identifying their third-party inventories and have that mapped out in technology. Many of the firms I work with from a financial services perspective have got thousands if not tens of thousands’ worth of third parties, and moving away from manual spreadsheets and being able to look at that data and make risk-based decisions based on supply chains and third parties, I just think underpinning that by technology is going to become really important and we’ll see an acceleration for that. 

I think also we’re going to see an acceleration for cloud and digital transformation programmes. Most of the firms that I’ve spoken to, they’ve all got some sort of digital or cloud transformation programme, but what’s been clear is those firms have fared better. If they were operating with cloud, that’s really facilitated remote working, and also those that had digital platforms where people could buy their products were able to still keep trading and doing business. We’ve seen a massive move away in the last ten years from contact centres which have been traditionally run by third parties, with a focus of transferring customers on the platforms. The one thing I think it’s worth mentioning is you’re just replacing one third party for another, so if you start working with a tech provider, to take insurance as an example, and they’re designing your digital customer journeys onto that platform, then make sure you’ve really got the effective oversight in place to oversee a technology provider. What we’ve certainly seen recently is there’s been a lack of responsibility over that technology provider in designing those customer pathways to purchase an insurance product and people have been purchasing insurance products that haven’t been suitable for them, and lots of fingers start being pointed around who was responsible for that digital pathway, and the responsibility rests with yourself. Whilst we will see that acceleration of technology and transformation and digital pathways, just bear in mind you’ve really got to think around how you oversee that appropriately so it doesn’t give rise to a risk. 

And then just to echo Mark’s point around diversification, absolutely, I think for anyone who’s listening who’s a financial services firm, you’ll know yourselves that there’s been huge focus in the last year around concentration risk, and really understanding the fact that you’ve got a concentration risk, you can really do the quantification of that risk, many firms are still not sure, to cover a previous point around geographical location, or indeed a concentration risk through to a certain firm. So I think we’ll certainly see people looking to have dual providers, and move away from certain geographical territories, but what I would just urge firms to do is to do their homework before you swap. If you’re swapping to go to a third party because you want to reduce down your exposure to certain geographical country, then make sure you understand where they operate, just because you’re meeting with a relationship manager that happens to be based in London, where are their operations and chain outsourcing, where are their fourth party or fifth party operations? Are they in turn outsourcing some of your services, and you lead back to the same geographical location. The same if you decide to onboard a dual pathway, then to my previous point around overseeing the technology provider effectively, again that’s going to increase your oversight cost and the team members that you need to oversee that dual set of providers, so really think through on that. 

RM: OK, that all makes sense, and some really useful guidance there, thank you. So to wrap up both, what are your top tips for organisations looking to build resilience in their supply chain at this uncertain time, and mark, maybe if I start with you?

MA: Thanks Rowena, I know you challenged us to get this down to three so I’m going to try and do that – I probably have ten but I’ll go for three. I think first of all, look deeper into the supply chain, so the old model of relying on tier one to hold and manage risk is not going to fly in the new normal, so I think that’s about really understanding the critical pinch points and criticality indicators for you around financial and operational risk, and using technology and data to map that. I think the second point is around flexibility, and building capacity and flexibility into your supply chain, and again, I think technology and data can help you do that. We see some clients building things like digital twins and using AI and other tools to help them manage supply chain – I think that will become really important. 

And then last and third point is around communication and building strong relationships with suppliers. That’s going to be absolutely crucial. It’s the ecosystem of the future if you like. But at the same time, I guess the caveat to that is that you need to understand your own contract positions for the next stage, so especially if you’re in the extreme drop-off in demand group, you do need to understand what the clauses in your contract say, and if things do go wrong, what mitigation options you’ve got in place.

PF: Yeah I think those are great points. I think the key one for me is just to reflect on the fact that this isn’t like some natural events such as an earthquake, to give you an example. This will probably come back in waves, so just to just really think about that, it’s not that lockdown will be lifted across the world – the chances are that as we’re seeing in certain territories such as Singapore and potentially Germany now, it will come back in a wave, so it might be that you come out into the bright lights and then very quickly you need to respond and potentially there’s another lockdown. So really think about that, and think about how you are going to respond. You will have learnt so much over the course of the last few weeks and months. Take time, reflect, understand what you’ve learned, understand what went well, what didn’t go so well, and really do the root cause analysis on it and think how you’re going to be prepared for the next time.

The other point I would say, just to really reiterate what Mark said, is about that relationships point, building those good relationships with third parties, creating that culture where it’s transparent, you’ve got flows of communication, you understand their financial position, you understand if they’ve had to weaken their control environment, turn off certain controls to facilitate remote working. We’ve heard some fabulous stories over the course of the last few weeks, one firm actually went and gave a third party 5,000 laptops to facilitate them with the fact that they could keep the lights on, which is a great story, so really work with your third parties and that will really support you with delivering through to your customers.

RM: Brilliant, some really great stories there and lots of practical considerations hopefully for everyone to take away, so thank you very much Penny and Mark for sharing those insights, and of course, thanks to everyone for listening. If you’d like more practical advice, visit our website at pwc.co.uk/covid19. Here you’ll find our key considerations document, which contains some really useful insight to help you protect your supply chain and maintain business continuity. Please do subscribe to keep up to date with all of our latest episodes. So thanks so much, and until next time, please do stay safe and well.

Participants

• Rowena Morris, Director, PwC 
• Mark Anderson, Partner, PwC
• Penny Flint, Director, PwC