The coronavirus is causing significant supply chain disruptions for many companies across the board. Much of the world’s manufacturing happens in China. Further, Wuhan, the region of China where COVID-19 originated, is a hub of global supply chains. From the automobile industry to pharmaceuticals, everyone is feeling the heat. Even Apple, which was predicted to weather the coronavirus storm, was met with damaging supply chain issues and is now faced with stalled production lines. In fact, 94% of the Fortune 1000 are seeing supply chain disruptions.
But this is old news. Replace the coronavirus with SARS, MERS, or even the bird flu, and you have the same basic story. A specific region (usually in Asia) that typically serves as a manufacturing and supply chain hub sees a mass outbreak of an epidemic virus. The virus inhibits production lines and manufacturing slows to a halt. Then the virus itself and the economic implications it caused join forces to create a global panic. It’s a tale as old as time — you might even call it systemic risk related to supply chain and third parties.
The risk isn’t due to companies’ software or their general readiness. Instead, it’s due to how companies classify the pandemic risk. Despite the precedent for risk of pandemic from Asia, firms claim that this risk is out of their control and, thus, they are not able to mitigate it. But given the history, China is likely to continue to be impacted by these risks, and companies that are not classifying and addressing this risk proactively will be faced with identical issues in five years . . . or even before the next pandemic strikes.
Many of the third-party risks related to COVID-19 are classified in the same way climate change is — as an unpredictable unknown. Natural disasters and severe weather can fuel just as much manufacturing disruption as pandemics. (Though not climate-related, look at the disruptions the 2011 earthquake in Japan caused.) Climate change will create endless obstacles for companies to navigate, yet firms continue to claim that there is no way to mitigate the risk. Currently, we are witnessing the damage created by not accounting for your third-party risks. We knew a new pandemic would come, and much like pandemics, climate change is inevitable. Climate change is happening now and ignorance is no longer an excuse, so what is your firm doing to manage the risk?
(Written with Kate Pesa, senior research associate at Forrester)