It is difficult to find references to events as destructive to the economy as the one that we are experiencing right now. Only the "triple disaster" — earthquake, tsunami and meltdown — suffered by Japan in 2011 comes close in recent times. The economic impact of the triple disaster was very severe with an estimated cost of $350 billion, or around 6% of Japan's GDP at the time. All indications suggest that the economic impact of COVID-19 will be far greater. For example, the reported palliative economic measures already committed by the Chancellor of the Exchequer to combat COVID-19 account for around 15% of the UK's GDP.
One of the key ingredients for the better-than-expected recovery of Japan's economy was the ability to restore supplies quickly by setting up alternative supply chains in the south of Japan and abroad. This was possible thanks to the fact that the disaster struck in a large but localised area. Our ability to set up alternative supply chains post COVID-19 will be far more limited since the pandemic has disrupted supply chains at global scale. We will have to find our alternative ways for supplying our projects.
We have however one key advantage over the Japanese disaster; and this is that COVID-19 is striking us in slow motion. It is giving us an opportunity to react and plan how we will continue or re-start our projects by navigating the impact of the restrictions on our supply chains. Those projects that proactively put contingency plans or work on scenario planning are most likely to succeed.
The Case for Acting Now
Contingency or scenario planning for ensuring the operation or re-starting of supply chains begins now. The end date for the lockdowns and quarantines may be unknown, and it is even less clear if there will be any remaining restrictions. However, the complexity of operating under these conditions or remobilising an entire supply chain from almost standstill cannot be underestimated. It is now that we have to plan and strategise how we can work in an efficient and effective manner.
Reports from China, where the restrictions are being lifted, have begun to emerge and they give us some idea of the issues that we may face. It is clear that this is an unprecedented situation. The situation appears to vary from industry to industry and even region to region. What we can say for certain is that some of the issues will originate from the lower tiers of the supply chain, and it will require a holistic view of the entire supply management to ensure an orderly and effective operation.
Key Challenges Hindering Supply Chain Recovery
If we were to summarise the issues that have been reported as hindering the supply chain's return to full productivity, these would include:
- Supply chain liquidity and cashflow. The impact that lockdowns and quarantines have had on companies' finances cannot be underestimated. Although some governments have been prompt to provide financial support, there is no doubt that most companies' finances will be severely impacted. This is not only a problem for contractors but also for lower-tier suppliers and in particular for small and medium enterprises (SMEs). A pragmatic approach may be needed to avoid starving the supply chain of cash, and consideration may be given to creating mechanisms that allow cash to flow down rapidly.
- Labour and the impact of potential remaining restrictions. It is unclear yet under which circumstances lockdowns and quarantines will be lifted. Most reports indicate that restrictions may be lifted gradually. The impact on projects will have to be carefully assessed, developing contingency plans to work around restrictions. Depending on the status of the fight against the disease, it is conceivable that there may be absenteeism and some level of social distancing at work. Our engagement with the supply chain may need to follow modified methods of work, which will have to be carefully planned in advance to minimise additional costs, delays and any impact on productivity.
- Availability of equipment and material. Global supply chains have been severely disrupted and, in spite of best efforts, it is likely to take some time to recover. Global production will be subject to the timing of restrictions being lifted in each country. A spike in demand as all industries mobilise at once is likely to add to the problem. Understanding and planning in advance for the availability of equipment and materials — and their impact on the construction schedule — will be a key consideration in any scenario planning. It may be that additional workfronts are required to maintain progress, or alternative supplies or substitutes may need to be found.
- Financial viability of projects. Sadly, most analysts believe that the economic outlook will worsen following this pandemic. The impact and severity will depend on a project-by-project basis. Some revised business cases may lead to changes on projects to ensure they remain financially viable. This potential scenario will have to be tested to understand the commercial implications with the supply chain.
- Disputes. Site closures forced by lockdowns and quarantines were unprecedented, and both contractors and clients are trying to understand who is responsible for bearing the associated costs. Discussions on the responsibility and quantum of those costs are likely to ripple for quite some time. Any contingency and scenario planning must take into account how contractors are likely to react under the circumstances.
Collaboration Is the Only Path Forward
As time passes by, we will have greater clarity on the extent of the issues and challenges that we face. One fact is clear: we will only be able to mitigate or prepare for the impact of COVID-19 if we work together with our supply chain. It is a time for transparency and to identify issues and address them collectively.
Contractors and suppliers alike need to help clients deliver projects, and they need to be encouraged to share problems and potential solutions. The key to navigating this disruption lies not in isolating the problem to individual firms, but in treating the supply chain as the interconnected system it has always been — one that succeeds or fails together.
