Risk Management – Is the Coronavirus the Latest Black Swan Event?

The Coronavirus puts new emphasis on the evolving complexity of risks that must be balanced in the design and construction industries.  The most unpredictable facet of construction risk management is the effects of unstable just-in-time supply chains.  We are aware that isolated supply chain bottlenecks exist, but this latest disruption may be the next Black Swan¹ event to negatively impact the bottom line.

Just-In-Time Supply Chains Could Be in Trouble

At the time of this writing, several quarantined cruise ships and evacuation flights have become headline news from mainland China and the world does not have an understanding of the coming economic challenges. Speculation is that the overall impact when measured in economic terms, will not only be a lower projected growth rate in China but also across the world.

The supply of materials coming from China has already been impacted by the local Chinese quarantines and lack of workers available to operate in various industries. Manufacturing industries have been impacted by quarantines, and these impacts have not yet been felt due to the planned slowdown of production during the Chinese New Year period, which is just ending. These new manufacturing losses will extend and deepen the resulting effect on the supply of Chinese building materials available in the world market. The flow of the supply chain could potentially reverse, making China an importer rather than an exporter.

Just-In-Time supply chains will see the earliest effects of this current problem, and then as the longer-term effects of the infections continue, both the lack of manufacturing capacity and the logistic delays due to workforce issues will compound the difficulties of returning to a “normal” supply environment.

Act Now to Prevent Just-In-Time Supply Chain Problems

Owners, contractors, and specialty sub-contractors should evaluate their needs for any materials or components sourced from China and expect that the full effects of the current Coronavirus impacts will not arise for a few months and possibly longer. While it is always good practice to utilize diverse sources for materials, globalization has tended to concentrate sources geographically and limit choices to the lowest cost provider.

One way to gauge the effectiveness of potential supply disruptions would be to conduct a premortem. This would be essentially an after-action evaluation conducted prior to the event and projecting the effect of the disruption at a future point in time.

All industrial consumers (contractors and sub-contractors) should review their plans involving materials and components manufactured in China and determine if supply disruptions will affect their critical path during construction. Also, we know from past events that having an alternate supplier may not guarantee needed supplies as shortages force hoarding. If China cannot produce enough for its own domestic needs and becomes an importer, the global marketplace will not be able to compensate, and a cascade of shortages and disruptions will be inevitable. Owners and Contractors should carefully evaluate new commitments and determine if Force Majeure protections are enough to preserve their projects in the world of looming Black Swan events such as the Coronavirus.

¹ Black Swan event is an event that is a rare occurrence but has an outsized impact that is not anticipated.

©2020 MDC Systems^®