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The Impact of Coronavirus on Global Supply Chains: Part 1

The Impact of Coronavirus on Global Supply Chains: Part 1

Spreading around the globe at an exponential rate, the COVID-19 pandemic has transformed the lives of many around the world in a matter of a few months. With no vaccine and little knowledge of the virus, global citizens have been ordered to stay at home in an effort to “flatten the curve.”

The proven practice of quarantining, also known as “social distancing,” is a method that was used as early as the Middle Ages, during the Black Death, in an effort to limit the number of cases over a longer period of time.

As we’ve transitioned to a remote lifestyle, we have seen immediate consequences to the global economy and supply chains. Never before has the world become so aware, informed and concerned regarding the total supply chain. The coronavirus supply chain impact will continue to affect the world far beyond the development of a vaccine or the end of stay-at-home orders, changing how we understand trade, manufacturing, and production as we know it.

High-impact areas of supply chains

By March 11, the World Health Organization (WHO) characterized Coronavirus Disease 2019 (COVID-19) as a global pandemic. As we enter May, increased supply chain visibility means more insight into the effects of coronavirus on global supply chains and the high-impact areas that went undetected as the world was transformed.

Decline in production and trade in China

Many industries rely heavily on China for its finished goods, parts and materials. China became a significant supplier and shipper in the global supply chain. The impact of that dependency became immediately apparent with the advent of the coronavirus. “Exports from China have declined to all regions across the world. This decline has been severe across the globe, with the exception of North America, where trade was already in decline for more than a year due to the ongoing trade disputes between the US and China,” the World Economic Forum reported. With the spread of the virus and the restricted movement of goods, a reduction of imports and exports have elevated supply chain consciousness on a global scale indefinitely.

Production Sites

Concern for the health and safety of employees has led to closures of assembly and manufacturing facilities around the globe. With the exhaustive focus on LEAN principles by industries in the past 20 years, inventory levels for materials and components were driven to a bare minimum to maintain a steady state of ‘normal’ demand variations. With suppliers halting production, company inventories are not able to be replenished. It is now harder for manufacturers to get their hands on severely limited raw materials and components due to closures, and lead times have increased exponentially leaving some materials unobtainable.

Supply lead times

With the closure of manufacturing facilities, longer lead times have become a major issue for companies, causing a decrease in revenue. According to a survey conducted by the Institute for Supply Management, 57 percent of lead times have worsened since the outbreak of coronavirus and the shutdown of factories in China.

Long-term vs. short-term impacts

Impacted areas give insight into supply chain vulnerability, both long and short-term. With a global crisis of this degree, the world will be experiencing its impacts for years to come, as we have in the past with events like the 2008 recession, SARS and 9/11.

 

Short-term impacts

The short-term impacts of coronavirus are easily visible and continue to affect our daily lives more and more as we continue to practice social distancing.

  • Challenges in big tech: Tech giants like Foxconn, Intel, Sony and Apple have relied heavily on Japan and China to manufacture their technology and distribute their goods. In fact, “on February 17, Apple announced it expected its quarterly earnings to be lower than previously expected. The company refers to two challenges, constrained global supply of iPhones and a significant drop in demand in Chinese markets,” writes the Harvard Business Review.
  • Decline in customer demand: Some industries have taken a much harder hit than others, including the aerospace and automotive industries. Due to decreased mobility, the demand for these industries has decreased, forcing entire facilities to shut down and gas prices to drop. The closing of restaurants and commercial and institutional food services have caused farmers to dump milk and plow produce under.
  • Decrease in investment: Due to the rapid decline of the economy and loss of revenues, many large businesses are reducing or even pulling their investments for the year. This goes beyond the needs of big business, as individuals have been spending less in order to survive this tumultuous economic downturn.

Long-term impacts

Coronavirus has transformed our way of thinking about the supply chain. Here are three things to consider if we want to be adequately prepared for future events:

  • Reevaluate inventory kept on-hand: In order to be prepared for the next unexpected disruption, companies will need to reevaluate inventory levels of critical components and raw materials considering more than just profit but also risk due to disruption. Warehouses may need to expand, and sustainable storage solutions may need to be adopted in order to avoid the heavy reliance on global manufacturing.
  • Increase in supply diversification: Over the last few decades, the United States has relied heavily on Chinese-manufactured goods. In order to minimize material shortages in the future, there will need to be more diversification of critical material suppliers; considering geo location, political and trade stability, and costs.
  • Contingency planning: Now more than ever, the importance of flexible supply chains and detailed contingency plans are being reinforced. Businesses will need to place long-term emphasis on preparation and risk management, so high-impact areas of the supply chain can be less vulnerable to catastrophic events to the economy in the future.

What can we learn?

Coronavirus supply chain impacts have awakened the world, changing the lives of individuals and revealing vulnerable areas in the global economy that were often overlooked. There is much to learn from this pandemic and there is hope for recovery, even if it requires long-term changes to “business as usual” practices, relationships and policies

As the world waits patiently for a vaccine or a solution, companies can take micro-actions to help ease the stress of coronavirus. In Part 2 of this article series, we’ll show you how to begin to protect your business from the long-term impacts of coronavirus-like events and ways you can mitigate the consequences of an inflexible supply chain.

Look for “Five Ways to Better Position your Business for Future Supply Chain Disruptions” in the coming weeks.

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