As health care agencies and governments scramble to halt the spread of coronavirus, manufacturers in dozens of countries are struggling to handle the pandemic’s growing impact on the global supply chain. Many are dealing with a supply crisis that results from weak points in their sourcing methods that should’ve been addressed years ago.
Just how widespread is this crisis? According to data published by Resilinc, the world’s largest 1,000 companies and their suppliers own factories and warehouses in three of the worst COVID-19 hit areas, namely China, South Korea, and Italy. These industries include a wide range of products and services like heavy machinery, industrial and automotive parts, consumer goods, consumer electronics, semiconductors, health care products, medical devices, and so on.
Why is coronavirus halting global supply chain operations?
Economists are predicting that by mid-March, COVID-19 will force thousands of supply chains around the world to temporarily shut down or curb manufacturing and assembly plants in Europe and the United States. Companies that are most at risk are those that rely solely or greatly on Chinese factories for materials and parts. The production and manufacturing activities in Chinese plants has plummeted in the past few months and is going to remain down in the foreseeable future.
Here’s why the coronavirus pandemic is impacting these companies:
Failing to examine the supply tier
The March 2011 tsunami and earthquake that hit Fukushima, Japan, taught many multinational companies some very painful lessons about the weaknesses hidden in their supply chains. These flaws resulted in billions of dollars of lost revenue and even market cap. Although most companies were able to immediately assess the full extent of the Fukushima incident on their first-tier suppliers, they were completely blindsided by the effects on their second, third, fourth-tier suppliers in the region.
Exactly nine years after the Fukushima incident, these lessons need to be re-learned once again. Companies are scrambling to determine which of their bottom-tier suppliers (those they’re not aware of or directly deal with) are located in China’s affected regions like Wuhan and Hubei.
Lacking multiple sources
Companies that rely on just a single supplier based in any of the coronavirus-hit areas are likely regretting their dependence on a limited source for items. Most supply chain managers are aware of the risks of relying on single-sourcing; however, they maintain this practice anyway. Why? – To either maintain a cost target or to shelter their supply. Usually, they don’t have multiple options to select from and often, those options are based solely in China.
Sometimes, the basis of the present supply-chain crunch lies in the decisions made by the management. For instance, a company may have to source a common ingredient that is vital to its manufacturing from one region or one supplier. These decisions trickle down through all the supply chain tiers and affect companies that aren’t directly sourcing products or materials from China, but whose suppliers are.
Other times it’s not possible to find several sources for certain materials or parts, particularly in cases where the supplier hold intellectual property rights. Sometimes, the volume isn’t enough to require more than one source, and it could be that multiple sources just aren’t available.
What impact is coronavirus having on the global supply chain?
Many companies have started throttling back on plants located outside China. For instance, Fiat Chrysler Automobiles announced on February 14 that it would temporarily halt production at their car factory based in Siberia because of their inability to source parts from China.
Hyundai suspended its production lines from operating plants located in Korea because of disruptions in the parts supply chain due to the coronavirus epidemic in China.
The tech industry hasn’t been spared by this supply chain disruption. Apple Inc. announced on February 17 that due to a significant decline in demand and a constrained supply of iPhones, they were predicting low quarterly earnings.
Another hard-hit industry is bridal gown production. Most wedding gowns are manufactured in China and then sold globally. However, the current closure of most manufacturing facilities has led to a marked supply shortage that will affect the summer wedding season.
Supply lead times
It will take an average of 30 days or more to supply stock. Most of the Chinese manufacturing plants stopped their work on or before January 25. The last shipment arrived in Europe and the United States by February 25. This means you can expect a spike in temporary closures of manufacturing and assembly facilities all over by mid-March.
The impact of the coronavirus can be seen at ports. For instance, at Rotterdam harbour in the Netherlands, the number of Chinese departures has dropped by 20%. Activity at the Le Havre port in France has decreased by 30% within just two months. It is still unclear about the impact coronavirus is having on American ports, but we can assume that the effect is negative.
Companies are facing enormous pressure to cut down on supply chain costs by pursuing strategies like offshoring, lean manufacturing and even outsourcing. These cost-cutting measures are put in place because of problems in the supply chain. However, it will quickly halt manufacturing due to a lack of parts.
The current Coronavirus impact on global chains is far more detrimental than previously assumed. Some would also argue that comparing it to the SARS epidemic is futile because, since 2002, China has gained significant importance in the world economic landscape. In fact, in the past two decades, China has nearly tripled its share in trade with the world. The number of industries relying on China continued to increase; that is until this new coronavirus pandemic struck!
Considering the efforts made by the Chinese government to quarantine nearly half of its population and the negative effect this is having on manufacturing and transportation services in the country, it is safe to conclude that the impact of the coronavirus outbreak on Chinese manufacturing supersedes that of SARS.
Coronavirus is causing a major disruption in global supply chains that are vital for economic growth. The outbreak is forcing companies to focus their attentions on preparedness and responding to risk. Businesses should shorten their supply chain to be closer to customers, increase the visibility of value chains, leverage new technologies, and evaluate different outcomes. Could Coronavirus halt supply chain operations globally? Yes. It will hit with a full force by the end of March with a lasting impact for many months thereafter.
To continue keeping abreast of what’s happening this year, see the Emerging 3PL Trends Shaping Logistics in 2020.