Insights

Examining the Supply Chain Impacts of the Coronavirus Epidemic

February 24, 2020

Analysts fear that the new epidemic will impact global growth – concern rooted in Supply Chain disruptions. How do companies cope?

As we’ve discussed before on the Argentus blog, Supply Chain Management tends to make the wider news media only when disruptions open companies up to risk. Consumers only tend to think about Supply Chain Management when empty store shelves, unfilled orders, or distribution problems impact their access to products. Of course, the top Supply Chain professionals spend their days avoiding these problems for organizations, using a sophisticated understanding of global networks and movement of goods to find diverse supplier bases and keep things moving with a minimum of risk. Supply Chain is still often unsung – though that’s changing – but it’s essential to strategic business success.

Every once in a while, disruptions occur that are largely outside anyone’s control. These black swan events leave massive companies scrambling, with only the most agile Supply Chain organizations able to avoid the worst outcomes. In 2020, Supply Chains – and the wider business community – are facing a massive disruption of this kind:

The Coronavirus Epidemic (COVID-19).

Unless you’ve been living under a rock, you’ve heard about the novel coronavirus and the disruptions it’s causing – not to mention the very real human pain, inconvenience, and concern it’s bringing. You’ve probably also heard about China’s attempt to contain the virus, and the impact that factory closures in China are having on the global economy. Given that China represents about a quarter of the world’s manufacturing, it’s at the root of many of the biggest and most sophisticated Supply Chains on the globe.

For that reason, we wanted to write a quick post to offer our perspective on some of the biggest Supply Chain impacts of the crisis, and our predictions for how the best Supply Chain organizations can cope.

A major disruption to the world’s manufacturing hub.

Hubei Province, the origin and epicenter of the coronavirus epidemic, has been called the “Chicago of China.” Located in a region roughly analogous to the American Midwest, it’s a production hub for many global multinationals including IBM, Siemens, Walmart and Honeywell. As the virus has spread over the past two months, it’s begun to impact other major manufacturing regions in the country including the Shanghai region and Shenzhen, a major tech manufacturing hub.

China has responded to the epidemic by issuing unprecedented travel restrictions for citizens to stem the tide. Originally, the Chinese New Year holiday stemmed the disruption. Then, the Chinese government extended the holiday. Now, travel restrictions are biting into the economy’s ability to reboot. According to the New York Times, a staggering 760 million Chinese citizens were under some level of residential lockdown as of February 15th. Numerous factories have shuttered, with companies like Hyundai and Airbus feeling the squeeze. In the past few days, companies including Apple and Daimler have indicated that Supply Chain shortages due to China manufacturing are affecting their earnings outlook.

According to South China Morning Post, a survey in the Shanghai region found that two thirds of factories are back up and running, but 78% were missing enough workers to ramp back up to full production. Things appear to be getting back on track, production-wise, but in fits and starts.

An epidemic striking at the heart of global manufacturing is a stone thrown into the ocean of the global economy, and even as production ramps back up, the ripple effects are sure to be felt downstream.

In the west, they may be just starting.

The Supply Chain Effects, and the solutions:

  • It’s more widespread. The SARS epidemic in 2003 (another coronavirus) had significant disruptions to Chinese manufacturing. But China’s economy has vastly expanded since then, and it’s now much more integral to global economic growth than in 2003. It’s not just textiles and furniture: China is now a leading manufacturer of electrical machinery, automobiles, hardware, and tech, not to mention raw materials like steel. That means that the number of industries feeling Supply Chain disruptions is much broader than before.
  • Diverse supply bases will thrive – narrow ones will feel the pain. Every Supply Chain professional worth their salt knows that maintaining solid diversity in a supplier base is a key to avoiding risk. Companies that rely solely on Chinese manufacturing are more likely to see direct, customer-facing impacts from this crisis. As Supply Chain Management Review noted in their recent writeup, many companies have already shifted production out of China in reaction to the trade war between the U.S. and China, pivoting to countries like Vietnam and Thailand. Companies with either backup suppliers in place – or the agility to quickly source and bring on new ones – will be able to avoid the worst effects. Strong front-line strategic sourcing personnel are key to this effort, both for finished goods and raw materials.
  • The significant downstream risk is compounded if you don’t have supplier transparency. As the Times notes, many manufacturers don’t even have the visibility deep into their Supply Chains to realize the impact this disruption might cause, because crucial parts might have fewer sources in China than companies even realize. Companies might be sourcing components or raw materials three or four rungs up the chain of production. These companies might not even realize exactly who those original sources are within China, and how much risk they’re facing. We – along with many in the industry – have been writing about the importance of Supply Chain transparency for a number of reasons. Now’s the time when that transparency pays off. Having the right individuals who can provide insight deep into your Supply Chain, with close relationships with suppliers, can help understand exactly the scope of the disruption you face, which is the first step to mitigating it.

It’s a huge topic, with multifaceted Supply Chain ramifications, and this is only the tip of the iceberg. But we want to get a conversation going in our network. What are your thoughts? Are you seeing disruptions in your own Supply Chains or those of your organizations, and how are you responding?

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