Rethinking Supply Chains Amid Coronavirus Disruption
Supply chain risk management has been a top-of-mind business issue in executive board rooms for quite some time, but occasionally, a major disruptor brings this issue to the forefront once again.
Most recently, that disruptor has been COVID-19, aka “coronavirus,” which has now affected more than 100,000 people across 23 countries worldwide. The swift spread of the virus from the Wuhan province in China in late 2019 has left markets in flux – evidenced by recent volatility on Wall Street.
Less-than-stellar or even worrisome revenue projections for Q1 have driven much of the coronavirus volatility. Companies are left with an inability to get products/parts/supplies sourced from China to the U.S. market due to mandatory shutdowns and worker restrictions/quarantines in industrial cities and plants across China. One report from Dun & Bradstreet said that 92% of companies with tier one suppliers in the impacted region are based in the U.S.
According to Supply Chain Dive, the COVID-19 outbreak and resulting quarantines have led to a record number of “blank sailings” (i.e., empty container ships), according to data from Alphaliner. Inactive fleet size has swelled to 2.04 million twenty-foot equivalent units (TEU) or 8.8% of global capacity. The decline is greater than the 1.52 million TEUs of canceled capacity during the 2009 financial crisis. That mark was the previous record, which was 11.7% of the total fleet capacity at the time.
This isn't the first time a virus or natural disaster in Asia has disrupted company supply chains – most can recall SARS in 2003, the 2011 Fukushima nuclear disaster and the 2011 Thailand floods. However, most of these outbreaks – and accompanying commercial impact – were limited at the time.
Supply chains are much more complex today than they were two decades ago, or even one.
Today, U.S. companies may theoretically rely on suppliers in multiple countries, but often, even those suppliers are still sourcing some parts for their products from China. As an example, according to the Wall Street Journal, Apple Inc. works with suppliers in 43 countries, all of which receive components from Apple’s contract manufacturers in China.
Pharmaceutical and Consumer Products Supply Chains
The pharmaceutical space has been one of the hardest hit supply chains thus far in the coronavirus scare – an impact that is still projected to worsen. According to Dr. Joel Zinberg, clinical professor of surgery at Mount Sinai Hospital in New York (in a recent City Journal article), COVID-19 is more likely to harm Americans indirectly because the U.S. is increasingly reliant on drugs either directly sourced from China or made from intermediate chemicals called active pharmaceutical ingredients (APIs), or their chemical precursors, manufactured in China.
Dr. Zinberg cited a report that indicated U.S. imports of Chinese pharmaceuticals increased 76% between 2010 and 2018. Medical supplies and equipment supply chains are also being hit hard as imports of these goods from China increased 78% over the same period.
Some consumer and household product companies are also being hit hard. Stanley Black and Decker announced this week that they expect the spring rollout of their tools and other products to be delayed due to impacts of the coronavirus. This will also impact revenue projections for the first and second quarter, as the company relies on Chinese manufacturing for nearly 40% of its supply chain, including both finished goods and parts for goods ultimately assembled in the U.S. and other countries.
Near Term Options
In the near term, these companies will need to look to other countries to fill the gaps. Options in the U.S. are somewhat limited because many of these supplier operations offshored decades ago chasing low cost labor. This means countries such as India, Brazil and Columbia may see near-term benefit from the diversification of supplier networks. But what’s to prevent this type of crisis from happening in one of those countries?
In a recent Wall Street Journal article, Yossi Sheffi, director of the Massachusetts Institute of Technology’s Center for Transportation and Logistics, laid out a checklist for companies to follow in the near term in case of a major coronavirus outbreak, including seeking alternative suppliers for critical parts and setting priorities for customer orders, should capacities be reduced.
“Hoping for the best while preparing for the worst may not seem like a rigorous business approach to the crisis,” Sheffi wrote. “But given our lack of knowledge, it is the most prudent strategy for managing risk.”
Automation Will Open More Options in the Future
Longer term, many companies will have additional options for filling supply chain gaps for the U.S. customer market. Today, many manufacturing processes are changing and evolving with the increase in technology and automation. They are becoming less reliant on "low cost" labor, the primary reason in which most companies offshored to China in the past.
As more processes can be automated, U.S. manufacturers can, and are, considering bringing manufacturing closer to the markets in which they will be consumed.
In addition to avoiding global supply chain risks, there are other benefits to this model, including speed to market for new products, speed to customer for order fulfillment, and ability to react faster to changing consumer preferences.
Additive manufacturing (aka 3D printing) is also rapidly evolving with equipment and types of materials in which products and parts can be customized and made on demand. This method is expected to be utilized heavily in the next few years as it becomes more and more efficient and cost effective. According to a representative from EOS, a producer of systems for additive manufacturing, the first fully automated 3D printing operation is in the design phase and is expected to be fully functional within the next three years.
Time to Rethink Networks
Though manufacturers have focused on minimizing production risks over the last decade, COVID-19 will likely have a long-lasting impact on companies’ global supply chain networks. As a result, it is likely that the U.S. will see an increase in manufacturing investment in the years to come, particularly from companies in the supply chain for products destined for U.S. customers.
In the meantime, global medical and economic officials will look to get ahead of – and put a stop to – coronavirus’ alarming impact, which will allow companies to begin to regulate supply chains and backfill customer orders.
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Michelle Comerford is the industrial and supply chain practice leader of Biggins Lacy Shapiro & Company (BLS & Co.). Biggins Lacy Shapiro & Company is a location economics consulting firm. For more information, visit www.blsstrategies.com or connect with Michelle directly on LinkedIn.
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