The Great Global Supply Chain Reckoning

April 16, 2020 James Green

Two months ago, I wrote about how the coronavirus was set to cripple the global supply chain. Now here we are; economic activity has been sledgehammered. The layered nature of the COVID-19 crisis is impacting everything from the stock market to the stock levels on our store shelves.

Modern industry relies on ingredients and materials crossing borders. When they can’t, products around the world are endangered. The coronavirus outbreak caused a break in the biggest link in this vast, global supply chain – China.

The Institute for Supply Management, which conducts monthly economic surveys, found that nearly 75% of the U.S. organizations it contacted in late February and early March reported some kind of supply-chain disruption due to the coronavirus. And 44% of the companies didn’t have a plan to deal with this kind of disruption.

In an effort to slow the virus spread, businesses have been forced to close and citizens have isolated at home on an unprecedented scale worldwide. It’s caused a unique economic crisis, the impact of which will be greater on some industries, in particular brick and mortar retail, entertainment, and hospitality. These businesses will have high costs, which they’ll need to keep meeting. So suddenly you have a lot of costs continuing and absolutely no revenues. The worst possible outcome for these businesses.

But even if a business isn’t directly losing out from people staying at home, lockdowns are having a devastating ripple effect exposing several unwanted vulnerabilities to supply chains as we know them today.

COVID-19 is forcing business leaders to reconcile the unknown, making decisions with little qualified data, affecting every area of the supply chain from transport to purchasing levels and job creation.

A beacon of hope from China

V-shaped economic recoveryThe most encouraging news we’ve had so far is coming out of China, which was the first economy to be hit. The latest figures suggest the most hopeful possibility. Experts are holding out hope for a sharp, V-shaped rebound recession that would last only a few quarters before rapid growth brings the economy back to previous levels by the end of the year. 

Now, if China can do that, the hope is that Europe and the U.S. can do so later when the lockdowns are lifted.

But despite the world’s second-largest economy and biggest goods exporter stuttering back to life, the world is facing the possibility of extended supply chain disruptions. We’re not talking about months of disruption – more likely quarters to ramp up operations and catch up on lost output. 

While a bounce in the official purchasing managers’ index from a record low in February was inevitable as workers returned to factories after an extraordinary shutdown, the scale of the rebound – to 52 in March from 35.7 – exceeded most economists’ expectations.

As the bedrock of the global manufacturing supply chain, China represents 30% of global manufacturing, and 51,000 companies globally have tier-one suppliers located in the country. Chinese materials and manufacturing are so pervasive that the average customer has no idea how many of their everyday products contain Chinese components, or how reliant on Chinese components most businesses have become.

According to port call data from maritime analytics and insights specialist Windward, activity levels at Chinese ports has begun to recover from early March. But despite China’s exports showing signs of recovery, demand is faltering across the globe as the COVID-19 outbreak has widened. Even as China relaxes its containment measures, demand is falling elsewhere as the virus spreads. From Singapore to Rotterdam, many ports are seeing sharp falls in activity.

The port of Los Angeles is a harbinger for how the coronavirus slowdown could threaten already weak global trade. Imports were down a little more than 22% year-over-year as of March 10, according to information released by the port. Rotterdam, Europe’s largest port and one of the world’s busiest, saw traffic from China fall 20% at the beginning of March from a year earlier. About 470m tonnes of goods pass through Rotterdam each year. 

Even if the Chinese manufacturing companies were to resume their work at full scale, what we’re going to see is countries and regions receiving a second hit from the drop in trading partners’ supplies. In the interim, because there’s very little demand for finished products, few companies are going to want to resurrect that supply chain instantly until they know that the economy has settled down.

Change is afoot

As China heals from the pandemic, the question is whether organizations are able to ring-fence risks and localize their straining and snapping supply chains.

We’re already seeing businesses looking for alternative suppliers but as the virus has spread, they have become fewer and farther between. This wouldn’t be a problem if businesses operated flexible supply chains. That way they could switch order volumes to alternative suppliers in times of stress. However, very few organizations do this, leaving them unable to identify and connect with alternative suppliers during a crisis.

This is because the way our modern supply chain is built is incredibly fragile. We’ve built a global supply chain that runs on outsourcing, offshoring and thin margins. Such cost-cutting measures mean that when there is a supply-chain disruption, manufacturing will stop quickly because of a lack of parts.

Additionally, most organizations operate at reduced inventory levels. Just-in-time manufacturing may increase efficiency and lower costs, but it does leave supply chains less resilient to sudden shocks and supply shortages. And the coronavirus has exposed just how delicate operating this way can be by poisoning the entire just-in-time system.

Equally important, businesses are often unaware of what’s happening across their supply chain beyond the first tier of vendors – so they’re unable to know where threats exist. This has made it almost impossible to proactively manage a situation like the Coronavirus outbreak. The result: a tangible impact on production. 

Insular but not isolated

Prior to the outbreak, global supply chains were already coming under fire – economically, due to rising Chinese labor costs, Brexit, tariffs, trade wars and advances in robotics and automation, as well as politically, due to real and perceived job losses, especially in mature economies.

COVID-19, however, has been a wake-up call for organizations. And given the scale of financial market losses we’ve experienced since February; the health crisis could be the straw that breaks the camel’s back of economic globalization resulting in the way global supply chains work. Time is ripe to rebalance allocation and to move away from reactive supply chain management to proactive supply chain management.

Organizations are already rethinking and shrinking the multistep, multi-country supply chains that dominate production today. And, post-coronavirus, I foresee organizations likely to be decidedly gun-shy about the just-in-time model and about globally dispersed production.

For now, the threat to supply chains and the vendors within those chains does not look existential, but, as and when we return to some form of business as usual, organizations need to understand what happened. More importantly, they need to understand what was missed, because there will always be another black swan event around the corner. Organizations that are the most resilient are the ones that will be able to withstand the next great unknown.

 


Visit our pandemic information center, which includes reading materials, podcasts, videos and best-practice guidance around managing business continuity, compliance, workforce safety and health, and risk management amid the coronavirus pandemic.
 

About the Author

James Green

James Green is Director, Risk Advisory Services at SAI Global. He is passionate about life safety and helps the C-Suite understand the importance of business continuity not just during an emergency, but as an integral part of day to day operations. He has worked on risk events that have occurred all over the globe, including civil unrest in Egypt during the Arab Spring, executive travel and protection in the Pacific Rim, and the effects of destructive tornadoes in Oklahoma.

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