The current disruption
The COVID-19 virus event has been a supply chain risk waiting to happen. A virus is not a ‘black swan’ event, but a ‘known-unknown’. The potential risks and likely consequences of a new virus were evident at the time of the SARS virus of 2002-3 and the H1N1 virus of 2009.
The difference between then and now is that the global economy has changed. China’s economy is about four time larger than when the SARS virus event occurred, which has influenced region trade lanes to be more dependent on China. For example, as a share of global industries, China accounts for nearly 30 percent of electronics and about 40 percent of textiles.
Transfers between related parties of companies i.e. subsidiaries and divisions, is often in the form of ‘intermediate goods’ (parts, components and sub-assemblies). These account for at least 70 percent of intra-Asian trade. Value of about 20 to 30 percent of the manufactured price is then added in the final country through assembly of the intermediate goods, final inspection and test and then packaging finished goods. So, a disruption in one country of a region, coupled with extended lead times, can quickly affect multiple country’s supply chains and deliveries to end users.
Factories in China started to re-open on February 24. Restarting production carries the risk of renewed virus spread after people return to work, but the government has said that employers will carry all risks associated with the evolving situation. If factories and transport links need to close in the later infected areas of northern Italy, South Korea and Japan , the international trade situation will remain fluid, even if the elapsed time for the virus to be active is six months.
The SARS event commenced in Q4 2002 and lasted about six months, until June 2003. The largest epidemic of modern times was the Spanish flue (although not originating in Spain), which commenced in the northern spring of 1918 and finished in June 1919 – about 14 months.
The COVID-19 virus was notified in January 2020, but a major unknown is the time for the virus to stop spreading. Some commentators consider that even if the virus is quickly contained, it will be September 2020 or later until sufficient capacity is again available through the supply chains.
Restarting supply chains
Supply chains can be stopped or restricted by natural events such as earthquakes, tsunamis, hurricanes/cyclones/tornadoes or man made events, such as virus epidemics and political and labour disputes. Getting supply chains back to full flow can be a major exercise. In the current situation, different elements of supply chains are affected:
People: The current disruptions in China have been made worse due to the Lunar New Year holidays. Millions of people who travelled to their home location for the holiday have yet to return to the cities where they live and work. And some may decide not to return.
Quarantine restrictions, blocked roads and checkpoints established by provincial and local authorities are being removed, but it will take time. This will affect road transport movements for people, agricultural supplies and industrial goods.The capacity of public transport to move people will be stretched; aggravated by the need for passengers to be seated apart from each other, thereby reducing available capacity.
Factories: Due to the shortage of workers, many factories will operate below capacity for some time. From the restart, employers must fulfil local government requirements to provide masks (with a global shortage), protective suits and disinfectant, which must be regularly applied in the work area. Workers are required to sit apart in factory canteens, reducing the capacity to feed people in a reasonable time.
As manufacturing facilities in China re-open and Asia supply chains flow again, the backlog of orders from customers must be completed, then new orders that were placed over the shutdown period. Manufacturers must also wait for suppliers to deliver materials and components, which could be imported, with lengthened lead times. All this is likely to require increased external capacity in the form of containers, bulk and container shipping capacity and storage facilities.
Planning factory and distribution operations in the restart period will require planners to ignore history and forecasts. Instead they will need to plan based on interpreting data and information from outside the business (‘outside-in’ as opposed to the typical approach of ‘inside-out’). This will cover capacities and availability of inbound items, people, outbound transport and customers’ immediate needs. The capability of current planning software will be tested.
Transport: A large disruption to trade lanes can cause an imbalance across locations for full and empty containers, including refrigerated containers, due to insufficient power points to keep stored containers cold. Airlines that cancelled flights in and out of China, have impacted the available air cargo capacity and this will take time to correct. There is also a shortage of available truck drivers and therefore trucks to transport any goods that are available.
The overall transport situation in the China trades is expected to become more visible in March. Statements by larger companies in developed countries indicate that supply chains could be notably affected by the end of March. However, companies at levels 3 and 4 in supply chains are already affected, due to their lower inventory holdings and restricted cash flows.
Consumers: The onset of the virus and restrictions on travel has meant that clerical, professional and management employees in China have been instructed by their employers to work from home. This has led to an increased use of teleconferencing for meetings. Also the use of eCommerce by more affluent consumers. One company stated that the number of orders processed daily has nearly doubled, which has tested suppliers’ ability to satisfy demand, via ‘click and collect’ (with collections being from banks of lockers in apartment blocks). Success with conference calls and eCommerce on a large scale could influence how travel and retail shopping develops in China and in other parts of Asia. This could influence the design of supply chains in the future.
A organisation’s risk profile
These steps to getting supply chains flowing are applicable to any country that, due to a major disruption, experiences a ‘lockdown’ of its commerce. It illustrates that the consequences of a disruption to supply chains takes time and money to correct.
The current disruptions should cause companies to take a more proactive approach to managing risks in their supply chains. However, it did not happen following SARS, so why now? It could be because the possible costs for companies and economies will be large enough for senior executives to take notice. But will supply chain professionals be knowledgeable enough to manage a review of their company’s risk profile?