The Impact of Coronavirus on Global Supply Chains
by Tim Richardson | Iter Insights
The Impact of Coronavirus on Global Supply Chains
The rapid spread of Coronavirus clearly will dominate the headlines over the coming months, but what does it mean for supply chains in the short and long-term?
In this article we focus on the short-term impact and how to mitigate the effects. A subsequent article will address the longer-term impact.
Should we have been better prepared?
We have had warning shots over supply chain resilience whether it has been from SARS in 2002 or the Japanese Tsunami in 2011, but nothing of the scale, spread and potential duration of Coronavirus. Even so we seem poorly prepared with Supply Chain Risk Management (SCRM) often ignored for lower costs, but this must change so that we balance cost with supply chain resilience.
We are surprised at what little coverage supply chains have had in the news, but we will see the real impacts in the next couple of weeks. In the very short-term the west has been buffered by the stocking to cover Chinese New Year and the fact that six weeks pipeline was on the water, but this buffer is about to end.
A discussion we had with a client last week, demonstrates the short-term reality we face:
- Only 60 of their 170 staff who had returned after Chinese New Year, primarily because of travel restrictions. As a consequence a single rather than three shift operation is in place.
- Bolstering existing European manufacturing was providing an opportunity as most of their direct competitors are far more dependent on Asian manufacturing. However:
- Ramping up takes time
- Shipping by sea adds six weeks to supply lead times and currently most of the containers are in Asia
- Air freight is uneconomic, but customer-funded air shipments have grown ten-fold
Another extreme illustration of the impact is represented by a simple product – face masks. 50% of world production is in China and there is little chance of exports in the short-term, which will impact dental and medical procedures in Europe. A similar story could be told for other low- value “C class” items that few have given consideration of. How many multi-million dollar systems are not going to be shippable for the lack of a $5 bolt or low-level electronic component?
More importantly how many pharmaceuticals are not going to be available? A client of ours has 50% of global pharma production in China and even if physical capacity could be moved, regulatory approvals restrict supply to many markets.
There are few complete short-term solutions making shortages inevitable; the best we can do is mitigate the effects. Mitigations will differ depending on product and its impacts. Some are commercial i.e. lost revenue if someone can’t get their new Apple Watch whilst some may be life threatening from a lack of drug, or even a simple face mask.
In the event of shortage, supply needs can either be snapped up “first come first served” or allocated according to a range of strategies and if you haven’t already done so, now is the time to decide who to prioritise and the information you need to ensure this is effective. It could be a case of looking after your largest customers however they may already be siting upon the greatest number of days inventory, alternatively, in the life-threatening scenario, ethically and in PR terms there is clearly the requirement to collaboratively focus on need.
To allocate effectively, complete visibility of your supply chain is required and historically this may not exist due to layers of distributors and resellers. In the short term, given the impact shortages may have, a manual short-term solution can be implemented and having gained visibility the opportunity exists to formalise this and use the data to improve your regular planning activity.
This can then be a precursor to the full digitisation of your supply chain that with the right decision-making systems and technology can deliver supply chain autonomy.
Nationalistic approaches led by the USA will mitigate against this, counterbalanced by the greater level of integrated supply chain planning and blockchain technology that allows visibility throughout all stages of the supply chain and global planning. Unfortunately, this technology is only in its infancy and most organisations will only easily be able to see and plan part of a globalised supply chain.
The critical aspect in our ability to maintain supply over the next few months is going to be how we manage inventory from raw material to finished goods. The key to success will be our ability to collaborate along the length of our supply chain to make sure that every piece of inventory is used where it adds most value.
Our worst fear is that the reaction of most organisations will be to respond to extended lead times with increased orders (correctly to address the statistical need) which will further extend lead times and we then enter into a vicious circle where the visibility of what is really required is completely opaque and the precious capacity that is exists is poorly used.
How Iter can help
Iter Consulting is a specialist supply chain and operational excellence consultancy and we support our clients in balancing working capital, operating cost and service.
In the short term, we can support by modelling your inventory deployment and how it can be used most effectively. In the medium and long term out expertise in digitising supply chains, improving planning and scheduling, and ensuring supply chain resilience and agility can ensure your organisation takes these 1 in 100 events as routinely as possible.
Welcome to Iter Insight, this is one of a monthly series of articles from Iter Consulting addressing the most critical operational and supply chain problems businesses face today.