14 Apr Beyond the Coronavirus Pandemic | Global supply chains
The coronavirus outbreak started from Wuhan, China in December 2019. It has now spread to more than 170 countries in the world within a span of 3 months. This statement is not just a plain fact. It tells us how connected the human population around the world is. Distances have become shorter by the rapid advancement in the means of travel. This, along with other factors, has led to a boom in international trade across the globe. Humans have carried this virus across the globe in a matter of three short months. Multiple countries in Europe have been hit quite hard. As of the writing of this article, US had reported more than 600,000 cases of Covid-19 (highest in the world). Total confirmed cases in the world have risen to more than 1.8 million according to WHO’s statistics, which now has officially declared the coronavirus pandemic.
My purpose behind highlighting the connectivity of human diaspora is to illuminate something more than just the unmistakable medical impact of Covid-19. The economic interdependence of countries across the world has intertwined the global supply chains. This is likely to cause the suffering to sustain for months after the spread of Covid-19 is medically contained. In this edition of Beyond The Coronavirus Pandemic, let’s look at the impact of the Coronavirus pandemic on the global supply chains. Let’s look at the major developments in motion and what could happen in the months ahead.
Why an impact on supply chains?
The virus has spread rapidly across the globe. Various administrations are placing restrictions on the movement of people, across international as well as state borders. A unique feature of the more successful mitigation strategies is a complete lockdown of communities. The city of San Francisco issued a ‘shelter in place’ order on March 16. NY has been on lockdown for the past two weeks. India announced a country-wide lockdown for 21 days beginning March 24.
When people stay at home, the focus shifts to essentials. Luxury expenditures will take a back seat. This will kill the demand side. Moreover, production and transportation will take a hit due to people not being able to work or not willing to. With timeline of the spread varying across nations, trade will be impacted until all major nations have recouped.
Does China have an advantage?
China’s regime under President Xi took drastic measures to contain the spread and mitigate the impact of Covid-19. These measures included a shutdown of local businesses including wholesale, retail shops and manufacturing units. As a result, smaller businesses are under deep financial strain. As the Chinese have been able to contain further spread of the disease, the economic capacity is likely to rebound in the next few weeks, even though at a gradual pace.
While the demand for most Chinese products across the globe could stay weak, the supply side should be able to come back to capacity within a few weeks. But having production capacity doesn’t do much good when half the world has hit a pause button on life.
Tragedy in the United States
With almost 600,000 confirmed cases and the death toll accelerating, US is undoubtedly the epicenter of this pandemic. As reported by National Retail Federation, estimates show that import activity at major US container ports dropped to their lowest levels in five years in March. Projections aren’t showing any signs of picking up as of yet. If lives don’t return to normalcy soon, the damage could last much longer.
Truck drivers in all of North America were already in short supply (a mini crisis) and Covid-19 has exacerbated the problem to an extreme. Fewer drivers are on the road. Many truck-stops have either closed completely or have converted to drive-thru versions. To make things worse, drivers are facing newer kinds of problems. Many drivers are not allowed to use the restrooms when they deliver a shipment as truck terminals are trying to minimize person to person contact. This is in line with the social distancing guidelines but is a huge problem for those on the road. Driving on empty roads with minimal access to roadside facilities including food, unsurprisingly, is a catastrophe for those involved.
Under normal circumstances, fewer drivers willing to get behind the wheel would mean more opportunities for those who are willing. Unfortunately, that is not the case. As reported by DAT, for the week of March 30 – April 4, loads posted in the spot market fell by a staggering 39% w/w while the number of trucks posted increased by 13%. The rise in posted trucks in the spot market usually indicates a desperation on part of drivers/carriers to find a load to move. Although this means trouble in the short-term for carriers, the activity should rebound once the lockdowns end consumption starts to go back up.
Should we expect a quick recovery?
International ports around the world aren’t working at full capacity. Restrictions on people’s mobility has adversely impacted road transportation. Less people are working more hours but the logistical capacity is way below optimum levels. This means that movement of essential goods like food & medicine will be of priority. Even though this is the right thing to do, it’s not the best thing for producers around the world. Moreover, even within the ‘essentials’ category, priority does not always lead to fulfillment. Take the case of farmers in the Satara district of western India. They are feeding their crops to cattle. If they don’t, the crops will rot in absence of road transportation. Farmers are bearing all the loss. India, under the leadership of Prime Minister Modi announced the country’s lock down just hours before it took effect. Supply chains in the country did not even have an opportunity to prepare.
India’s is not a singular case. Shortage of Mexican migrant workers in Florida means watermelon and blueberry crops will rot before harvest or packaging. For Europe, this pandemic could mean that vegetable farms may miss the window to plant their crops which would impact food supply in the next season.
So, the recovery might not be as quick as some people claim.
The damage to global supply chains from the coronavirus pandemic will likely last at least a little longer than the pandemic itself. It is amateur to think that all will be well once the government loosens the restrictions/guidelines on public activity. The fact that different countries are dealing with Covid-19 on different timelines makes it quite a bit more likely that the global recovery will be longer than just a couple of months.
Covid-19 will have a lasting impact on how the world moves its goods. Post coronavirus, organizations will have a new perspective on managing global supply chains in times of uncertainty. Risk mitigation is a common phenomenon in the world of investing but hopefully, this crisis will stoke supply chain managers to be more sensitive to risks that may arise from uncertainty and put measures in place so that their response is better than an ad hoc reaction.
Here are some of the practices that could help executives better prepare their organizations for market events beyond anyone’s control.
- Diversify the supplier base to minimize dependence on any one or a few suppliers
- Collaborate with suppliers who have good flexibility in their business organization so that they can weather storms like these
- When working with international suppliers, make sure they have a robust local supply chain. Do the research
- Investigate the depth of technological capabilities of the partners. The technology in place when a crisis hits is of paramount importance because it can provide the tools an organization may need to swiftly become leaner as a business
Covid-19 has led humanity to rethink its ways and we are hopeful that the world of business will re-emerge while drawing some key lessons from it.
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