With dramatic pictures filling our TV screens of Chinese cities in lockdown, factories closed, and cruise ships becoming no-go zones, it’s not difficult to detect a growing sense of global panic about the epidemic officially known as novel coronavirus 2019-nCov. But what is the impact for business – and, in particular, the management of supply chains from this new contagion? And what lessons should supply chain and procurement directors be learning from the personal tragedy that is unfolding before our eyes?
Coronavirus was first reported by China on 31 December 2019, and, on 30 January 2020, the World Health Organisation declared the situation as a Public Health Emergency of International Concern (PHEIC).
The figures associated with this previously unknown disease are staggering. According to the John Hopkins University Center for Systems Science Engineering, coronavirus has, at the time of writing, killed more than 1,000 and infected 43,000 people. About 10% of those who have caught the virus have recovered – but 2.3% of victims have died.
Currently, the disease is focused in China: 99% of the infections have been in mainland China – and most of those in Hubei province, around the city of Wuhan - but cases have been found in 26 other countries.
The consequences – at least in China – have been dramatic. According to the US State Department, “Most commercial air carriers have reduced or suspended routes to and from China … the Chinese authorities have suspended air, road, and rail travel in the area around Wuhan and placed restrictions on travel and other activities throughout the country…”. China has become an enormous isolation zone, with empty city streets, and residents ordered to stay at home to contain the spread of infection. Factories and offices have remained shut after the compulsory extension of the Chinese Lunar New Year holiday to reduce the movement of people.
With Chinese citizens unable to travel, many countries will already be feeling the economic impact of China’s isolation. On a trip to the US, a Chinese tourist (and there were 3 million in 2018) typically spend $6700 – 50% more than an average foreign visitor, according to the US Travel Association. But Chinese tourism spending in 2019 was already down by about 5%, because of the US-China trade war, and the tightening economy in China. What will be the reduction in 2020 to overseas visitor numbers, if Chinese tourists have less money to spend while their offices or factories were closed for an extended period?
With Chinese economic activity reduced, another immediate effect has been seen in the global oil industry. China is a big importer of oil and gas and, according to the Financial Times “Oil demand in China is estimated to have fallen by as much as a quarter in February, as big cities have been quarantined, flights cancelled and public holidays extended to try to contain the spread of the virus”.
Looking at the supply side of the supply-demand equation, we can also see immediate damage being caused to industries relying on just-in-time delivery (JIT) from Chinese factories. JIT involves manufacturers reducing their warehouse inventory levels and relying on suppliers to deliver stock components a short time before they are required on an assembly line.
Car manufacturing is feeling the JIT supply pain right now (although other sectors such as aircraft manufacture are also exposed). Car makers strictly speaking make very little themselves – they assemble components delivered by an ecosystem of suppliers and sub-suppliers who have long term supply contracts. Retail customer demand for individually tailored cars ‘pulls’ the supply of product in a highly efficient and organised way all the way to the car plant: and products are expected to be of flawless quality to enable continuous car production – a technique developed originally by Toyota. Right now, not many cars are being bought in Wuhan.
Car plants in China have already shut down, including those run by Tesla, Nissan, and Ford. Hyundai Motors, the world’s 5th largest car manufacturer by sales, announced on 4 February that it would temporarily close its factories in South Korea, because of shortages of components from China. It has so far been unable to source parts from alternative, non-Chinese suppliers.
Car parts makers with factories in China, such as Continental, which has 50 manufacturing plants in the country, are assessing how to handle the supply challenge. Continental makes braking systems, sensors, display units, and many other products and is said to be hoping to re-open its Chinese factories soon – but needs government authorisation to do so.
Right now, any industry, anywhere in the world, that is dependent on Chinese manufacturing will be trying to second guess the future: how long will the coronavirus crisis last? How long will those Chinese factories stay closed? Where can we source alternative products before our production also has to stop?
But beyond the crisis, however long it lasts, manufacturers will have to reconfigure their supply chains and consider a range of options to mitigate the future risk of supply shortages. They will need to answer questions like:
- How much stock – and what stock – should we be carrying to act as a buffer in the event of breakdowns in our supply chains – even though carrying inventory leads to waste and has a capital cost to the company?
- How can we diversify our supply chains so that we can multi-source from suppliers who themselves diversify their own suppliers?
- Is our dependence on sourcing from a handful of key suppliers creating too great a business risk – should we instead make more of our own components?
The coronavirus is, without doubt, a personal tragedy for individuals who have the misfortune to catch the disease, and for their families. But to companies and businesses, it should act as a wake-up call to rethink how to structure their supply chains.
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