Impact of Coronavirus on the Global Supply Chain and the Need for Operational Flexibility

March 17, 2020

The trade war between the US and China since 2018 has compelled many companies to re-examine their global supply chain design and look for supply options outside of China. COVID-19 will accelerate that process.

By Dr. Sammi Yu Tang, Associate Professor, Management

The novel coronavirus (COVID-19) has spread so widely around the world that it is affecting almost all links on the global supply chain. Since the outbreak started in Wuhan in January, global production out of China has fallen to a record low. Factories in China were shut down for more than a month. Although Chinese factories normally built up inventory to prepare for the Lunar New Year holiday, those inventory start to run out quickly as COVID-19 prevented workers from returning to work.

Companies that are most vulnerable to this situation are those that heavily depend on factories in China for parts and supplies. With the prevalence of the Just-In-Time practice, many companies keep their parts inventories low – sometimes only a couple of weeks’ supply – in an effort to streamline costs and operations. Now, with these inventories exhausted and Chinese factories remaining closed or having trouble getting the shipment to the US, we will likely see slowdown or even temporary shutdown of American assembly lines and manufacturing plants. Companies with disaster reserve inventories in place to cope with rare events like this might do better, but only to a limited extent as the COVID-19 outbreak this time is not only a rare event, but also one with long-lasting impact.

Supplier diversification has proved to be effective in mitigating supply risk at a single source by having more than one supplier, possibly in multiple regions. When one supplier is disrupted due to natural disaster, logistics delay, labor strike, or disease outbreak, companies can quickly route orders to other non-disrupted suppliers, which can minimize damage to supply disruption. The trade war between the US and China since 2018 has compelled many companies to re-examine their global supply chain design and look for supply options outside of China. COVID-19 will accelerate that process. 

Now considered a global pandemic, COVID-19 is impacting more and more countries besides China. Even supplier diversification may not provide a complete solution. Some companies with a diversified supply base may also start to see the impact when they find their entire supply base being disrupted, one after another. This very unique situation is calling for more innovative risk mitigation strategies to increase global supply chain resilience.

COVID-19 has not only posed disruption on the supply side, but also impacted the demand side. For some companies, especially those that rely on traditional brick-and-mortar channels to reach their customers, sales may drop significantly as consumers are encouraged to practice social distancing. It is crucial for these companies to quickly resort to other channels and collaborate with delivery service partners to get their product in the hands of consumers.

For some other companies, demand is skyrocketing. For example, the face mask manufacturer Prestige Ameritech in the US has ramped production from 250,000 masks to 1 million a day, but is still struggling to meet demand. Hand sanitizer and other disinfectants are in a similar situation. As companies increase their capacity and establish new facilities to meet short-term demand, they should watch out for the bullwhip effect caused by the boom-and-bust cycle after demand stabilizes. Those with a flexible manufacturing system (FMS) in place can avoid this by utilizing or changing their current assembly lines to produce the highly demanded items. This operational flexibility enables a greater responsiveness and agility during this period of uncertainty.

 

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