This week, amid the ongoing COVID-19 disruption of industry, business and global supply chains, the Supply Chain Matters blog provides our readers, select capsule reviews of reported Q1-2020 global economic outlooks, and both industry and individual corporate financial performance results. Our goal is to provide broader perspective from a supply chain management lens as to what to expect in the post COVID-19 sense of operating environment.
While some might argue that there is no real sense of what the post-COVID future will bring, we advocate that there needs to be a form of an operating plan in the time windows of best or least confidence.
We began this mini-series with first quarter global economic as well as April’s reported manufacturing and supply chain activity as depicted by various global PMI indices. 
In this blog, we provide a select capsule view of industries that we feel will be somewhat representative of how global customer demand and supply networks have initially been impacted, along with the sense of mitigation plans moving forward.
Amid this backdrop, let us survey key industries important to regional and global supply chains. Our focus is on positive as well as challenging aspects.
Commercial Aircraft
As noted in prior Supply Chain Matters industry supply chain specific commentaries, the global commercial aircraft industry which at the start of the year 2020 continued with plans to scale-up monthly production to respond to near 9-year aircraft order backlogs from global airline carriers, has now suffered the consequences of the literal 70 percent reductions in global air travel. Many global and domestic air carriers are in severe financial distress with thousands of previously operational aircraft now grounded. The ability among air carriers to take planned deliveries of new aircraft is now encumbered by financial and business obstacles.
Our commentaries related to both Boeing and to Airbus, each reflect the consequences of steep manufacturing and headcount cutbacks and the potential for a multi-year disruption duration.
Boeing’s recent report of Q1 financial performance was headlined with a 26 percent decline in total revenues, a significant operating loss, and plans to cut upwards of 15 percent of payroll in the commercial aircraft business. CEO David Calhoun indicated to shareholders that it would likely take 2-3 years for travel demand to recover to 2019 levels. Cancellation of existing aircraft orders, particularly for the single aisle Boeing 737 MAX, are a further growing concern.
In a recent letter to all employees last week, Airbus CEO Guillaume Faury did not mince words: “The survival of Airbus is in question if we don’t act now.” He further stated that the aircraft manufacturer was “bleeding cash at unprecedented speed.” Thousands of European based employees are being furloughed amid monthly production cutbacks.
The significant cascading impacts to this industry’s supplier chain ecosystems are already underway. In aircraft engines, the very critical weak link in the aircraft value-chain, GE Aircraft announced this week that the company intends to cut upwards of 25 percent of that company’s global aviation business unit workforce, amounting to roughly 10,000 jobs, in an overall effort to reduce costs by $1 billion. Aircraft fuselage and airframe component supplier Spirit AeroSystems has already announced plans for voluntary layoffs, followed by more definitive reductions. Similar cascading reductions will occur up and down commercial aircraft demand and supply networks, risking the loss of a highly skilled engineering and manufacturing and services workforce. Industry insiders are already of the view that this industry’s immediate ecosystem future will present a much smaller footprint, especially if the two major OEM’s find themselves unable to lend supplier financial support. Some contend that bankruptcies among certain suppliers are inevitable.
Regional governments will in turn, remain sensitive to the critical importance of this industry’s capabilities in technology and job creation, but governments have only so much money to go around.
This is an industry that powers global supply chain trade along with advanced technology development in product and process areas. In a time span of one quarter, the COVID-19 coronavirus pandemic has altered this industry’s business strategies in unforeseen and likely unimaginable ways.
Global Automotive
Prior to the onset of COVID-19, this industry was deep into the transition for new product design and production of more electrical and hybrid fueled vehicles, some with added autonomous driving capabilities. Global demand for traditional cars peaked in 2019, and forecasts for 2020 output were muted at best.
The sheer cost of development of new electrical powered auto platforms prompted added strategic development relations among global auto brands, as well initial discussions of mergers. In the post-COVID industry environment, the notions of more mergers to leverage financial resources or cash may likely be more attractive.
With the epicenter of the initial virus outbreak being in China’s Hubei province, with its concentration of automotive vehicle and component manufacturing, this industry was the first to be impacted by component shortages. Now the industry remains challenged by both end-consumer demand impacts, along with ongoing tests of either production suspensions or cutbacks with social distancing manufacturing and worker protections.
Players to watch include Volkswagen and Toyota, whom each successfully navigated prior severe global economic downturns. A further player of industry change is that of Tesla, continuing to push for mass market design and volume dominance in electric powered vehicles, but at the same time, needing to add further global production capacity.
Future automotive demand will be predicated on the ability of consumers to obtain long-term financing and on the perceived need for a new vehicle. On the one hand, COVID-19 lockdowns have provided strong sensory evidence of what a cleaner and less pollution environment really feels like across the globe, and in major cities. On the other, is when consumer’s feel confident that they can either afford a new vehicle or rely on other forms of transportation. From our lens, it could go either way.
Automotive demand and supply networks are another engine of economic and global supply chain growth, and similarly could be facing multi-year setbacks.
Consumer Goods
Over the past three years the prime driver of most global supply chain activity has been all forms of consumer goods. Economies have been very much driven by consumer confidence levels as well as sentiments.
With the initial panic buying brought on by the global-wide coronavirus outbreaks, manufacturers of cleaning products, disinfectants, toilet paper, soaps and many others benefitted from increased sales in Q1. Some struggled to keep up with demand and some, such as Procter and Gamble, demonstrated considerable agility and flexibility in quickly responding to market demand. P&G Q1 financial results were headlined as impressive and included a reported 6 percent boost in organic sales, with record manufacturing volumes.
Clorox reported March ending fiscal third quarter sales growth of 15 percent with some cleaning segment revenues increasing 32 percent. Net income increased 28 percent year-over year and the company also raised its fiscal 2020 forecast.
Reckitt Benckiser, producers of Lysol disinfectant, Mucinex cough medicines and Dettol soap, among other products reported a 13 percent growth in revenues, the strongest sales growth since its formation in 1999 via the merger of Reckitt & Coleman and Benckiser NV. The company announced plans to increase capacity and production of in-demand products.
In the snacks and cookie category, manufacturer’s reported mixed results. PepsiCo, maker of FritoLay snacks and assorted beverages reported organic revenue growth of 7.7 percent in the March ending quarter, but that included a 4.9 percent decrease in net income as a result of increased costs. The company announced that it currently will not suspend its quarterly stockholder dividend or stock buyback program. Mondelez International reported unprecedented demand for its snack brands in North America, but higher costs and supply chain disruptions dragged down earnings, declining 18 percent overall. Hershey reported a revenue decline attributed to its China sales and suspended annual guidance.
Thus are the mixed results of consumer goods firms. They are either directly benefitting from the panic buying surges by providing products and brands in demand or discovering that supply chain and other disruptions is adding unplanned costs.
Looking forward are prospects for a potential second-wave of virus outbreaks later this year, and the prospects of added supply network disruptions impacting manufacturing and distribution facilities. Even if products remain in robust demand, supply chain agility will be a key determinant.
Online Commerce
The pandemic has provided a clear opportunity for online commerce to become the preferred method of all forms of buying, while populations struggle with social distancing and concerns for community spread.
Across China, a maturity in online buying, especially among that country’s urban area, allowed that nation’s online provider’s to positively supplement needs for food, medicines and essentials. While they each struggled, they generally provided a positive consumer experience and will likely benefit with more of China’s consumers being inclined to buy online in broader product areas.
Across the U.S. and in in some parts of Europe, major online providers were generally overwhelmed and not prepared for the COVID-19 induced online volume surge. Online grocery and food delivery was especially overwhelmed, with thousands of added hiring having to be deployed in lieu of automation. Price gouging, opportunism and fake products have come to the forefront.
This week, Amazon reported a whopping 26 percent increase in revenues, the highest in the provider’s record, but suffered an overwhelming combination of inventory and worker shortages and consequent shipping delays. As a result, profit declined 29 percent, well short of expectations. The online retailer was forced to temporarily suspend merchants offering non-essential products, hired an additional 175,000 workers, and supplemented pay levels for frontline workers. Worker protests led to some employee firings which placed the online provider in the lens of local and state level government watchdogs. A staggering statistic was that worldwide shipping costs in Q1 were upwards of $10.9 billion, a 49 percent year-to-year increase. Yet with this level of spend, the company’s Prime members that were guaranteed one-day delivery experienced in some cases, upwards weeks in shipping delays depending on origin of inventory.
While opportunity came knocking at the door, Amazon remains challenged with the need to handle such increased volumes in a profitable way.
Financial performance reports from other online providers are likely to reflect similar new opportunities but added volume and cost challenges.
While consumers are likely to continue to turn to more online channels for ordering of goods, food, services and other needs during the COVID-19 period, many online providers will need to address the agility and flexibility of their own customer fulfillment processes and logistics networks.
While this is an area of industry growth opportunity for both B2C and B2B buying needs, there are strong dependencies on other product supply chain networks to be able to allocate limited inventories to online providers.
Personal Protection Equipment (PPE), Testing and Healthcare Delivery
We cannot conclude this industry focused commentary without mention of this segment, which Supply Chain Matters concluded were the supply networks of the highest global priority.
Since the outbreak began to spread at the beginning of the year, there have been continuous shortages of PPE, testing reagent and supply, as well as other healthcare delivery supply needs. The innovation and ingenuity of local manufacturers, businesses and services providers have helped to supplement the most urgent and lifesaving needs, but the bottom line remains that COVID-19 has made bare the vulnerabilities and sourcing overdependence of respective supply chains.
Once again, any timetable of economic or supply chain recovery will have a strong dependence on this segment, and how quickly changes are made in capacity sourcing, volume scale-up and in supplier vetting and development.
On the one hand, digital based technologies have shown some promise to address such needs. On the other, industry and government need to come together in formulating coherent and clear calls to action and a Marshall Plan effort of response.
Neither is visible at this point, certainly not in the United States.
Reader Takeaways
We began this Q1-2020 focused two-part series with a review of global economic data, mostly all pointing to a very challenging 2020 in the months to come. Global manufacturing and supply chain activity levels have declined to all-time lows, more likely additional declines expected in the coming quarter. Such declines will impact available capacity and manufacturing headcounts globally, adding more challenges to insuring overall supply chain agility and resilience.
Our Industry snapshot was provided in the context of strategic importance to either local, regional or global impacts. Some industries have market opportunities if they can successfully navigate supply networks challenges or obstacles. Some companies have opportunities to take market share.
On the other hand, industries and businesses are facing challenges never before experienced. There is no sugar coating the tough tests that remain, but the most innovative and resilient will rise, prevail and come to the other side much stronger. Planning will be continuous with constant revisions. Execution will require the most visibility feasible with continuous feedback of on the ground conditions. Data and information will have to continuously be captured, sorted and analyzed for context and impact.
From our lens, the strongest will manifest bold leadership, creative innovation in decision-making, creative application of technology, and a demonstrated commitment to taking care of employees and suppliers with resources available.
There is a lot of work to be done, including the ongoing broader education to the reality that Supply Chains do Matter.
Bob Ferrari
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