Overview

Just after 39 days since our initial Supply Chain Matters commentary focusing on the impacts of the ongoing global coronavirus outbreak on global and multi-industry supply chains, the supply chain assessment and risk phases once again remain very much heightened.

Containment of the virus is now much more challenging as the virus spreads globally. COVID-19 China outbreak

In this seventh update, we provide our readers with information that again points to the supply chain ripple impacts becoming more visible among  multi-industry customer demand and supply networks. This disruption clearly involves both customer demand and supply network implications, a dual challenge of management and attempted mitigation.

Once again, the takeaway for multi-industry sales and operations planning (S&OP) and supply chain management teams is providing a dedicated and vigorous effort in monitoring and business impact assessment. Indications continue to  point to continued disruptions in the weeks to come along with visibility and interest at the highest levels of businesses large and small. The latter are especially impacted.

 

Latest Virus Snapshot Overview

As we pen this Sunday evening, March 8, 2020  update, the John Hopkins CSEE COVID-19 Global Cases Dashboard  indicates the following summarized statistics:

More than 109,500 virus cases reported globally, an addition of 24,100 cases, representing a fourfold increase since our last update ten days ago,. While the majority of cases still remain in mainland China, the virus has now reportedly spread to 107 countries, and increase of 58 in ten days.

Reported deaths of more than 3800 souls, an increase of 900 since our prior update, representing a three-fold increase.

There are now a total of 60,693 recovered cases, an increase of nearly 22,000  since our prior update, which remains somewhat encouraging.

While the epicenter of the virus was once China, it now appears as though the Europe and the Middle East regions have become far more involved in virus spread.

Cases are spreading in the United States, and while the overall total is not as large thus far, there are growing concerns that without an adequate number of test kits available across the U.S., there could be far more undetected cases.

Besides the epicenter Wuhan district and broader Hubei province in China, the second-highest outbreak rate is now Italy with over 7300 cases, followed by South Korea, Iran, France, Germany and Japan.

Last night, the Italian government made the unprecedented decision to lock-down both the Lombardy and other northern regions of the country, including Venice, amounting to over 17 million people impacted. With more than 250 deaths reported in a relatively short period of time, Italian authorities have grown increasingly alarmed that the virus must be contained. The lockdown extends to April 2, and involves citizens staying in residence and not allowed to attend public spaces including areas of work.  This will have added implications for food, consumer goods, bio-pharmaceutical and other industry supply networks.

Media reports continue to indicate that new cases of the virus are now ebbing within the former virus epicenter in the Hubei region of China, but as noted, concerns are now growing across the globe.

 

Global Business, Product Demand and Supply Impacts

Global equity markets continue a selloff over economic fears related to shock impacts of the virus impacts to the global economy. Financial media headlines over the past few days have now raised concerns relative to a potential recession occurring in Italy and other EU countries as the virus spreads. Europe was already showing signs of looming recession and the current disruption has the risk of accelerating the occurrence.

As noted in our last update, businesses continue to warn of the revenue shortfall or disruptive aspects of the ongoing global outbreak, while many have initiated added restrictions regarding employee non-critical business travel, avoidance of large meeting gatherings or encouraging employees to work virtually during this crisis.

Multi-Industry Product Demand and Supply Network Vulnerabilities

As we continue to point out, the Wuhan and associated Hubei Province area serves as a manufacturing hub for automotive, high-tech, optical component and certain pharmaceutical API ingredient related supply networks.

With the inevitable spread of this virus globally, the ripple effects on multi-industry customer product demand and supply networks is taking an indeed new turn, one that cascades among various tiers of networks.

Webinars conducted in the past few days from the MIT Center for Transportation and Logistics, and supply chain risk management services provider Resilinc, both reinforce that the disruptions to both product demand and supply networks are yet to play out for manufacturers and retailers and will likely be far more visible over the coming 3-4 weeks.

Professor Yossi Sheffi again pointed to prior disruptions such as the 2002 SARS outbreak and the 2011 Fukishima earthquake in Japan as disruption reference indicators. He stressed that planning and response preparations should be done now, not when the crisis peaks in the coming weeks. Sheffi reiterated that many businesses still lack visibility to suppliers in lower tiers of supply networks, and as occurred with the Fukishima disruption, some of these suppliers may well be discovered to be the sole source of a needed component.

In its webcast, Resilinc observed that while factories across China are starting up, many are not near full capacity because of a lack of full manpower. Data representing suppliers with parts being placed on allocation show a growing trend. Industries classified as red status for parts allocation included high tech and consumer electronics, semiconductor, medical device and consumer goods. Resilinc anticipates that all tracked industries will be categorized as red by the end of March.

Both webcasts stressed the parallel of the past global financial crisis, and the criticality for businesses to now be assessing the financial health of smaller suppliers, and if necessary, be prepared to proactively lend some assistance or relief in the form of advanced payments or augmented supply agreements. Resilinc Founder and CEO Bindiya Vakil referenced recent Bloomberg data indicating that 65 percent of SMB companies across China have but two months of cash balances.

Foxconn Technology, the globe’s largest contract manufacturer, and the largest private employer across China provided an important reference point for assessing the status of resumption of full production across that country. The CMS indicated to investors last week that the manufacturer does not expect to return to normal seasonal manufacturing output levels this month, provided the COVID-19 outbreak does not worsen across China. While production has resumed, it is estimated to be at 50 percent of seasonal capacity, and there remains a shortage of workers, since many of China’s workers are still under restricted movements or quarantine conditions. The contract manufacturer is reportedly offering $750 cash bonuses for recruiting workers. Workers returning or applying for work reportedly must submit detailed forms relative to health status along with location history over the prior two weeks. Those workers deemed to have come from infected areas must show proof of 14-day quarantine and good health, or be subject to such as quarantine.

A further area to keep a close eye on is that of India. While the country has not been greatly impacted by the virus thus far, many inbound supply links stem from China, including generic pharmaceuticals and high-tech products. Many high tech and other industries view India as the potential alternative sourcing region for current China sourced goods, but much will depend on how the country weather’s the current outbreak.

 

Global Logistics And Transportation

As noted in prior updates, the leading indicator of multi-industry impacts is that of shipping activity into and out of the impacted region.

While some reports are indicating that activity among China’s major ports may be returning to some semblance of normal, sailings from the region remain rather low. Once more, local reports point to the continued shortage of truck drivers across the country and in impacted regions. The Wall Street Journal reported last week that a mere half of the country’s 30 million truck drivers have yet to return to work. Drivers who are working have been assigned to the movement of outbreak response related loads such as medical supplies, masks, drugs and medicines. Movement of goods across provinces remain restricted for fear of spreading the virus, and those drivers traveling between provinces remain subject to an additional 14-day quarantine before taking on a new load.

Seaports remain clogged with containers, and with reduced global sailings, there is a growing imbalance of empty or specialty shipping containers available for China or other country exports.

The Wall Street Journal now reports that container ship operators have cancelled nearly 60 trans-Pacific sailings to the Ports of Los Angeles and Long Beach in the first quarter, and more than 110 to all of North America. That implies fewer ships to make return voyages which include export or empty containers. The publication also cites an industry ship brokering analyst firm as indicating that the number of idled ships in the Pacific region has reached 370 compared to 230 at the start of the year. While some of these ships are being retrofitted for new scrubber exhaust technology, others are awaiting adequate cargoes.

As that imbalance continues, logistics and brokerage businesses are scrambling to secure any available containers which implies increased shipping costs.

With the ongoing restrictions of international air carriers flying into and out of China, air freight capacity has become limited, which will invariably add to inflated air movement costs for those global businesses that are compelled to keep production lines operating. Technology and white glove fulfillment solutions provider ARTA told Supply Chain Matters that as production in China picks-up and given the many cargo and international airline flights already cancelled or suspended, there will be even more limited space available for shipments out of China or Hong Kong at higher costs.

 

Supply Chain Matters Updated Takeaway

Once again, with the ongoing outbreak continuing to widen and with implications that virus containment may be fleeting, it is becoming ever more evident that the business and supply network disruption implications will extend themselves for several additional weeks, or potentially months.  Resilinc is advising its clients to prepare for a six-month duration disruption.

Our gut belief is that that number may be conservative.

Once again, that will provide for challenging individual decisions among businesses large and small, and their respective supply chain operational teams related to cost and pricing impacts.

Some experts continue to warn that China’s mature and world class manufacturing and supply network capabilities will continue to challenge the timeline for shifting production out of China. None the less, one eventual takeaway from this disruption for many businesses and industries is that too much reliance and disruption risk was placed in China.

While Nikkei Asian Review reports that larger global manufacturers such as Google and Microsoft are accelerating their efforts to shift production of hardware to other Asia based regions, the nature of this virus spread provides added uncertainties. Foxconn also indicated that it is actively assessing alternative production assembly sites in Vietnam, India, Mexico and Brazil, most likely to accommodate the production needs of Apple.

Two Perspectives

We call reader attention to a published WIRED opinion contribution, Covid-19 Is Traveling Along the New Silk Road, authored by Parang Khanna, author of the book, The Future is Asian which was featured in an interview podcast by this blog. Khanna observes that there is a striking overlap between the path of today’s virus spread and the path of Black Death that emerged in the 14th Century. Both originated in China’s Hubei Province, and traveled along the major trade routes. He then goes on to argue that even as the world continues with essential crisis management: ..the geopolitical and economic consequences are coming into sharper focus. Firms will accelerate shifting supply chains out of China, limiting their exposure to only what they make for the Chinese market.

Conversely, a published Harvard Business Review Operations Management column authored by Tom Linton and Bindiya Vakil, makes the argument that supply chain management teams will again learn the painful lessons of the 2011 Fukishima disruption, namely being blindsided by the impacts of second or third tier suppliers in affected regions: “Supply-chain managers know the risks of single sourcing, but they do it anyway in order to secure their supply or meet a cost target. Often, they have limited options to choose from, and increasingly those options are only in China.”

We contrast both perspectives in the view that somewhere among them will indeed be the future lessons of this disruption. From our lens, the difference may well be the more leveraged use of advanced technology in decision-making, analysis and real-time cost and risk assessment of manufacturing in regions closest to where products are sold.

We close this update by again reiterating to heed expert advice in planning for the worst while hoping for the best. Be prepared for even more disruption and needed response in the coming weeks, and perhaps months. This ongoing disruption is yet to play out in many dimensions, and as the virus continues its spread, cascading disruptions to product demand and supply networks will indeed test the business interruption and supply chain risk mitigation capabilities of many manufacturers, retailers, service and other businesses.

 

Bob Ferrari

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