6 Ways to Mitigate Covid-19’s Impact on Your Supply Chain

The Impact of Coronavirus on Supply Chains

How Global Supply Chains will be Affected at a Macro Level by the COVID-19 Pandemic

By: Saroj Tripathi, VP, Field Operations NA and ANZ

COVID-19 is leaving an indelible impression on global supply chains. The World Health Organization declared COVID-19 a “pandemic” on March 11, 2020. As of March 20, 2020,

  • Globally, there are more than 234,000 confirmed cases and nearly 10,000 deaths
  • In the United States, there are more than 15,000 confirmed cases and over 200 deaths
  • U.S. has already passed an $8.3 billion bill for vaccine research and aid to states
  • U.S. also passed a second bill, valued at $104 billion for sick pay and family leave
  • U.S. Congress is working on a third, massive $1 trillion-plus economic stimulus package
  • U.S. State Department has advised citizens to avoid all international travel

Coronavirus, or COVID-19, has literally brought the world to a halt.

In the San Francisco Bay area of California, in New York City, and throughout the nation, roads are empty, and people are at home under state order. Schools, bars, hair salons, theaters and gyms all are closed. Restaurants are only serving delivery and take-out orders.

The details of the impact are slowly coming out, yet it’s likely we won’t begin to see a full picture until after the infection curve starts to flatten. COVID-19 is spreading at such a rapid pace that healthcare infrastructures, even in the most advanced economies like the United States, France and Italy, are under extreme pressure. Testing equipment, masks, ventilators and other essential healthcare products are in dangerously short supply, and companies are having a difficult time meeting the high demand for these items.

The public is under, at best, a mild panic. People have stockpiled food items, hand sanitizers, and paper products like toilet paper and paper towels, despite ongoing assurance from the government that these items will continue to be available. Superstores continue to run out of these supplies. Shelves are emptying faster than they can be restocked. The supply chains are strained. Any amount of contingency planning by the companies couldn’t have sufficed what this situation now demands.

What seems like a problem for some companies may actually be an opportunity for many others, if they decide to inspect their supply chains and discover ways to inject flexibility that will make them more resilient to similar disruptions.

Let’s look at the structure of a few industries, their demand and supply dynamics, the impact of COVID-19, and what can be done about it, if anything at all.

Travel and Tourism:

This sector includes airlines, hotels, cruises and other travel-related businesses. This is a $9 trillion sector worldwide and almost 10% of the global economy. It employs 320 million people, or 5% of the global population. People have cancelled business trips and personal vacations as a result of COVID-19.

Marriott initially estimated the impact to be $25-50 million and a recovery timeframe of 6 to 12 months. The World Travel and Tourism Council estimates job losses to be around 50 million or 15% worldwide. The U.S. alone is projecting to lose $24 billion in foreign spending this year. It’s no wonder the industry has reached out to the U.S. federal government for help in the form of bailout money.

The industry needs to be capitalized, hang onto their key employees, and manage their existing relationships with customers and event companies, even if they cancel en masse. Disruptions come and go – even this one will eventually pass – but relationships are what will keep the business going long-term.

Retailers:

This is probably the most visible industry to consumers and another one that is feeling the significant impact of COVID-19. These include some big retailers like Macy’s, Starbucks, Nordstrom, Walmart and Walgreens; superstores like Safeway, Lucky’s Market, Albertsons, Big Lots, Amazon and REI; and small local “mom-and-pop” retailers.

As I write this, the U.S. national retail body, the National Retail Federation, still maintains the projected growth rate of 3.5% to 4.1% as compared to 3.7% in 2019, making the size of this industry segment $3.9 trillion. These numbers do include online sales as well. According to 2017 data, this represents almost 6% of the U.S. GDP and contributes around 5 million jobs.

COVID-19 has forced many retailers – besides those deemed “essential” like grocery stores and pharmacies – to shut down temporarily. They are the last stop in the consumer products supply chain and typically, it’s an industry rife with channel inventory.

Like any other industry, retail is an aggregate of several sub-industries – e.g. clothing and fashion, food and beverage, etc. The dependency of these sub-sectors varies, and therefore the impact on their supply chains will also vary.

The clothing and mid-market fashion goods sector relies heavily on China for fabrics like cotton and silk, as well as China’s manufacturing capabilities. In the last few years, this sub-industry has reduced its dependency on China for manufacturing and spread its supply chain to countries like Bangladesh and Vietnam, but still has heavy reliance on China for fabric and other raw materials. So, the impact of the coronavirus spread will be felt by this sub-industry due to factory shutdowns, staff unavailability, and shoppers staying away from retail outlets and malls.

In my understanding, e-commerce becomes the channel of choice at moments like these, and it should be exploited to the hilt. Companies should focus on beefing their online presence and shopping capabilities, and informing customers and potential customers about the web enablement and what all they can do from the company’s website.

The food and beverage sub-sector typically has localized supply chains. Their dependency on other countries is relatively less. With this virus becoming a pandemic, this industry has become pretty important from a common man’s point of view. People are rushing to stock up on food, milk, vegetables, fresh fruit and paper products. The supply chains are likely strained, factories are running at peak capacity and it is absolutely critical that they continue to do so. President Trump has already met big retailers like Safeway, Costco, Walmart and others to ensure that stores remain open and essential items will continue to be available to consumers.

In my opinion, this will be the second most important sector deserving of government’s attention after healthcare, particularly the small businesses that have had to shut their doors and layoff employees.

If possible, food retailers should go hyper-local to the extent possible, and they should have contingency plans and replacements available so that customers have suitable alternatives available in the absence of what they regularly buy. They should also strengthen doorstep delivery or get into alliances with food delivery companies.

High-Tech and Semiconductors:

The most important tradeshows are cancelled, and Apple is likely to miss their forecasts as suggested by TrendForce, a supply chain analytics provider. They estimate heavy decline in labor-intensive sub-industries like smartwatches, smartphones, laptops and smart speakers. Just to give you a picture of the size of this sector, in 2019, high-tech, or simply the tech industry, was a $5 trillion industry.

This industry has largely outsourced its manufacturing to China, Taiwan and other Asian countries. All the big OEMs like Apple, Dell, HP, Qualcomm, etc., rely heavily on those manufacturers for their products – and as a result, they anticipate a huge adverse impact on their supply chains as a result of COVID-19. For example, Foxconn is the biggest manufacturer for Apple and they still have not opened their production plants. This will impact Apple’s ability to meet demand, and their financial results will be adversely affected.

Consider the statistics of sub-sectors – semiconductor is almost $0.5 trillion industry worldwide and growth is around 15% annually. The largest player in this segment is Samsung with revenues of $76 billion. Samsung had to shut down its production plants twice in the last month or so, and they have announced closure of all U.S. stores. Apple has closed all stores worldwide except in greater China.

This industry will face the brunt of the coronavirus pandemic due to its heavy reliance on China as its manufacturing hub and reduction in demand due to the fact that most consumers are now staying in their homes and tightening their wallets. Many consumers are being furloughed or losing their jobs.

These companies will not be able to do anything to make their supply chain more resilient due to the higher investments required to build a factory. For example, a semiconductor wafer fabrication plant costs somewhere in the neighborhood of $1 billion to build, but companies will be prudent to look for distributing their manufacturing to other countries and bring part of it back home. Locally, they can try beefing up doorstep service if not sales. Anything done to facilitate the customer will be remembered and at least some of the lost sales might be avoided when the shops do open again.

Medical Devices and Equipment:

This is one of the fastest-growing industries in the United States, currently worth about $180 billion. Globally, this industry stands around $600 billion. The U.S. has a large aging population, which makes it the largest market for companies like 3M, Alcon, Zimmer Biomet, Boston Scientific, Medtronic, NuVasive, Intuitive Surgical, etc. This is also a highly regulated industry. Any device sold in the United States must be approved by the U.S. Food and Drug Administration (FDA) before it can go to market. Their main business is around elective surgeries like hip and knee replacements as well as non-elective procedures.

From a demand perspective, COVID-19 will dampen the demand for these procedures in the short term, but demand will resurface once the pandemic has died down. Companies like PerkinElmer are seeing significant deterioration in demand in China. One good thing about this industry is their localized manufacturing and supply chains, which makes it less prone to disruptions. But there are sizeable companies which have supply chain dependencies on Europe (i.e., they manage their inventory in European countries and supply to American hospitals from there). Those companies are at huge risk of losses.

In summary, the impact of this virus is already being felt across all the industries. Some are faring better than others, but most will learn a few lessons from this pandemic. The one lesson that most organizations will hopefully learn from this unprecedented global disruption is the absolute necessity to constantly scan the supply chain and adjust. This will go a long way toward reducing losses from disruptions and preparing them for future disruptions.