Coronavirus lockdowns to speed up long-pending revamping of supply chains
With millions of production lines impacted, business disruptions to some extent are unavoidable and the lessons learned from this turbulence will leave an everlasting impact on both global and local levels of supply chains.COE-EDP | Updated: 23-04-2020 10:50 IST | Created: 28-03-2020 13:13 IST
The coronavirus outbreak has impacted daily life in at least 171 countries. Hundreds of cities and billions of people are under lockdown in the world, making it the largest such response to any crisis in human history.
The COVID-19 pandemic has brought the world to a halt and the topmost priority of all the top leaders is to stop the outbreak. It has deserted the biggest financial centers and is massively impacting every business in the world and thus the global economy.
Many businesses across the world are struggling to continue operations and those providing essential goods and services remain at the forefront of the crisis. But with a third of the global population in lockdown, businesses are finding it hard to reach the last mile customer due to the supply chain disruptions and are looking at alternative ways to fulfill the demand of fast-moving goods, which has been especially increased by the panic buying behavior.
Current supply chain disruptions
As the situation unfolds, supply chains across the world are largely being impacted in three primary ways: limited access to employees due to lockdowns and fear of getting infected, difficulty in production and procurement of components and finished products due to factory closures or manufacturing slowdowns, and limited access to logistics to move goods.
China is a global manufacturing hub and as restrictive measures across the country tightened during February, it became harder for factories in the country to operate due to lack of workers, leading to supply chain disruptions in various sectors across the world. Soon after China, European countries were also confronted with the harsh realities of the pandemic and many production units in the region suspended operations.
The impact was soon felt across the world and major automakers including Ford, Volkswagen, Fiat Chrysler Automobiles, Tesla and BMW had to suspend production in Europe, Asia and North America due to falling demand, disruptions in supply of components, and lockdowns.
"Component supplies to Ford manufacturing sites in Europe have been increasingly interrupted, while sales of vehicles across the industry have declined with dealerships required to temporarily close their sales operations in some countries," Ford said in a release. Some manufacturing units are being disrupted even in regions where lockdowns have not been imposed as companies prepare to adapt to the latest policy requirements on social distancing and hygiene.
The tech sector has also taken a big hit due to the coronavirus outbreak with Apple becoming an early victim of the outbreak when it's Chinese suppliers suspended production and disrupted its supply chains and even as China gets back to business as usual in March, the company has announced closures in rest of the world as the pandemic grows globally.
Experts were worried that the supply chain disruptions originating from China would spill over to other countries long before the coronavirus became a global phenomenon. Concerns were raised that the supply of even essential goods like medical equipment could be compromised as China is the world's top producer of active pharmaceutical ingredients.
Factory activity in China hit an all-time low of 35.7 in February from 50.0 in January, and below the 38.8 figure reported during the global financial crisis. The United States' Food and Drug Administration (FDA) had acknowledged its potential impact on the medical supply chain in late February.
"The FDA has been closely monitoring the supply chain with the expectation that the Covid-19 outbreak would probably impact the medical product supply chain, including potential disruptions to supply or shortages of critical medical products in the US," FDA commissioner Stephen Hahn said, adding that 20 drugs with active ingredients sourced solely from China have been identified by the authorities.
Due to fear of lockdowns, panic buying is also being witnessed in different parts of the world along with hoarding practices at different levels of the supply chain, which has led to price increases. Shortage of hand sanitizers, face masks, and toilet papers have been reported from across the world and these items are reportedly selling at exorbitant prices.
While paying a premium for everyday products can be tough for customers, it also impacts businesses. Small-scale traders are most vulnerable as any sharp uptick in the prices of directly impacts their trustworthiness and because of low purchasing power they have limited access to alternative suppliers in case of supply chain disruptions.
How are supply chains coping up?
Over the years, industries have weathered various supply chain disruptions, most of them due to natural disasters while some of them due to geopolitical factors.
When the Fukushima Prefecture of Japan was struck by an earthquake and tsunami in March 2011, the electronics industry had a huge problem on its hands. Two Mitsubishi Gas Chemical factories in the affected area made almost the entire world's supply of a small yet critical component used for making electronic chips and the industry would come to a halt without an overhaul of supply chain and manufacturing.
The disaster came as a shock to the industry as many major companies were sourcing the whole electronic chips from different suppliers and thus failed to gauge the impact of suspended production by their "invisible" suppliers in the affected areas.
But a coronavirus-like crisis hasn't been witnessed before, the outbreak has impacted the everyday life of almost the entire population of the planet. The outbreak has revealed that global supply chains are shockingly fragile and the lessons on invisible impact to businesses are once again haunting the corporate world. As the outbreak is still evolving, the need for businesses is to regularly assess the impact and if required, modify their response.
The pandemic has led to a sharp decline in demand for many goods and services as people avoid going out, but the demand for goods like hand sanitizers and face masks has skyrocketed to such an extent that businesses that manufacture the products just can't cope up, leading to a global shortage of the products.
But given the low product complexity, companies ranging from aerospace to liquor brands have offered a helping hand in producing these products to support the rising demand.
SpaceX and Tesla are manufacturing everything from ventilators, face masks, and hand sanitizers while liquor companies are expanding the use of extra neutral alcohol (ENA) and using distilleries for the production of hand sanitizers.
Due to the high demand for hand sanitizers, the US FDA has also allowed all companies to manufacture hand sanitizers for consumers and health care professionals.
Automakers including Toyota, Ford, and GM have pledged to manufacture ventilators to address the shortage of critical medical equipment. India, which recently imposed the largest lockdown to stop the spread of coronavirus, has also eased regulations on manufacturing of ventilators and has reportedly reached out to five automakers: Tata Motors Ltd, Mahindra and Mahindra Ltd (M&M), Hyundai Motor India Ltd, Honda Cars India Ltd, and Maruti Suzuki India Ltd, to explore the possibility of making ventilators at their plants.
The outbreak has also paved the way for faster adoption of new technologies to address shortages arriving due to supply chain disruptions. An Italian 3D-printing startup, Isinnova, recently began printing much-needed Venturi valves for hospitals after hearing about a shortage.
The startup's founder Cristian Fracassi said that the company was able to deliver 100 of the valves to his local hospital and that it cost next to nothing to produce the valves, which weigh around 20 grams each and are made of plastic.
The company is now working on converting snorkel masks to CPAP masks, which use positive air pressure to keep a patient's airways open.
A New York-based 3D-printing company Budmen Industries is also working on producing face masks to address the shortage in the United States, which recently surpassed China to become the country with most coronavirus infections.
Meanwhile, companies in countries and regions that aren't under lockdown are also trying to optimize their process with the help of alternate sources or substitutes of components that were previously sourced from quarantined regions. But with millions of production lines impacted, business disruptions to some extent are unavoidable and the lessons learned from this turbulence will leave an everlasting impact on both global and local levels of supply chains.
Future of supply chains
- Diversifying supply chains
Risks of single sourcing have been well documented but managers often lean towards it because of cost benefits or a higher degree of cooperation. Sometimes there just aren't enough options to choose from and in the past few years, those options are increasingly in China.
The trend to look away from China for manufacturing had started even before the coronavirus outbreak. The increasing labor costs along with geopolitical tensions have reduced the attractiveness of China as a manufacturing hub and companies are looking towards its neighbors like India, South Korea, and Vietnam.
But in many cases, the problems stem deep into supply chains. In many cases, it is vital for companies sourcing components of components from a single supplier or region due to unique intellectual property or competitiveness. In the case of disruptions, this even impacts large companies who don't source from a single supplier or region but whose suppliers do.
More transparency and risk management principles that include tier 1 and tier 2 suppliers should be implemented by companies to avoid such disruptions.
- Product complexity
China manufactures a lot of products and components and as its manufacturing activity fell to an all-time low, businesses ran for alternatives. But supply value chains aren't created overnight and a gap as big as China can simply not be filled.
A recent survey by the Institute of Supply Management, Tempe, Arizona said that 44 percent of the respondents do not have a plan in place to address supply disruption from China due to coronavirus outbreak.
With rapidly evolving products, flexibility in design and components was already a trend and it is likely to gain more steam after unprecedented supply chain disruptions.
Product complexity is referred to how complicated the manufacturing process of a product is, whether its components are substitutable, how flexible is its design if components aren't available. While complexity is important to achieve a competitive advantage, its degree might get lower, especially for fast-moving and essential products.
- Increased adoption of AI-based supply chain planning tools
While the importance of Artificial Intelligence-based supply chain planning tools has often been acknowledged, the coronavirus outbreak might push even small businesses to adopt it.
An unprecedented crisis like coronavirus or a natural disaster can reduce the dependability of traditional planning tools that use historical data and arises the need of AI-based tools that use real-time data for making predictive models that can include 'what if' scenarios and simulations.
Using real-time data for demand and production planning will also let businesses better adapt to global trends and sudden changes in customer behavior like panic-buying.
- Increased push for inclusion of robots in supply chains
As global supply chains struggle due to limited access to the workforce during the coronavirus pandemic, the corporate lobby is expected to push for faster adaption of robotics in different levels of the supply chain.
Robot-equipped warehouses and loading, unloading robots could become more common as businesses aim to make supply chains more resilient.
The popularity of "contactless deliveries" during the coronavirus outbreak would also lead to further innovation in the sector and drone deliveries would be developed for the masses.
- Enhanced Last-Mile Delivery
As the coronavirus pandemic forced billions into their homes, the demand for home deliveries skyrocketed. Resistant local grocery stores had to adapt to technological-friendly methods and improve last-mile deliveries.
Lessons learned from these times of turbulence are expected to leave a long-lasting impact on the way supply chain work and as customer sentiment change towards home deliveries, especially of perishable items, businesses would need to adapt.
Large e-commerce corporations are expected to be the catalyst for innovation in last-mile deliveries. Innovative and faster delivery options like drone deliveries are expected to gain steam as home deliveries become the norm.
As China suffered the worst of the outbreak, deliveries became tougher and connecting to customers and patients with drones became a feasible alternative. From spraying disinfectants to transporting samples to reaching remote areas, drones helped China get through the pandemic.
- Enhanced cybersecurity measures
As the post-coronavirus future seems to be technology-driven, there is a dire need to focus on the cybersecurity aspect.
Taking AI-powered supply chain planning tools online improves interconnectivity and can make operations efficient but also poses a threat to businesses because of real-time and often confidential data being exposed to the risk of hacking or theft.
Organizations can't always control or monitor the security measures taken by supply chain partners which could become a weak link that can be targeted by cybercriminals.
- More efficient decision-making with secure data sharing at different levels of supply chain
Drawing actionable conclusions at all levels based on the best information possible is important to maintaining an efficient and effective supply chain.
Decision-making can be much more informed as adequate data will be shared at different levels of the supply chain when companies integrate AI-powered tools.
For eg. If given the right information, regional managers expecting a shock can timely take action to address a weak link in the supply chain that could cause disruption.
- Blockchain-powered solutions to track hygiene
Hygiene and cleanliness are the most important aspects of life during the coronavirus crisis and will remain so for the years to come. Integrating blockchain in all levels of the supply chain can increase transparency and accountability by enabling anyone to track and see the history of the product.
The demand for transparency is especially high in the food and beverage industry. Even before the coronavirus outbreak, a 2018 study by the United States-based Food Marketing Institute (FMI) showed that the public demand for transparency is growing as consumers become more health-conscious. The report found that as much as 75% of consumers are more likely to switch to a brand that provides more in-depth product information.
The traceability can be extended to customers as well as the government with the help of blockchain, which helps companies to prove that the information provided is not corrupt or tampered with. This will also make a supply chain future-proof and easy to adapt to the latest policy requirements.
Centre of Excellence on Emerging Development Perspectives (COE-EDP) is an initiative of VisionRI and aims to keep track of the transition trajectory of the global development sector and works towards conceptualization, development, and mainstreaming of innovative developmental approaches, frameworks, and practices.
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