As of the day of this article, it has been reported by the World Health Organization that 105,586 people have been infected in over 100 countries and territories, and more than 3,500 people have died from the coronavirus (COVID-19). It has only been just over two months since December 31, 2019, when officials in Wuhan, China reported they identified an unknown virus and were treating several cases locally. The coronavirus has since then spread rapidly around the world threatening to become a global epidemic and forcing us to realize that not only do we have to be more cautious to avoid getting and spreading the virus, but that our world is truly a complex global supply chain.
U.S. consumers and U.S.-based companies are extremely dependent on the global economy, specifically China, to supply a significant portion of our goods. China has already implemented quarantines on up to half of their population, essentially shutting down the majority of manufacturing in the country. The impact of the lack of manufacturing is already starting to be felt in the supply chain. The ripple effect has been quick, as most companies had shifted to lean manufacturing models years ago to reduce carrying costs, lower working capital requirements, and offshore manufacturing to partners like China. Which means that when there is a disruption in the supply chain, as we’re currently seeing with the impact of the coronavirus, it could be detrimental to availability of products, freight costs, and pricing. With most of the closures of China-based manufacturing plants occurring towards the end of January and average container shipping to the U.S. taking 30+ days, we anticipate the disruption on product availability to start to be felt in early March, as this article is being written. The ripple effect of product shortage will be felt in the United States as local distributors will begin to run low on product and manufacturing companies, who are dependent on parts for their products, will begin to run slow on operations or potentially have shut downs or slow downs of their manufacturing facilities likely starting in March.
As you lead your company through this uncertainty, it’s important to take this very seriously and be proactive. Create an action plan and communicate to your employees. Your employees are the key to your organization and protecting their health and safety should be your first priority. Ensure employees are aware of best practices for safety and health matters, and offer them opportunities to keep themselves healthy. Implement more, timely, and improved standards related to the cleaning of your facilities. For non-essential employees with the ability to work remotely, or travel-related matters for non-critical business, make sure to communicate your guidelines and minimize any non-essential business matters. This will minimize disruptions and maximize your company’s ability to operate or come back online in case of an outbreak.
As we are learning, our global supply chain is extremely interrelated. As China plants began to close, not only do we feel the impact in the United States in regard to finished products, but we realize the impact on other countries who are extremely dependent on Chinese goods to continue to manufacture products. You should begin with an assessment of your entire supply chain, taking a look at where you are purchasing your goods from and determining if your suppliers are dependent on other countries. This will allow you to quickly isolate risks as outbreaks of the coronavirus expand to other countries. For example, if you purchase a great deal of your products from an Italian supplier, you should map out their supply chain, in addition to your own, so that you know if they are in a high risk country and can begin to find alternate supply if needed. To avoid complete disruption, try to find local sources for supply of products, even if the cost will be slightly higher. The long-term benefits of customer retention by having products available will outweigh the short-term impact of reduced margins due to increased cost of parts or product.
As China starts to come back online and manufacturing picks up, prepare to see delays in outbound shipments as well as increases in freights costs and time to clear customs. China’s manufacturing plants are not fully staffed and, because they’re dealing with limited inventory supplies during the shutdown, will take time to ramp back up. There are significant flight restrictions in place, along with an increased scrutiny on goods coming into the U.S. and leaving China, which will cause delays in timing but also an increase in airfreight and trucking costs as goods begin to come back in. You should be prepared to have alternate logistics plans in place, as well as a forecast for increased products/freight costs, in 2020.
With most of us focused on the sourcing of production coming out of countries affected by the coronavirus, very little attention is being paid to the end users and the implications within the retail market. Travel is down significantly, and conventions and large events such as South by Southwest, usually an incubator for new business, are being cancelled. As if brick-and-mortar stores didn’t have enough to worry about with the ongoing shift in consumer preference to be online shopping, with this outbreak, foot traffic takes another hit. This disruption has the potential to lead to overstock issues, increased inventory hold costs, and various other procurement issues.
It’s clear the coronavirus is not only a worldwide health concern, but also a large concern for the global economy. With the uncertainty of when the global economy will recover from its impacts, we need to continue to be proactive in our preparedness and response plan. If nothing else, this should be a call to action in terms of evaluating your company’s supplier concentrations, and starting the conversation regarding future diversification. Who knows where the next disruption is coming from and when.