University of Virginia: COVID-19 and the supply chain

By Professor Vidya Mani
Professor Vidya Mani of Darden School of Business, University of Virginia on COVID-19 and the supply chain...

The supply side effect

Given the initial outbreak and shutdown in China and neighbouring Asian countries, all manufacturing operations that were based in China or sourced raw material from China saw SC disruptions. Retail, Electronics, Automotive were the immediate hits. Most of them bled through the inventory build-up they had for the lunar year holiday and safety stock and were still left grappling with shortages.

Almost all countries are now in a phased re-opening stage. As supply chains start to work their way back to normal we should expect to see some long-term changes in both configuration and management of supply chains. Enabling a phased reopening is a much tougher challenge than lockdown, especially with virus continuing to spread in the different communities. 

Industries particularly vulnerable

Critical supply chains (largely defined by national security interests) will see a long-term shift towards shorter and more diversified sources. We have already seen movement in government funds and trade policies in this context.

Food and retail supply chains, while continuing to operate, will see more oversight and investment in processing, packaging, logistics. Warehouse automation and shortening the link from farm-to-table would be places to watch. Amazon, WalMart in the US and some similar names in Europe and Asia are expected to lead here. Both companies have used learnings from places ahead in the epidemic curve to make changes in home countries, staying potentially 2-3 weeks ahead. To me, that appears key to surviving the next few months.

Automotive and high-tech supply chains, while being able to reopen early, may take longer to function at capacity due to demand pressure. The downstream supply chain members will have to proactively ensure that their upstream partners continue to remain in business.

Retail (apparel, specialty goods) is up in the air. We would expect to see a lot of M&A and restructuring here, as well a completely new business model evolve with online/e-commerce channels. Real estate around shopping centres used to look at food courts and services to get traffic into the mall, with retail shutting down and services only operating at 25-30% capacity, the viability of large shopping complexes remain in doubt.

Services are largely the first to reopen, but at reduced capacity. This means that most businesses will operate below profitability on-site in the initial days. These businesses are most susceptible to a second wave of infections and lockdowns and many of them do not have the liquidity reserves to survive an extended lockdown.

Cross cutting issues

Need for a global response

The lockdown lead to goods and migrant workers stranded at the borders. The WTO/WCO, UN Global Compact, ILO/IOE and many other international organisations have issued guidance on shutdown/reopens. These transcend borders, and rightly so, as the shutdown of borders leaves essential goods locked out. We are now hearing industry call for more coordinated action (e.g., shipping) across nations. At a policy level, we should expect to see more on this front, and resistance from nationalist policies/governments.

Just-in –time vs. Just-in-case

At an operations level, there is much discussion on the pitfalls of JIT systems. Unfortunately, the conversation has tended to focus on “Just-in-case” and this can potentially reverse decades of progress in inventory and manufacturing sectors. Building inventory is a knee-jerk reaction and can buy some time. Instead, we need to invest in knowing our supply chains better. That way, we can evaluate inventory positioning strategies that would help mitigate risk. Going back to inefficient systems will hamper innovation and progress down the line. Also, more inventory doesn’t mean more responsiveness, it is the flexibility in the supply chain that matters.

Role of workers

Throughout the pandemic, there has been much discussion on worker-health. We should see some changes to worker-safety-health guidelines, especially in low-end manufacturing. Before the pandemic, forward-looking companies incorporated worker considerations as part of their social responsibility, but largely in a “nice-to-have” category. This will move to “must-have” for quite a few industry sectors, especially in more developed countries. With inspections and audits shutdown there is a very real risk of the lower end of the supply chain slipping back on worker rights and guidelines.

Impact of travel bans

While this is for people and not goods yet, this is going to impact mostly hiring and investment decisions. If the trade stops, then we would be in completely unchartered territory as most high-end goods, instruments, drugs etc. will no longer be available. Ironically, manufacturing in EU used to be a buffer for disruptions in China and other South-Central Asian countries, we may see the reverse buffer happen if manufacturing and assembly in EU is shut down.

Sectors to watch

Education technology and networking options seem to be where we are shifting to, a virtual SC. People still need to complete classes, graduate, and use their phones and make financial trades. I would expect this sector to upend in a way we have not expected, and possibly change the way we think of education and virtual teams completely. 

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