Understanding Supply Chain Disruptions
The impact of COVID-19 is seen far and wide, and few industries will be immune to its reach. Many business experts are saying that recent events will drive businesses to rethink global supply chain operations.
So what are the current supply chain issues? And how can we expect businesses to pivot from traditional supply chain models?
Poole College of Management’s Dr. Noel Greis, research professor of operations and supply chain management, and Dr. Eda Kemahlioglu Ziya, associate professor of operations and supply chain management, weigh in.
How will the current crisis change consumer buying behavior?
Greis: Everyone is speculating how the current crisis will change retail consumer buying behavior – specifically, with respect to online buying. However other industries, like entertainment and sports, are also thinking about long-term changes in behavior. Right now, Disney is concerned about drops in attendance at their theme parks but is seeing more subscriptions to their Disney+ streaming platform. I think we will see big changes. The question is how much will they persist after the crisis has ended.
Looking beyond toilet paper and hand sanitizer, which goods may be impacted by this virus that may not be on people’s radar?
Kemahlioglu-Ziya: In addition to PPEs and ventilators, the biggest concern should be in the pharma supply chains. A lot of drug ingredients come from not only China but other countries around the world. Some drugs, especially generics, are manufactured overseas. With supply chains disrupted and governments not allowing the export of goods that could be needed domestically, we should really be planning for back-up options for pharmaceuticals whose supply chains may be disrupted.
Greis: Definitely the medical products, as mentioned. These are critical. Other consumer products will also be hard hit, such as the complex retail fashion supply chains that cross China and other countries in Asia that are hard hit by the virus. Global manufacturers have been moving their production out of China over the last year due to high labor costs and tariffs. Some have moved to other Asian countries like Vietnam or Malaysia without too much disruption, but with COVID-19, there is no place to go since these countries are also impacted by the virus. Automotive is another industry that is heavily impacted. Plants in the United States have closed. Not only do they want to protect their workers, but they also cannot get all the parts they need.
China essentially shut down operations for weeks. What is the impact of that on goods here in America?
Kemahlioglu-Ziya: There could be shortages or delays in many of the consumer products we are accustomed to seeing in stock at places like Amazon.com. To reduce the impact, Amazon has been trying to increase its inventory levels, but at the same time Amazon relies on many third-party sellers on its platform, who also depend on China for products and they may not have the financial means to stockpile inventory even if the goods were there. It is also important to think about the strain the pandemic has put on warehousing operations and last-mile delivery. While a lot of manufacturing facilities and brick-and-mortar retailers closed shop, warehouses and logistics companies like UPS and FedEx cannot keep up with demand.
Greis: China’s production is still not back to its pre-virus levels. As a result, here in the U.S., many companies are still experiencing supply chain disruptions due to COVID-19. At the peak of the COVID-19 crisis in China, production was down at much as 50% and, although estimates vary, current production is still only 60% to 85% of pre-virus levels. There will be a pipeline effect when production does ramp up again. The lead times are long now and will get longer from pent-up demand. For some businesses, it is very difficult – even now – to book transport because of a shortage of air and ocean freight options. Consumers may be in for some shortages of some products for a while.
Will this pandemic force companies to change the way they view the global supply chain?
Greis: It is speculative, but there are discussions in boardrooms about the role of China in their future supply chains unless those products are targeted for the Chinese market. The coronavirus may have put more oomph into the reshoring of manufacturing back to the United States, especially for critical products.