The Harvard Business Review paints a dire portrait of the effects of the COVID-19 virus on global supply chains. The first wave of manufacturing shutdowns in China and overseas created a scarcity of raw materials affecting U.S. manufacturers. By mid-March, we moved to phase two of supply chain disruption, as the rest of the world went on lockdown and product demand dried up. How will COVID-19 continue to affect supply chain in the coming months and how can companies cope?
Global pandemic’s effect on supply chain
Initially, manufacturers were concerned about coronavirus and the impact on their plants in that region. Not anymore.
In an increasingly interconnected global market, a pandemic creates something similar to a tsunami. China, as the epicenter of the impact, sent waves across the rest of the planet. The tidal waves are now hitting U.S. shores and the impact on our supply chain is threatening to drown us.
The concern today is that disruption in China’s supply chain could serve as the knockout blow to businesses already reeling from shutdowns. CNBC reports on a negative impact already being felt on back-to-school products, and they say if the virus lingers, it could also impact the 2020 holiday season. Many raw materials come from the area, but retailers are expected to feel the biggest impact. Roughly 20% of all U.S. retailers are connected in some way to China. CNBC predicts at least $700 million in losses this spring alone.
But Chief Executive says, “Modern global supply chains can be remarkably resilient and self-healing.”
As the rest of the world goes on lockdown, there are signs that China’s manufacturing companies are coming back online. The problem now is demand.
Phase two: the economic impact of zero demand
Beyond the blip in the markets we saw during the 2002-2003 SARS epidemic, economists predict a serious supply chain problem this year. The issue is that the past 18 years has doubled its trade output with the rest of the world. Global cost-cutting efforts outsourced manufacturing overseas during this time. As a result, many industries are now dependent on raw materials from China.
If we use China as an indicator, other countries will replicate their production disruption experience. The lockdown China experienced was the first wave. It paralyzed the second largest economy in the world. A month later, limited production resumed. But now the global markets are feeling the impact. The issue by the beginning of April is demand.
The South China Morning Post says, “Many in China are now bracing for the second wave of economic fallout from the coronavirus pandemic.” January and February saw a 17.2% reduction in exports and analysts warning that “worse may lie ahead.” China handles orders from much of the retail sector, but many stores are in shutdown mode across the globe. Orders are canceling, as the issue becomes too much supply and not enough demand.
The South China Morning Post quotes a Peking University finance professor who spells out the second wave of COVID-19 disruption:
“I suspect that while supply-side constraints will be eliminated fairly quickly, it will be much more difficult for demand to recover, and this will be exacerbated to the extent that even people who do not lose income react to the shock by deciding to save more and spend less out of their incomes.”
Recovery is coming, but it’s going to take some time. How can we prepare for the months of turmoil ahead?
Preparing for recovery
The New York Times calls this our “day of reckoning,” as financial markets teeter and businesses go dark. Economists do not currently predict a V-shaped recovery from COVID-19, instead of a U-shape, with an extended low period. Predictions suggest consumer purchasing will grow more cautious as a result of the pandemic, making a quick recovery unlikely.
Part of the shock has been the shift from a slow decline in revenues to an abrupt halt in everything we consider “normal.” In the U.S. smaller companies have already felt the blow, and many will not survive, even with government stimulus. Unemployment claims skyrocketed by 30% during the final week of March. Predictions indicate a 10% unemployment rate by April; that’s a jump from 5.8 million unemployed in February to 16.5 million at the beginning of the second quarter. However, The New York Times suggests, “Even if the pessimists are correct in their estimates so far, the coronavirus recession would not approach the devastation of the Great Depression.”
How can companies survive and prepare for recovery during these uncertainties?
- Review and adjust both 2020 and long-term strategies.
- Protect your existing talent and prepare now for recovery.
- Cut costs and manage cash tightly.
- Monitor supply chain constantly and remain agile in your approach.
- Realign your product offerings in light of existing market factors.
- Stay alert for short- and long-term opportunities.
Organizations must act now to mitigate their risk. It’s a proactive strategy based on the worst assumptions around long-term economic adversity. The Windsor Group Sourcing Advisory can help during this time by providing trusted counsel to help your business survive unprecedented disruption. Call on us today.