COVID-19 has disrupted business & economy like no other event in the past 50 years. Not even the US-Afghanistan or US – Iraq War affected business as Coronavirus has. Governments are taking unprecedented steps to keep businesses operational, but social distancing is making a return to normalcy an impossibility.
From our research, we have identified 4 leading causes of supply chain disruptions in the wake of COVID-19:
1. Decreased Demand
McKinsey reported that in the USA, 6,648,000 people filed for unemployment claims at the end of March, this number is nearly 45% more than unemployment claims at the beginning of the same month.
As businesses are shut down, employers find themselves unable to pay employees. Most companies have shut down and fired their employees altogether, whereas others are paying less rate/hour, have sent their employees on furloughs, or temporary unpaid leaves.
Lack of employment causes a lack of purchasing power, which is strongly reflected in the sharp decrease in retail sales. Simply put, people don’t have the money to spend on buying anything other than the absolute essentials of life.
What is worse, this economic downturn is prevalent across the world. In Europe, Asia, America, and Australia, unemployment is soaring, which is causing the demand for certain goods to decrease drastically.
The sharpest declines have been in non-essential and luxury items such as electronic appliances (-1.4%), construction material (-1.3%), clothing and related accessories (-1.2%), motor vehicles (-0.9%), and furniture and related products (-0.4%).
Since the demand for these products has fallen During COVID-19, manufacturers and retailers are placing reduced orders to their supply chain. Of course, this decrease in demand is also caused by a lack of access. Consumers cannot buy non-essential items even if they want to because of strict lockdown in more than 140 countries.
2. Restricted Manufacturing
The Institute of Supply Management (ISM) reported that most manufacturing plants in China are operating at a 50% less capacity than the norm. This is not surprising considering that the industrial and port cities of Wuhan, along with other cities in the Hubei province, were in lockdown for 76 days.
Although China is claiming that it has contained the virus successfully and business practices will resume as usual, however, it has not been so. The population is still wary of the virus, and in some regions, partial or complete lockdown is still in place.
Therefore, manufacturing output has decreased considerably. Since the production is low, the industries cannot full fill orders to their clients. ISM reported that companies across the globe are experiencing delays in receiving their orders.
3. Reduced Workforce
Chinese industries claim that they are operating at less than 56% of their workforce capacity. Simply, it means that fewer people are working. As people are advised an in some cases mandated by law to social isolation, they cannot go to work.
Some companies have initiate work from home routine, but manufacturing companies suffer as their employees cannot work from home. Factories are either completely shut down or partially open and operating at reduced capacity.
A low number of workers means decreased production, which affects the supply chain significantly. Apart from factory workers, transportation and local logistics workers are also crucial to the supply chain operation.
While many companies are trying to manage their workers remotely, there is no doubt that the rate of transportation has decreased significantly.
4. Limitations of Air and Freight Cargo
Along with a shortage of materials, companies are facing shipping delays. Shipping delays are affected by two things: reduced cargo activity and a lack of workforce to load and unload.
ISM reported that companies around the world are experiencing delays in loading and unloading their goods from ports. Companies are following government guidelines and making sure to call a reduced number of workers to load and unload so they can maintain the recommended distance from each other.
The reduced workforce means works is slower.
How Can Businesses Prepare Themselves for Continued Supply Chain Disruptions
Large Businesses
For the past 20 decades, multinational corporations have focused on establishing their products in specific geographic regions such as China and India for various economic reasons. Experts argue that instead of building production facilities in one geographic area, large companies can diversify production to decrease risk. So, for instance, if one factory in china is closed down, the other one in say Mexico will still be operational.
If we look at it in the current context, shipping from China is facing severe delays, and lead time has almost doubled. If companies had production centers nearby, they would not have been facing these shortages.
Small Businesses
Big businesses are not the only ones affected by broken supply chains, local, regional, and national retailers are also affected by the delays in manufacturing and shipping. Previously, small retailers used inventories to weather out supply chain disruptions, but inventories are insufficient and expensive in the face of COVID-19.
Experts suggest that small businesses invest in technological innovations to overcome these challenges. For instance, one savvy Italian company was unable to get respirators valves due to supply disruptions, and so they used 3D technology to print one for themselves and resumed production.
Digital Supply Networks (DNS) are another promising alternative to traditional channels. DNS was gaining popularity even before COVID-19, but with the pandemic, their necessity has become even more apparent. Small businesses can utilize the interconnected and dynamic nature of DNS to react quickly to unpredictable changes in the macro-environment.
A local food company is using the logistic optimization concept of DNS to improve their Sushi delivery through Direct-to-user delivery. The optimization concept integrates driverless delivery options (like drone delivery) and predictive routing to ensure efficient distribution.
Conclusion
Businesses big and small are concentrating on tackling the short-term challenges posed by the COVID-19 pandemic. However, they should also be planning for the future. Businesses should develop a viable supply chain contingencies to protect themselves against future pandemics, natural disasters, and wars. Only the companies that can achieve a stable and dependable supply chain will be able to survive in the tough business environment post-pandemic.
