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COVID-19 outbreak in China slows global supply chain

The COVID-19 outbreak started in China, where a large percentage of major enterprises have factories. Here's what business leaders should learn from the resulting slowdown.

One of the first effects of the coronavirus was the shutdown of Chinese manufacturing factories. While some are reopening, the effects of that slowdown in Chinese production is causing ripple effects throughout the global supply chain.

"China plays a key role in the global supply chain," said Charlie Kun Dai, principal analyst at Forrester Research, who focuses on China. "As many Chinese manufacturing companies are forced to pause their activities, the impact is broadcasted through the global supply chain networks."

Folly of single-sourcing supply chain strategies

The slowdown in Chinese productivity casts a spotlight on enterprises that have relied too heavily on Chinese suppliers.

"[The impact of] COVID-19 has demonstrated the vulnerability of conventional supply chain strategy," said Alberto Oca, a partner in the strategic operations practice of Kearney, a global strategy and management consulting firm.

In particular, organizations that rely on manufacturing operations or parts, raw materials and finished goods suppliers from primarily one country put themselves at risk.

The coronavirus impact to the global supply chain is profound and could even lead to some companies going out of business, especially those running on lean inventories to minimize working capital, Oca said.

Global supply chain impacts from the initial outbreak in China are only going to get worse in the second quarter of 2020 with COVID-19 outbreaks now spreading through Europe and the United States, he said.

The rollout of higher tariffs on a variety of goods due to the unsuccessful U.S.-Chinese trade negotiations could have served as a wakeup call. A number of companies didn't heed the warning.

Forty-four percent of companies did not have a have a plan in place to address supply disruption from China, and 23% are already feeling disruptions, according to a COVID-19 supply chain effects survey from the Institute for Supply Management (ISM).

"This suggests that companies were so focused on lowest cost, they were a little complacent about risk," said Thomas Derry, CEO of the ISM. "Now that risk has blown up in their face."

Even companies with a supply chain disruption plan are seeing the impact of the coronavirus pandemic in China.

Almost 60% reported delays in receiving orders and 57% reported longer lead times for tier 1 China sourced components, according to the ISM study. Average lead times have more than doubled compared to the end of 2019.

"Companies have to realize that part of building a resilient supply chain is having alternative suppliers in place that are geographically dispersed," Derry said.

Growing COVID-19 impact on global supply chains

As the COVID-19 outbreak grows, its impact on the global supply chain will grow with it.

The profound impact of the coronavirus will get worse in the second quarter, Derry said. Many enterprises have stocked away reserves in anticipation of the Chinese New Year and tariff-related trade disruption. Now those stockpiles are being depleted.

"It will really hit companies in the next six to eight weeks as companies work through that and will not be able to replenish in as orderly a way as they expected."

The industries that have been impacted the most are manufacturing, shipping, travel and transportation, and consumer-packaged goods, said Roi Hansraj, executive director of RCI, a management consulting firm.

"All these industries have seen a significant in drop in supply," he said.

A prime example is hardware and electronics manufacturing. The coronavirus outbreak in China and resulting manufacturing slowdown had a devastating effect on Apple products, including a shortage of iPhones.

"We need more diverse supply chain strategies to include less reliance on outsourcing the manufacturing to China," Hansraj said.

Many electronics, telecommunications, auto and medical device manufacturers could also experience major supply chain problems, said Ken Hung, professor at the Sawyer Business School at Suffolk University.

For example, Wuhan is China's auto production center that provides parts for auto manufacturers like General Motors, Honda, Nissan, Peugeot Group and Renault, he said. Shanghai is home to Tesla's new factory. Taiwanese electronics contract manufacturer Foxconn Technology Group is a major supplier to Huawei, Amazon, HP, Dell, and, of course, Apple's iPhone.

Though some of these factories are reopening, a number of companies will likely feel the effects of the shutdown.

"The fear and lockdown have increased further disruption to production," Hung said.

Coronavirus supply chain effects in retail

The impact of the Chinese slowdown is likely to play out over the next couple of months as retailers struggle to prepare for big selling seasons later in the year.

"This impact will be felt during the key back-to-school and holiday shopping time periods given the factory closures and slowdown right now," said Carlos Castelán, managing director of The Navio Group, a retail consulting firm.

Retailers will see the biggest problems in the Q3 and Q4 seasons due to the average lead times to procure, produce and then ship product, he said. Already there's an impact on global retailers -- particularly for luxury goods -- that obtain a significant part of their revenue from China.

Retailers should be working with their suppliers to understand which items or products will be affected.
Carlos CastelánManaging director, The Navio Group

"To prepare for these changes, retailers should be working with their suppliers to understand which items or products will be affected," Castelán said.

Retailers should also consider pricing changes if there are no viable alternatives or quickly identify suppliers that have not been affected by the closures due to different supply chains and sourcing.

In some cases, pricing will be higher from other suppliers due to a variety of different factors. In these cases, retailers need to consider the impact of being in-stock during these key time periods in relation to other retailers that may not be able to meet consumer demand. This is a good opportunity for retailers to consider alternative sources in the event of new tariffs.

"The current outbreak may already accelerate efforts to move away from China for retailers already transitioning their supply chain practices," Castelán said.

Will demand change?

The drop in supply due to the coronavirus is one supply chain disruption. However, another is likely to be the now-expected drop in demand.

Many experts are predicting an economic slowdown and a resulting recession. That is yet one more variable in the coronavirus's effects on the global supply chain, which is developing by the day.

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