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Impact of coronavirus on supply chain

Studies about how the COVID-19 outbreak affects supply chains

Studies about how the Covid-19 outbreak affects supply chains and disrupts manufacturing activities worldwide are on the rise. Yet the worst thing has yet to come.

The height of the effect of Covid-19 on global supply chains will occur causing thousands of businesses to throttle down or temporarily shut down production and manufacturing plants all over the world.

The most vulnerable companies are those that depend heavily or solely on parts and supplies factories in China.

The operation of Chinese manufacturing plants has decreased over the last month and is expected to remain depressed for months.

Most analyzes equate the latest outbreak with the 2002-2003 SARS outbreak, which has triggered a blip in global financial markets.

This analogy is alarming because China's relative importance to the global economic landscape has grown significantly in the last 18 years: China has more than doubled its share of trade with the rest of the world since the SARS outbreak and today, and a large number of industries are now heavily dependent on China.   

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Equally significant, rising pressure to reduce supply chain costs has driven businesses to adopt strategies such as lean manufacturing, offshoring, and outsourcing.

These cost-cutting steps mean that, in the event of supply-chain instability, production will stop rapidly due to a lack of parts.

The vast majority of multinational businesses have no idea what their risk exposure to what is currently going on in Asia is; this is because few, if any, have full knowledge of the locations of all companies that sell parts to their direct suppliers.

Impact of Covad-19 on Chinese manufacturing

Given the current efforts of the Chinese Government to quarantine just over half of all its population and the negative impact it has on transport and manufacturing activities in the region, we can logically conclude that the impact of Covad-19 on Chinese manufacturing is at least of a magnitude greater than that of SARS.

As a result of incidents such as the 2002-2003 SARS outbreak, Iceland's volcanic eruption in March 2010, Japan's earthquake and tsunami in March 2011 and Thailand's flood in August 2011, businesses have raised their inventory.

But they typically hold just 15 to 30 days’ worth of inventory. It is likely that Chinese New Year's holidays for a week have encouraged some businesses to increase their inventory coverage by another week.

Therefore, for most businesses, the inventory coverage they have would allow them to balance their supply with demand, without any additional supply, for between two and five weeks, depending on the company's supply chain strategy. If the supply of components is interrupted longer, the production process would have to end.

Many factories have already had to cut back production in their plants outside of China, and the list is getting longer by the day.

Fiat Chrysler Automobiles NV, for example, announced on 14 February that "it is temporarily stopping production at a car factory in Serbia because it cannot get parts from China."

The problem is also important in the high-tech market. Nonetheless, on February 17, Apple announced that it expected its quarterly earnings to be smaller than previously anticipated. The business points to two challenges: a small global supply of iPhones and a major decrease in demand in Chinese markets.

In summary, we agree that we will have a big effect on manufacturing worldwide. It will begin to reach full force in two to three weeks, and it could last for months.