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How the coronavirus is disrupting supply chain


Since the global outbreak of the new COVID-19 coronavirus in January, my news feed has been flooded with articles about its impacts around the world. In Tokyo, surgical masks are sold out almost everywhere, and people are avoiding going to crowded places. Bigger companies are offering the option for employees to work at home, and some companies have even postponed non-urgent hiring until after the virus subsides. 
It seems like some aspects of our daily life in Tokyo have been put on pause. But with so many unknowns about the virus, and with new cases being confirmed every day, things will probably stay like this for some time.

As of 26 Feb, China’s National Health Commission reported 78,064 confirmed cases in China alone. The good news is that the spread of the virus seems to be slowing down, with new cases on a steady decline since 12 Feb. It’s still too early to celebrate however, as health professionals warn of being too complacent.

So, when will our normal lives resume? And will these pauses and changes in our daily lives in the short and medium term have an impact on society outside of China?

Yes, especially if you work in supply chain. 



China is a key player in global supply chain

According to a 2019 report by the McKinsey Global Institute, China accounts for 11.4% of traded goods and 35% of the global manufacturing output, making them the largest exporter in the world. Hiccups in Chinese production has ripple effects across the globe, as supplies of both finished goods and raw materials take a hit.

China's main strategy to control the virus is to restrict face to face interactions between people. There are currently lock downs and travel restrictions put in place to reduce the chances of transmission. This translates into pauses in manufacturing as factories shut down and finished goods being stuck at various ports, unable to be delivered. Retail stores have also been temporarily shut down as sales plummet.



Here is how the coronavirus is impacting supply chain:


Sourcing

China a staple in global sourcing, and a favourite for procurement specialists around the world. In a 2015 study done by Msg Systems, 71% of the companies surveyed had at least 25% of their suppliers in China. Among that, mechanical components and parts are by far the most popular, making up half of the materials sourced.

Often, it would mean that parts from China are essential to the production of finished goods in other parts of the world. With supplies dwindling in China, large manufacturers are already having trouble keeping up with their production schedule.

Notably, early in February, Hyundai had halted production in South Korea due to a shortage of parts due to factory closures in China. Other automakers such as Tesla and Honda are also expected to be affected, but not to the extent of Hyundai, as they source less of their components from China.

Small businesses depending on Chinese suppliers are perhaps are worst affected as their sourcing is less diversified and have more trouble switching suppliers to other countries in the short term.


Manufacturing

Manufacturing in China across all industries is suffering a labour shortage due to the ongoing lock down in China's worst hit areas. The vast majority of China's workers in manufacturing are migrant workers, and as of last week, less than a third of them were able to return to work.

Let's have a look at the numbers to see just how badly hurt the manufacturing sector is. Of China's 300 million migrant workers, 28% (84 million) are in the manufacturing sector of 100 million people. That means that of the 100 million workers in manufacturing, only 27 million were able to return to work. With factories missing more than half of their work force, it's no wonder why factories remain closed.

As transport bottlenecks caused by travel restrictions make it difficult for workers to return, some companies have resorted to hiring private cars and buses to escort returning remote employees. Even then, it would be some time before factories are able to produce again at their full capacity.


Delivery

Lock-downs and travel restrictions in parts of China have halted logistics both domestically and internationally. The first half of February saw ports and trucks suspending operations, and even now when transportation is beginning to unfreeze, recovery is clustered in the north of China, with southern and central China operating at around 20 to 40 percent capacity.

China is hoping to resume most of its operations within March. But disruptions are still expected when transportation resumes its full capacity. We can expect to see an increase in costs as shipping companies struggle to meet a surge in demand after 46% of departures from China was cancelled in the month of February.


Sales

Demand for goods and services have also declined along with supply, as people are opting to stay indoors and major retailers in China have temporarily closed their stores across the country. Notable Japanese retailers who have suspended store operations include Muji and Uniqlo, who have both temporarily closed around half of their retail stores in early February. Although Uniqlo had reopened 100 of their stores on 21 Feb, the temporary closure is expected to hurt, as 20% of their sales comes from China.

As people avoid unnecessary outings, non-essential expenses have seen a drop. The luxury industry, movie theatres, and theme parks have also taken a hit.


What does this mean for the future of global supply chain?

As the virus continues to spread, and still much is unknown, major disruptions are anticipated for weeks to come, and even when business operations begin, these disruptions are expected to be felt for months, as each stage of the supply chain slowly recover in waves.

The trade war between the US and China had already begun the process of relocating manufacturing processes from China to neighbouring countries. It seems like the coronavirus is speeding up the process as it highlights the importance of having multiple sources of suppliers.

Pandemics are always said to be a question of when, and not if. Just like scientists are always preparing for the next pandemic, will global supply chain professionals take this as a lesson to diversity their sourcing in anticipation for the next big disruption?
​For those of you working in supply chain, how has your job been affected? What are your thoughts on how the coronavirus has disrupted global supply chain?

For more supply chain related information, job hunting tips and hiring information in Japan, visit the Icon Partners Homepage and follow the Icon Partners LinkedIn page.

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