Supply Chain Management: Covid-19 and its Disruptions

The world today is the world of globalization, and the supply chain is the indispensable part of globalization. It has not been long since the term Supply Chain Management (SCM) arose. It arose in the late 1980s and came in widespread in the 90s. Before this, the standard terms in the organizational lexicon were “logistics” and “operations.”

There is a difference between the concept of supply chain management and the traditional concept of logistics. Logistics typically refers to activities that occur within the boundaries of a single organization, whereas supply chain is the network of companies that work together and coordinate their actions that deliver a product to market.

The evolution in supply chain management results from a progression blending technical, technological, and modern improvements.

Fig. 1: Evolution of Supply chain Management. Source: Digital Supply Network

Therefore,SCM is the organization’s sequence – its facilities and activities involved in producing and delivering products and services. The supply chain sequence begins with the essential suppliers of the raw materials and extends to the final customer. Facilities include warehouse, factories, processing centers, distribution centers, retail outlets, and offices in this context, and activities include forecasting, purchasing, inventory management, information management, quality assurance, scheduling, production, distribution, delivery, and customer service.

Companies involved in any supply chain must make decisions individually and collectively regarding their actions in five areas: production, inventory, location, transportation, and information.

Fig. 2: The five major supply chain drivers. Source: SCMGLOBE

Global Disruption in SCM by COVID-19

The current pandemic has spotlighted the traditional supply chain vulnerabilities across industries- from healthcare to retail, industrial manufacturing to pharmaceuticals. Raw materials and components stopped shipping. Supplies were unable to reach their destination due to canceled air flights, Shipments and trucking systems. What started in a few distinct geographies quickly blossomed into a domino-effect of supply disruption, grinding production to a halt across regions and sectors.

Fig. 3: Domino-effect on Supply chain Disruption. Source: ResearchGate

Epidemic outbreaks are rare cases of supply chain (SC) risks, distinctively characterized by a long-term disruption existence and high uncertainty. Supply chain risks are multifaceted and can be classified into operational and disruption risks. The operational risks are concerned with day to day disturbances in the Supply Chain operations such as lead-time and demand fluctuations, and disruption risks belong to a low-frequency high impact events such as earthquakes and tsunamis (e.g., tsunami in Japan in 2011 and its massive impact on the SCs worldwide), human-made catastrophes (e.g., an explosion at BASF factory in Germany in 2016 and the resulting shortage of raw material in global SCs). Such risks are characterized by a powerful and immediate impact on the SCs network design since some factories, suppliers, and DCS and transportation links become temporarily unavailable.

The recent coronavirus outbreak started from the Wuhan area and immediately impacted Chinese exports and drastically reduced Supply availability in global SCs. As the number of cases exponentially surged in Asia, Europe and the USA resulted in border closures and quarantines.

China is the epicenter for the global supply of inputs and outputs. Moreover, being lean and globalized in structure, the supply chains of many companies became especially prone to epidemic outbreaks. 94% of the Fortune 1000 companies have reported impacts from Coronavirus driven SC disruptions. A report by corporate data analytics firm Dun & Bradstreet says that 51,000 companies around the world have one or more direct suppliers in the Wuhan region. Moreover, 938 of the Fortune 1000 companies have tier-one or tier two suppliers in Wuhan district.

The data obtained from the Resilinc System, world’s most extensive repository of deep supply chain intelligence shows that the world’s largest SCs own more than 12,000 facilities (i.e., factories, warehouses, and other operations) in COVID-19’s quarantine areas. The outbreak of the virus disrupts both supply and demand. Considering the different scenarios of an epidemic outbreak, e.g., only in China vs. also in Europe, North America, and South America, we can see the disruption of the virus outbreak that stops at facilities and demand disorders in the market and delay in lead time.

Fig. 4: Disruption in the lead time under different scenarios. Source: Sciencedirect

Economic impacts of COVID-19 under different lockdown scenarios

The following figure summarizes the results of several typical pandemic scenarios. The panels in the left column show the supply-chain effects if COVID-19 were successfully contained to only China. Similarly, the panels in the middle column show the impact if COVID-19 had spread from China to Europe and the United States, which had implemented lockdowns, but no further; and the panels in the right column show the impact when the virus spreads globally, and all of the remaining countries implemented containment measures.

The different spatial spreads show the results of 3 different lockdown strictness–duration combinations: from 80% restriction for two months to 60% restriction for six months. Note that China’s lockdown is consistently modeled as an 80% restriction for the two months of January and February in the scenarios of greater spatial spread, with constraints in Europe and the United States beginning in March, and limitations in the remaining countries (in the global situation) starting in April.

Fig. 5: Economic impacts (value-added loss) of COVID-19 under different lockdown scenarios.
Source: Nature News

The above figure illustrates that the global cost of pandemic primarily depends on the number of affected countries. And secondly, on the duration of the lockdown policies regardless of these policies’ strictness. Had it only been China, then the global supply-chain effects (measured by value-added loss) would have been 3.5% of global gross domestic product. With the containment expanded to developed European and American regions, global supply chain effects increase almost four-fold to 12.6%. And finally, the impacts of global lockdown in response to Covid-19 leaped to a global loss of -26.8%. The magnitude of lockdown duration is shown in Fig. 5  which shows the effects of global spread and relatively strict (60%) lockdowns for 4 and 6 months. Global value-added losses increase more than 4% slightly (from 26.3% to 30.8%).

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Disruption of Supply Chain Management in Asia-Pacific and Nepalese Scenario

Asia-Pacific Scenario

Even though China is recovering its domestic market demands, Southeast Asian countries are still in the endangerment phase due to pandemic situations. A survey conducted on more than 200 Asia-Pacific manufacturing and supply-chain leaders across industries by Mckinsey depicts that 39% of respondents expect the rapid recovery of the manufacturing sector, whereas 61% of the respondents expect its timely recovery (Chenneveau, 2020).

Fig. 6: Expectations of Asia-Pacific manufacturing leaders across industries for when recovery could take place. Source: (Chenneveau, 2020)

Based on responses across the Asia-Pacific region, we can see optimism in the stage of progression. The majority of the respondents in China expect a speedy recovery, whereas Southeast Asian countries possess a low level of confidence in quick recovery. It is because most of these regions are still facing critical issues due to the pandemic situation. South Korea is currently preparing to move ahead to the next normal under lockdown measures cautiously. The dynamic nature of COVID-19 has also challenged Japanese manufacturing sectors. Almost 20% of respondents from Australia and New Zealand expect the timely recovery of the manufacturing industry mainly focused on the hardest hit primary areas.

Challenges Faced by Asia-Pacific Leaders across Industries

  1. Material Shortages

Inter-connected supply chains covering various geographical locations have made advanced industries most affected by material shortages. One of the auto companies in Southeast Asia has been facing this problem from tier-two companies, including aluminum and imported chemicals.

2. Drop-in Demand

Fashion, luxury, and cosmetics business companies are mostly affected by decreased demand during this pandemic. It is because of the country-wide lockdowns and even severs curfews in some parts.

3. Workers Shortages

Diminutions in the work capacity and social distancing measures are the major factors to cause worker shortages. Labor-intensive industries are the primary sufferers of this problem.

4. Cash-flow Issues

Both the leaders and their multitier suppliers are facing cash-flow issues. Some automotive original equipment manufacturers facilitated lower commercial discount rates, incorporated multi-channel financing, and collaborated with other organizations to manage cash-flow risk for suppliers.

5. Planning Issues

Lack of accurate demand forecast caused planning issues due to which many leaders found it challenging to fulfill their new orders. Due to the dynamic nature of COVID-19, demand forecasting tools have become inefficient and ineffective in producing meaningful demand forecasts.

Fig. 7: Challenges faced by Asia-Pacific manufacturing leaders expressed in percentage.
Source: (Chenneveau, 2020)

According to McKinsey, these five challenges differ among industrial groups. We can broadly classify the industrial groups into five categories, and they are:

1. Advanced Industries

2. Mining Industries

3. Construction Industries

4. Consumer-Facing Industries

5. Logistics Industries

The challenges faced by each industry are based on their specific external situations. The five challenges faced by Asia-Pacific leaders across sectors can be illustrated from the diagram given below:

Fig. 8: Major challenges faced by various industries ordered number wise.
Source: (Chenneveau, 2020)

Strategies to Minimize Supply Chain Disruptions

1. Measures to deal with material shortage challenges

End-to-end transparency and implementation of nerve centers can help to mitigate the risk of material shortage. Increasing supplier and logistics bases also lead to solving the material shortage challenge. One of the leading Asia-Pacific automotive manufacturers moved away from sole supplier partnership to minimize the shortage of one of its critical components.

2. Measures to deal with worker shortage challenges

One of the measures to deal with workers shortage challenges may be optimizing the allocation of works to priority customers. In order to respond to the reduced capacity caused by worker shortage, industries should focus their efforts on demand fulfillment from priority customers. They may also respond by producing their fastest selling product in the beginning phase. One of the leading automotive players in China emphasized the production of its fastest selling products to mitigate workers shortage risk.

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3. Emphasis on employee safety measures

Employee safety is a crucial concern to restart and bring stability in the manufacturing operations in the following normal situation. Necessary safety measures such as social distancing, employee temperature checks, face masks, and sanitizers are top priorities.

4. Shop-floor reconfiguration

To allow physical distancing, reconfiguration of canteens and factory entrances should be made. Due to insufficient floor space, fear of falling productivity, inability to employ support services, and requirement likelihood of investment, leaders are less inclined towards reconfiguring shop floors. Even though, many respondents are less inclined towards this strategy, one of the leading automotive-company executives shows the possibility of increment in manufacturing productivity while adopting shop-floor reconfiguration.

The measures which have been implemented by Asia-Pacific leaders across the industries can be prioritized and illustrated with the help of the diagram given below:

Fig. 9: Measures implemented by Asia-Pacific leaders on workplace ordered number wise. Source: (Chenneveau, 2020)

Nepalese Scenario: Hardest Hit on Food Supply Chains

Food Supply Chain Disruptions

A least-developed country like Nepal has continuously been facing the challenges to meet the dietary needs of all Nepalese citizens with or without the pandemic.

As per the joint text signed by the heads of the United Nations and Food and Agriculture Organization (FAO), export constraints can be caused by food availability uncertainties. Restrictions regarding imports for agricultural inputs imposed by neighboring countries India could cause a food crisis in the upcoming future.

Increasing tenure of lockdown in Nepal has compelled farmers, field hands, and transporters to remain indoors during peak springtime harvest season. The threat of food crisis has been rising as a shortage of workers causes the products to rot in the fields.

The nationwide lockdown imposed by the Indian government forced Indian rice traders to stop contracting Nepalese importers. The labor shortages and logistical constraints compelled the Indian government to make such decisions, as workers have been forced to stay at home.

Food crisis is also determined by the availability of chemical fertilizers since Nepal is a net importer of it. The food crisis would be approaching if global fertilizer companies stop manufacturing and exporting due to a shortage of workers.

As per the Ministry of Agricultural Development, poultry and dairy sectors have been affected to a great extent. In addition to these industries, fresh vegetables are not getting to the market. The lockdown may also impact the ongoing plantation of spring paddy.

Measures to mitigate food supply chain disruptions

Rameshwor Khanal, a former secretary at the Ministry of Finance, said that Nepalese labor returning home from India, the Gulf, Malaysia, and elsewhere would require jobs. Therefore, the Nepalese Government should prepare targeted schemes to convert such a pandemic situation into an opportunity by making Nepal self-sufficient in food production. The government should also provide Nepalese labour (returning from Gulf countries) subsidies and incentives for agricultural inputs so that they become psychologically prepared to provide their contribution on Nepalese agricultural sector (Prasain, 2020).

Nepalese government should first allow the farmers and transporters (who have been compelled to stay indoors) to perform their work maintaining physical distancing so that they can harvest the crops during peak springtime harvest season. The government should also provide basic safety measures such as face masks and sanitizers so that farmers feel safe to perform their task.

The government should formulate three major strategies concerned with the production, processing, and storage. There should be a proper linkage between rural and urban markets so that vegetables may not be rotten on the farm. Also, such vegetables can be dried and stored to use them in the upcoming months.

The government should formulate an effective industrial plan to establish chemical fertilizer industries so that farmers should not depend upon the global chemical fertilizer companies.

In this way, we can mitigate the food supply chain disruptions to save farmers and ensure food security in Nepal.

Works Cited

Sinha, Amit, et al. Digital Supply Networks: Transform Your Supply Chain and Gain Competitive Advantage with Disruptive Technology and Reimagined Processes. McGraw-Hill, 2020.

Ivanov, Dmitry. “Predicting the Impacts of Epidemic Outbreaks on Global Supply Chains: A Simulation-Based Analysis on the Coronavirus Outbreak (COVID-19/SARS-CoV-2) Case.” Transportation Research Part E: Logistics and Transportation Review, Pergamon, 24 Mar. 2020, www.sciencedirect.com/science/article/pii/S1366554520304300?via=ihub.

Guan, Dabo, et al. “Global Supply-Chain Effects of COVID-19 Control Measures.” NatureNews, Nature Publishing Group, 3 June 2020, www.nature.com/articles/s41562-020-0896-8.

Chenneveau. (2020, June 1). Retrieved from http://www.mckinsey.com

Prasain, S. (2020, April 11). THE KATHMANDU POST. Retrieved from http://www.kathmandupost.com

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