How the Covid-19 Outbreak Is Disrupting the Global Supply Chain

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The Covid-19 outbreak is affecting supply chains and disrupting manufacturing operations around the world in an increasing way. Thousands of companies were forced to slow down or temporarily shut assembly and manufacturing plants in the U.S. and Europe. The most vulnerable companies are those which rely heavily on factories in China for parts or materials. The productivity of Chinese manufacturing plants has fallen in the past month and is expected to remain low for months.  However, the worst is yet to come, as the peak of the impact of Covid-19 on global supply chains is predicted to occur in mid-March.

Since the 2002-2003 SARS epidemic, which had a small impact on the global financial markets, China has more than doubled its share of trade with the rest of the world, and many more industries are now heavily dependent on China. The SARS epidemic started in the Guangdong province in 2002 and led to 8,000 cases in 2003. During that year, the GDP of China represented 4.31% of the world GDP. By contrast, the number of detected cases of Covid-19 has already passed 80,000 and China represents about 16% of the world GDP.

Equally important, pressure to reduce supply chain costs motivated companies to pursue strategies such as lean manufacturing, offshoring, and outsourcing. Such cost-cutting measures mean that when there is a supply-chain disruption, manufacturing will stop quickly because of a lack of parts. The vast majority of global companies have no idea of what their risk exposure to what is going on in Asia actually is; that’s because few, if any, have complete knowledge of the locations of all the companies that provide parts to their direct suppliers.

As a result of events such as the 2002-2003 SARS epidemic, Japan’s earthquake and tsunami in March 2011, and the flood in Thailand in August 2011, companies increased the amount of inventory they keep on hand. But they still usually carry only 15 to 30 days worth of inventory. Supply lead times will also have an impact. Shipping by sea to either the U.S. or Europe takes, on average, 30 days. This implies that if Chinese plants stopped manufacturing prior to the beginning of the Chinese holiday on January 25, the last of their shipments will be arriving the last week of February.

All this suggests that there will be a spike in the temporary closures of assembly and manufacturing facilities in mid-March.

In summary, there will likely be a major effect on manufacturing worldwide. It will begin to hit full force in two to three weeks and could last for months, depending on the world’s ability to contain this new outbreak.

The global supply chain will never be immune to disruptions — some things are simply unpredictable. In our next Blog Post, we will discuss how to better protect it against such global disruptions.

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