Five questions about how coronavirus will affect the global supply chain

The products we use every day must be manufactured, packaged, transported and distributed. Any interruptions in the transportation of their components or parts by sea, rail, air and road may affect the global supply chain. Credit: iStock

Fearing that the new coronavirus (COVID-19) will affect the economy and global supply chains, we spoke with Nick Vyas, Executive Director of the Center for Global Supply Chain Management at the School of Business named after Marshall. Vyas is an assistant professor of clinical data and operations, and the academic director of the USC Marshall global supply chain management master's program.

What effect does the new coronavirus have on the global supply chain?

Nick Vyas: Coronavirus caused a huge global violation in the end-to-end global supply chainWhen we think of a supply chain disruption, consider the products you use every day. Each product includes many elements before it reaches you: raw materials, production, packaging, transportation and distribution. Each of them goes on a journey by sea, rail, air and road, before becoming available for your store or doorstep. Imagine that each of these steps has its own complex supply chain network connected around the world. As soon as you disconnect one of the nodes, you will affect the entire value chain. In the case of COVID-19, it affected all nodes connected through the Chinese network.

Take toilet paper, for example. Demand has risen sharply, but the shelves are empty due to production capacities and time limits. The raw materials used to make the tissue paper you buy at the store are connected by a complex network. At the factory where it is produced, there may not be enough labor or truck drivers to deliver raw materials to the factory or goods to warehouses, and from there to the shelves. This is what we mean when we say that the end-to-end global supply chain has been affected.

When will we see the impact on the wider global economy?

NV: We already see this. At the Global Supply Chain Management Center, we reviewed this about eight weeks ago when the damage was still localized in China. We saw a supply chain disruption after the planned closure of the Lunar New Year. This unplanned outage triggered a quick chain reaction around the world.

This is now a global pandemic and a growing crisis for financial markets. There are various scenarios – from medium to worst. It seems that in the short term there will be a significant impact on the global economy.

What long-term changes can we see?

NV: What is likely to happen with COVID-19 is that we will begin to see a separation from some long-term supply chain dependencies from a China-oriented supply chain network. Originally trade war set the stage for the start of the process, and COVID-19 may be the last straw that forces a change in the supply chain structure. As part of the redesign, I think we will see much more appetite to bring the supply chain closer to customer demand on land or on shore. Mexico is likely to play a larger role than in the past if its government can stabilize the situation and solve the problems of drug addiction and political corruption.

We will also see a much greater emphasis on supply chain sustainability and risk reduction and managing the global supply chain in an international environment; all that we teach in our program.

We will also see the impetus for greater diversification. If there were more diversification of supply chain nodes in the world, we would not see the consequences of the failures that we are seeing now.

How long before everything is back to square one?

NV: We will need two to three months after the virus passes through our system. China appears to have stabilized distribution, but data transparency is a big problem. We can see the impact in the third quarter before the supply chain stabilizes and normalizes.

Longer-term goals, such as separating China from a more diversified supply chain, will take at least several years.

What is the silver lining here? What can companies learn from this situation?

NV: The conclusion here is that cost should not be the only consideration when creating your company's supply chain. There should also be some mitigation strategies when the main products have several ways to enter the markets. You must embed them in your company's global strategy. You have to think through certain “what if” scenarios so as not to be taken by surprise. Companies should be active, not reactive.

We, as humans, have become globally connected. With a very sophisticated supply chain network, home customers can immediately get their services and products. In this process, we removed access to excess reserves and weak capacity. This phenomenon has deprived the elasticity of demand in the market, so there is no room for any disruption caused by natural disasters or a pandemic. We became dependent on each other's capabilities or their absence. COVID-19 is a great example. When it started, everyone thought it was a "China-only" problem. We did not cooperate in a way that could help with preemption, or participated in a way that could prevent proliferation, or we collaborated on potential mitigation plans.

At the Center for Global Supply Chain Management, we hope that this will pass, and we will return to a normal life with much better resilience. At the moment, we believe that this situation is a good lesson, and we will have the best global supply chain network that will be sustainable, flexible and reliable in the future.

Coronavirus and its impact on global supply chains

Five questions about how coronavirus will affect the global supply chain (2020, March 13)
retrieved March 13, 2020

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