Supply Chain

COVID-19: A supply chain response

Milligan: companies need to work together

The COVID-19 crisis is more severe and widespread than any other supply chain disruption in recent history. Due to the vital role that the Middle East plays in global trade, connecting China with the rest of the world, supply chain disruptions have hit the region hard and have significant consequences for the rest of the world.

These disruptions are being felt within every mode of transport in the GCC. In air freight, IATA noted a 1.4 per cent drop in the Middle Eastern cargo volume in January 2020 against the same period last year, with a deeper decline forecast in coming months. In shipping, container ships are unable to dock at many ports due to COVID-19, and where they can dock, the crew are often not permitted to leave the vessel. In road freight, social distancing measures are causing a sharp rise in e-commerce, resulting in a shortage of distribution capacity. For example, Bulkwhiz, a grocery e-commerce start-up in Dubai has seen a 100 per cent increase in orders since February and are currently urgently recruiting additional delivery drivers to cope with increased demand.

Supply chain disruptions are commonplace; supply chain professionals are highly adept at expertly dealing with issues relating to continuity of supply or fluctuations in demand without the customer ever realising there was a problem. So, what is so different about COVID-19? Simply stated, the current pandemic is so disruptive to supply chains that it has interrupted two of the “principal flows” that supply chains require to work efficiently, namely, the movement of goods and the exchange of information. COVID-19 has highlighted the fragility of many global supply chains, this article shall explore how the pandemic has caused disruption and what the leading supply chain research says can be done about it.

For any organisation, there are two supply chain considerations, the supply side and the demand side. To first explore the supply side, it is well documented that COVID-19 originated in China. China is responsible for 28.4 per cent of all global manufacturing (Statista, 2020). The infographic below details how each manufacturing sector in China was affected by COVID-19 in January and February this year.

Global supply chains are complex, often with component parts being produced in many different countries to strategically balance capacity, quality and cost. These are then shipped to a final place of assembly, ready to be distributed across the global marketplace. For example, Apple works with suppliers in 43 different countries to make the iPhone, these components are then shipped to central assembly factories, predominantly in China, to be distributed across the world. The 31.8 per cent reduction in motor vehicle manufacture in China, experienced in January and February therefore didn’t result in motor vehicle not being manufactured per se, what it did result in, was an acute shortage of critical components that are used in the final assembly of motor vehicles.

As the virus spreads around the world, continuity of supply will become a bigger challenge, especially as other global manufacturing hubs such as the US (16.6 per cent global manufacturing), Japan (7.2 per cent global manufacturing) and Germany (5.8 per cent global manufacturing) close their borders and their factories. These disruptions cause organisations and governments to react, ring-fencing strategic stock for domestic use rather than export, and a mad scramble to stockpile wherever possible. Both these actions have clear consequences for the downstream supply. Supply side strategies are often associated with lean approaches. Characterised by markets with predictable demand, lean supply chain strategies focus on the reduction of inventory to improve operational quality and supply chain efficiency. With lower inventory levels, these supply chains have been particularly vulnerable to the COVID-19 disruptions.

From the demand side, COVID-19 has been strongly associated with panic buying across the globe as society prepares itself with the challenge of social distancing and self-isolation. This is a major issue for organisations and is felt most acutely by healthcare and retail supply chains. In the healthcare sector, the industry is desperately trying to understand the likely demand on resources as a result of infection, with demand for critical items such as face masks and respirators significantly outstripping supply.

From a retail perspective, social distancing is creating a surge in demand which is not only difficult to replenish, it is also difficult to forecast. The increase in demand for grocery products is so widespread that consumers often cannot find the products they want and are therefore choosing substitute products, inflating the demand forecast for these products and understating the demand forecast for the desired products.

Conversely in retail, there is an excess of non-food stock which would normally be in demand. For example, are offering a 47 per cent discount on the iPhone XS and 30 per cent – 45 per cent discount across fashion lines in attempts to shift excess inventory. Characterised by markets with unpredictable demand and very fast cycle times agile supply chains, such as eCommerce supply chains, focus on strategic stock holding based on sales forecasts to rapidly respond to consumer demand. The COVID-19 crisis has forced consumers to adopt different demand patterns resulting in unplanned overstocks and stock outs.

Whilst there is no miracle cure that can solve these problems, recent research has identified the relationship between environmental scanning, supply chain integration and supply chain responsiveness that could ease these issues. The research really focusses on one of the principal flows which has been compromised by the current crisis – information. What has emerged is that integration, both internal and external, plays a vital role in how well organisations identify, respond to, and recover from supply chain disruptions. From an external perspective, an integrated supply chain, characterised by close relationships and high information sharing, is more likely to identify disruptions early on, allowing a proactive response and the opportunity for a holistic supply chain reaction rather than an individual organisational reaction.

Once organisations are aware of this information, it is vital that it informs supply chain strategy, allowing the generation of informed strategies that makes supply chains more responsive. This would translate into actions such as seeking alternative sources earlier for critical resources, making sure suppliers have the necessary resources and most up to date demand forecasts to plan to, and getting the right messages to market to influence future demand. Integrative supply chain relationships take a lot of work an effort on both sides. They are honest, transparent and challenging. It is an approach which focusses on identifying risks and opportunities together and sharing these responsibilities and benefits mutually.

There is no escaping from the fact that COVID-19 is severely damaging supply chains around the world. Organisations are struggling to get the right products on the supply side, and they are struggling to keep up with consumer demand with products in their portfolio whilst struggling to sell excessive inventory in other lines, on the demand side. Supply chain disruption is always expensive, whether the organisation is forced to source sub-optimally, increase stock holding, increase operational spend to satisfy customer demand, or indeed, lose sales due to poor availability. Supply chain integration can present an early warning to the entire supply chain and present a joined-up response to supply chain risk. Internal integration ensures that the requirements of the supply chain has a strong voice in the executive office. COVID-19 represents serious risks to supply chains across the world, now, more than ever, organisations need to work together to survive.

About the author:

Stuart Milligan joined the University of South Wales in 2016 and is the Academic Manager for procurement, logistics and supply chain management. He is also the Course Leader for the MSc International Logistics and Supply Chain Management in the UK, and for the course at the Dubai campus, which was introduced in September 2019.

Alongside teaching, Milligan is studying for a PhD. His research is based on the impact of adopting an omni-channel strategy, and his research interests include supply chain strategy, sustainable operations and the impact technology has upon the supply chain.