Coronavirus and supply chain: cascading effect of the disrupted Chinese supply chain
by Hyeonji Choi, Global Resilience Institute
Since the initial outbreak of Coronavirus disease (COVID-19) in China last December, more than 130,000 people are infected and 4,000 are dead in three months. Even considering the delay in centralizing such fragmented data from all over the world, this novel coronavirus proves to be spreading at a concerning speed as the exponentially increasing number of infected and deceased people show. The intense media coverage of the coronavirus outbreaks, epidemics, and finally pandemic coupled with red banner travel bans heighten anxiety not only in the epicenters but also in places where the disease has yet to fully manifest. This anxiety is being reflected globally through major events. For instance, the $5-trillion-plummeting of the New York Stock Exchange earlier this week (3/9/20) was the worst it performed in over a decade. On the same day, the entire country of Italy committed itself to a nationwide lockdown to contain the rapidly spreading disease despite the criticism that such measures can be legally fraught.
Amid the general unrest is the disrupted global supply chain. It is reported that more than a dozen industries are under the pressure of distressed supply chains caused by the current pandemic. The cascading effect of the disrupted Chinese supply chain reiterates the desperate need for companies to establish and adopt a resilient supply chain model. According to a Financial Times article, experts warn that the impact of the slowed-down Chinese production will be far worse than previously anticipated because many US companies are unaware of the level of exposure they have. The article explains, “[W]hile companies closely track their direct suppliers – the tier ones such as Foxconn that would send Apple a finished iPhone – they can be blind to their suppliers’ factories, the tier twos, and those further down the chain.” This means even those companies that do not hire Chinese suppliers directly can be exposed to the conundrum if their direct, AKA first tier, suppliers do.
In fact, the coronavirus was not the first time businesses found themselves in a situation where they had no choice but to learn the importance of establishing a secure supply chain scheme. After the March 2011 earthquake and tsunami in Fukushima, Japan, many companies suffered a loss of revenue and even market capitalization because they fell short in recognizing their second- and third-tier suppliers in the compromised region. Almost a decade later, a similar phenomenon is happening on a much larger scale.
It is not always possible for enterprises to prepare for every type of risk or threat, especially in today’s unpredictable and hyper-connected world. Hence, resilience is a critical trait that companies should emphasize to ensure business continuity in case of major disruption. Diversification of suppliers is one (obvious) solution to mitigate risks associated with over-reliance on one or few suppliers. In some cases, however, companies are confined to a limited pool of suppliers – e.g., if the production of certain items is protected by license or intellectual property regulations, or order quantities are not high enough to justify having multiple sources. In addition to diversification and for companies without that option, resilience in supply chain can be achieved by taking proactive measures. Carefully examining existing operations to map out where potential risks might lay and buttress the supply flows with new sources of relevant data ensures the ability to identify disruption early on and respond accordingly in a case like the recent coronavirus outbreaks.