Coronavirus: Firms need to rethink existing supply chain route
The coronavirus outbreak and its massive impact on the economy has ringed the bell to immediately rethink existing supply chain scenario as established strategies only work when they are not disrupted, a new report emphasised on Thursday.
The cost of poor planning for supply chain disruption is measured in hundreds of millions of dollars and it is time for conventional supply chain thinking to be revisited, said global management consulting firm Kearney in its report titled "Coronavirus and the impact on global supply chains".
The effects of the coronavirus are being felt in three areas of commercial activity: manufacturing, distribution of goods and transportation.
The virus' impact differs by industry and Chinese province. Hubei, for example, contains an automotive industry cluster. Henan has a high concentration of food and agricultural activities. Zhejiang is home to a cluster of apparel producers. Guangdong is home to a number of machinery producers.
"And Zhejiang, Guangdong, and Hubei all have concentrated productions of electronics goods," said the report.
As a rule, more labour-intensive industries face greater impacts from a quarantine policy, due to the lower level of work resumption. As a consequence, declining output has hit the globally-sourced automotive components, electronics, and apparel industries especially hard.
The automotive industry is still at less than 50 per cent of its pre-virus production rates.
"While some Chinese parts suppliers have partially resumed operations, all major automotive suppliers, especially in Wuhan, have postponed resumption. These delays have created a ripple effect on domestic and overseas OEMs, which are postponing or interrupting production,"
The epidemic is dealing a heavy blow to an already falling market, causing an additional 2-5 percent volume decline this year. Abrupt Q1 sales declines of up to 20 percent are expected.
"Multiple labour-intensive segments in the apparel supply chain have been critically hurt, especially in Zhejiang. The slowdown there will have a domino effect throughout the supply chain, creating pressure on stock and logistics systems and ultimately affecting retailers' stocks," said the report.
Currently, global retailers purchase about 20 per cent of their goods value from China, a percentage that rises substantially in seasonal categories.
Electronics companies are operating at 40-60 per cent of pre-outbreak levels.
This impact varies significantly from category to category: wafer fabrication and PCB and LCD panels are less impacted, due to continuous production; assembly-related processes are affected the most.
Apple has already warned that Coronavirus outbreak will affect its business in the January-March quarter as worldwide iPhone supply will be temporarily constrained.
The report said that to tackle such a situation in the future, first step is to develop visibility to your entire supply chain - primary, secondary, and even tertiary players and steps.
"Next, recognize that events like the coronavirus outbreak are going to happen again and again - and determine what plans work best to mitigate the damage".
Discussions of just-in-time inventory, on-demand production, and eliminating warehousing are so popular they have become part of the conventional wisdom that we warned about earlier.
As many companies have found out the hard way, those models don't sufficiently indemnify you against a major supply chain disruption.
"Maintaining higher inventory levels may cost 0.3-0.7 percent more, but in a crisis, the higher inventory levels pay dividends in terms of customer satisfaction and competitive positioning. It's better to have enough buffer stock and not need it than to need it and not have it," the report stressed.-IANS