”As COVID-19 spreads globally, we are seeing increased supply chain disruption, but also changes in consumer spending habits,” said Sarah Watt, senior director analyst with the Gartner Supply Chain practice.
China – the world’s factory – has only recently started a return to factory following on extended closure following the coronavirus outbreak.
But the disruption to the supply chain is not limited to within China. The impact has expanded beyond its borders as China is supplier of finished products and components to the world. Therefore the impact cuts across the supply chain - from manufacturing and raw materials supply, to distribution and retail, and in between the financial services industry.
According to Watt: “Supply has been impacted in three primary ways: limited access to employees due to quarantines, factory closures or manufacturing slowdowns and limited access to logistics to move goods. Most supply chain organizations are in crisis management, assessing impacts and response on a daily, if not hourly basis.”
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Gartner suggests supply chain leaders to focus their efforts on three main areas:
Impact Area 1: Workforce
Governments are encouraging employers to tell workers to stay home. That means factory closures for those in the manufacturing sector. It also means layoffs as factories can’t pay workers if they don’t have products to ship – because parts of the logistics side of the supply chain is operating on limited capacity, also a result of COVID-19.
Retailers, hoteliers, mall operators, tourism and travel – these are businesses that will also be severely impacted as businesses will either operate on limited capacity or be closed entirely. Less impacted will be businesses that rely on the Internet for part of their business, including e-commerce, online entertainment. Food & beverage should recover provided they can work with delivery companies.
Telcos are making a killing as demand surge for VPN and better broadband connections. Statista noted a surge in VPN usage during COVID-19 – US (53%), Spain (36%), Germany (29%) and France (21%). Silver lining anyone?
Watt warned that the unintended consequence of a prolonged crisis is “risk that crisis management teams become fatigued and make poor decisions.”
“As the virus extends globally, supply chain leaders need to think about how to protect the health of workers, and support individuals who are ill. Providing clear and consistent communication through human resources and travel security is essential,” Watt said.
Impact Area 2: Products
Gartner said COVID-19 has the potential to change the competitive landscape. Suppliers for commoditized products are at risk to lose market share, as clients will look into substitute suppliers when they don’t receive their products on time.
Products associated with a higher degree of brand loyalty are likely to be less impacted in the short term because customers are more willing to wait. As the virus progresses, consumers might adopt more conservative spending patterns, focusing on essential goods.
When forced to make trade-off decisions, supply chain leaders must analyse and forecast the impact of the new coronavirus on customer demand and product availability. Prioritization and trade off can be made based on high-revenue or high-profit margin products that are in demand.
“Supply chain organizations need to frequently reassess their supply and demand plans based on the evolution of the virus and consumer sentiment. Supply chains may also experience sharp increases in demand for products or unexpected consequences from the event, such as panic buying for essential items,” Watt continued.
Impact Area 3: Costs
There is a variety of financial impacts to organizations with increased costs for shipping, and more broadly concern about companies meeting their financial objectives.
“Even contractually agreed prices and quantities of materials might no longer be valid. Supplier could invoke force majeure clauses or otherwise look to pass on additional costs up through the supply chain,” Watt said.
Any additional cost related to the coronavirus should be treated as an issue that concerns the whole organization rather than a single department. This makes it easier to assess the costs against the organization’s ability to achieve its strategic objectives and manage stakeholder expectations.
“It’s also a good idea to sit together with the legal department and analyse all supplier contracts. When the time renewal comes, make sure that the organization is financially protected against similar situations that might occur in the future. Supply chains will not be the same after this event. There will be an increased focus on resilience, risk exposure and business continuity plans going forward,” Watt concluded.