The coronavirus started as a local problem in China. In a few short weeks, it transformed into a global health and economic emergency. Entire nations shut down. China made a hospital from scratch in a few days. As their nation suffered, the coronavirus disrupted supply chains everywhere. Little did we know, this was only the beginning.
Since then – at the time I’m writing this, March 22 – Italy shut down. Some US states have shut down, including California and New York. World leaders are pushing companies to create medical supplies like hand sanitizer and ventilators. Right-leaning politicians fathered stimulus packages to keep their countries’ economies from tanking.
We’re in uncharted waters. Nobody knows what’s going to happen next. In lieu of a stable environment in which to predict the future, we can only reliably look at the recent past.
In this week’s post, we’re going to talk about how exactly the coronavirus disrupted supply chains everywhere. With this knowledge, we hope that you can create an antifragile supply chain for our brave new world.
1. Healthy and safety needs for workers changed rapidly.
For better or worse, a lot of the supply chain is run by people. Robotic order fulfillment, for example, is not ready for primetime, so a lot of people work in close quarters in warehouses doing manual labor.
At Fulfillrite, we have implemented social distancing measures and we are encouraging employees to wash their hands. This is not possible for all companies in our sector, though, and they are having trouble adapting.
Almost overnight, the health and safety needs for workers changed. Without implementing new and often less efficient practices, coronavirus can show up in a warehouse and shut the whole place down. This dramatically delays in shipping times, and this is true whether you’re shipping with a company like Fulfillrite or the Leviathan corporation of Amazon.
2. Country-wide lockdowns and travel restrictions created uncertainty.
Countries far and wide are implementing travel restrictions. The US-Canada border, for example, was recently closed to all non-essential travel. Even some states, such as Hawaii, are requiring travelers to undergo a 14-day quarantine before they can go anywhere else in the state.
Travel restrictions and lockdowns are happening on local, national, and international levels with little to no notice. That makes it borderline impossible to reliably set up supply chains. Thankfully, most supply chain operations are considered “essential” and therefore excluded from restrictions, but the uncertainty alone is still a problem!
3. Panic buying did not follow typical consumer behavior patterns.
You’ve seen the memes about people buying 200 rolls of toilet paper at their local Costco. Because of the coronavirus, people started buying large quantities of items that we never expected them to. Toilet paper, sanitary wipes, and hand sanitizer sold out faster than anyone could have anticipated. Grocery store shelves were left barren.
All this happened not because there are nationwide shortages of food and consumer staples (with the exception of some cleaning supplies), but because people’s buying behavior changed far faster than the supply chain could cope. Just think about it – if a grocery store carries five days of inventory at any given time, what happens when over half the population chooses to buy 3-4 weeks of items?
4. Supply chains are being reconfigured because our nations need medical supplies.
The coronavirus crisis is a medical emergency first and foremost. That means anything that saves lives is top priority. Everything else rightly goes on the backburner. Wharton University says it best.
The choking of supply chains is “a second-order problem,” and the foremost priority is to ensure the availability of medical supplies, Senthil Veeraraghavan, Wharton professor of operations, information and decisions, said in an interview with the Wharton Business Daily radio show on SiriusXM. “The first-order problems have to do with medical devices, medical products, productive equipment, masks, screeners, disinfectants [and so on], which are critically necessary for providing care for people we are going to see getting infected over the next few months,” he said.
5. Prices fluctuated unpredictably.
In a world where people price gouge for hand sanitizer and toilet paper, getting your hands on critical supplies can be nerve-wracking. If your business is still operating, procurement of necessary supplies is vital. However, if suppliers have a lot of bargaining power, they can ratchet up the price out of the realm of small businesses.
To some degree, this has already happened. Unpredictable fluctuations in the price of supplies have made it much harder to calculate profit margins, which in turn makes it harder to know what to invest in. That leaves businesses vulnerable and paralyzed as they try to figure out how best to keep their businesses afloat.
6. Communication slowed down.
In almost every business, priorities changed quickly as companies scramble to respond to the pandemic. At the same time, more people are likely to call in sick, self-quarantine, or work from home for the first time.
The sum total result of all of these things happening at once? Vital communication between companies slowed down. Because the supply chain relies on timely communication between companies, this contributed to disrupted supply chains.
7. Just-in-time supply chains were extra vulnerable.
We have extolled the virtues of the lean supply chain on this blog before. The basic ideas are good: eliminate waste and complexity. A lot of companies take that a little too far and implement just-in-time supply chain principles. That is to say, they keep the smallest possible inventories of items and parts at all times.
In a smooth, well-oiled world, just-in-time supply chains are inexpensive paragons of efficiency. In a world with enormous instability, though, just-in-time supply chains are time bombs waiting to explode. Businesses have no cushion to fall on when the global supply chain suddenly breaks down. That means entire businesses are falling apart because they don’t have the items they need to keep going.
8. Rigid supply chains snapped.
Imagine a supply chain where you only have one supplier for each particular type of part. In some ways, this is a lot simpler to coordinate and is extremely efficient. At the same time, this is incredibly rigid.
What happens when you apply pressure to rigid objects? They snap.
That’s exactly what has happened with a lot of businesses. Without alternative suppliers to rely on, many businesses are facing shortages because they cannot procure needed supplies.
9. Confusing supply chains became untenable.
Similarly, some supply chains are managed manually. That is to say, there are no real processes in place. One or two people just keep entire companies’ supply chains running.
What happens when that person becomes sick? What happens when they are forced to leave their comfort zone?
Without clear processes in place, a lot of companies are trying to figure out how they are coordinating the shipment of items. Trying to detangle complex supply chain operations is difficult even when not under stress. Imagine just how much worse it is when there is stress.
10. The true extent of our dependency on China became obvious.
It’s no secret that the US and other developed nations have been relying on China for manufacturing. In some ways, this is good because we benefit from the lower prices and China benefits from the jobs and economic wealth creation.
The problem with all this, of course, is that when China was dealing with the worst of their coronavirus outbreak a couple of months ago, everybody in supply chain management was anxious. Remember: all this was happening before the disease spread worldwide. Disrupted supply chains were already a problem before the virus spread worldwide.
Now that we live in a world that is increasingly locked down, domestic manufacturing looks more attractive. The problem is that we no longer have the capacity before that because we, collectively as a nation, outsourced so much to China.
This is a tough, intractable problem that we will be dealing with for years. I am not a macroeconomist, so I am hardly suited to tell you the best way to proceed from here. However, I feel confident saying that there will be renewed interest in domestic production, at least in the US.
Where do we go from here?
It’s hard to imagine a world after coronavirus, but it’s worth a try. As we move forward from here, companies will definitely be more hesitant to rely on just-in-time supply chain methods. We may begin to see more decentralized supply chains and companies will start to keep strategic stockpiles as well.
At the same time, there will be a push for greater transparency. Because companies are having to adapt processes on the fly, so much of the poorly understood in supply chain management will be thrust into the spotlight. This is good – it will keep the supply chain from breaking down the next time we encounter a global crisis.
Last but not least, health and safety concerns may increase interest in automation of warehouse work. The groundwork has already been laid, we just needed a reason to start putting robots to work instead of people. The coronavirus may have just given the world a reason.
No matter what, we’re all in this together. Everyone – rich and poor, conservative and liberal, domestic and abroad – is bound together as we try to figure out how to proceed from here. No one knows what’s coming next. All we can do is have open conversations about our problems and try to solve them together.