The effects of the Coronavirus disease (COVID-19) outbreak are starting to receive more attention as a potential global pandemic.
Supply chain managers along with their C-level executives worldwide are huddled together attempting to determine what can possibly be done to keep their supply chains flowing without major interruptions. This is no longer just a speed bump affecting corporate supply chains, which corporations deal with on a regular basis.
No, this is a true supply chain disruption event that will demand all resources with real and effective solutions to save a company from total disaster. To say corporate executives are totally rattled by this situation would be an understatement. And, if they are not, they certainly should be.
As of this writing, no one really knows exactly where all of this is going to lead. However, the one thing known is that the industry is in a very fluid situation, and circumstances change by the day. And as such, businesses will be challenged to make some very hard and often quick, off-the-cuff decisions. These decisions must ensure not only the safety of their employees, suppliers, logistics providers and ultimately customers, but also what could be the survival of their supply chains and therefore their businesses.
As with any business disruption challenge, there are typically combinations of problems, as well as potential opportunities to help businesses move to the next level. And, how businesses react to these problems and opportunities during these business disruptions often makes the difference between success and total failure.
Supply chain challenges
The Coronavirus could turn out to be the “mother of all supply chain disruptions.” Global supply chains are already reeling from its effects.
Also, according to the World Bank, China accounted for one-third of global trade in 2018. If there are extended factory shutdowns, estimates result in increased costs worldwide to the tune of over $1 trillion. That is a significant increase in costs for all companies doing business in China.
The real question will be, how can companies possibly absorb additional costs of that magnitude, and is it even possible to do so?
With that being said, here are some real supply chain questions for businesses to ask themselves and use to develop real and effective plans.
• How can a company make any plans not knowing how long factory closings will last?
• What if the factories are shuttered for several months, what does a plan “B” look like; is there even a possibility of a plan B implementation?
• Can a company shift production “on the dime” to alternate suppliers for the products it needs to keep its business running, and if so, how fast can they make that change happen, and for how long?
• What are the fixed, variable and intrinsic costs as well as operational considerations involved if such a change in suppliers is implemented?
• How will the current Coronavirus outbreak affect corporate sales and ultimately corporate profits?
• What can, and more importantly, what should a company do now to soften the blow corporate profits will obviously take as a result of this business disruption?
While these questions are a direct result of the current concerns over the spread of the Coronavirus, perhaps there is another more probing question companies should be asking themselves. And, that is, should we create a more flexible supply chain, so that companies are no longer locked into single sourcing and dealing with the ongoing challenges single sourcing creates?
Perhaps some good news–lower freight rates
On the other side of the coin, the coronavirus outbreak just might create some unintended consequences of a positive nature. Experts predict that we will see a reduction in shipping rates, as freight volumes decrease, which is a direct result of the Coronavirus. These freight volume decreases have already started with a sharp reduction in freight movements from the Far East. These freight shipping reductions from China have created a drop in container demand, which some experts estimate exceeds 1.7 million TEUs.
We are also seeing the Coronavirus playing havoc in Europe (primarily Italy, at least at this point), so it’s projected that freight volumes will go down on intra-Europe shipping as well as exports from European countries, depending on how far the Coronavirus spreads throughout Europe.
Currently, there are thousands of empty cargo containers in the United States and in the European Union that will at some point need to be returned to the Far East. Rates for shipping product in those containers should be competitively priced, as the steamship lines would prefer charging lower rates as opposed to shipping empty containers.
Both international and domestic freight sectors will be impacted by the constant changing circumstances surrounding the Coronavirus. The industry is also already experiencing a significant drop in spot rates from Los Angeles and Long Beach due to low freight flows from China. This will have a domino effect, with other freight sectors experiencing the same price reduction opportunities.
The freight rate picture could change on an almost daily basis, however the trend in freight rates will continue downward across the board. So, this may be an excellent time to restructure pricing with both international and domestic freight carriers. The laws of supply and demand continually play a major role in freight rate structures. When adding in a global business disruption like the Coronavirus outbreak, it only exacerbates the situation.
Taking advantage of any opportunity to reduce corporate shipping expenses has a profound impact on corporate bottom lines. For example, a company with a 10% margin of profit, after taxes that reduces shipping expenses by $5 million annually and will add $50,000,000 to the company’s bottom line without having to sell a single additional product. And, the ability to reduce shipping expenses will go a long way toward offsetting any additional costs companies will be experiencing if they are forced to shift to new suppliers.
So, while the Coronavirus outbreak will create major challenges to businesses all over the world, it could also present an opportunity for companies to improve their shipping expenses. While that may not be enough to absorb the additional costs companies will endure by changing suppliers, it could go a long way toward leveling out the playing field.