Supply Chain Impact Of COVID-19

At the time of writing, the infection count and death toll for the novel Wuhan Coronavirus – now renamed COVID-19 (COrona VIrus Disease – 2019) – has reached 71,000 cases and 1,770 deaths. A little over 8,100 patients remain in critical condition; however there continues to be strong recovery rates, with over 11,000 reported recovered or discharged.

The economic impact however seems set to shake up the world and the supply chain status quo. It has become clearer over the last week that the over-reliance on China and just-in-time delivery is fraught with risk. The short term gains for companies like Hyundai made sense as over the past two decades ‘[Hyundai] suppliers have increased capacity in China over the past two decades’. South Korea’s proximity to China meant it could take advantage of swifter delivery of parts and lower labour costs in China. This has unfortunately had a severe impact. Reuters reports that that a major supplier of wiring harnesses, Kyungshin, increased production in factories in United States, India, Cambodia and South Korea. It is also reported that ‘Hundreds of workers failed to turn up for work at two of its four plants in Jiangsu and Qingdao’, putting pressure on not only the minimal workforce but also alternative factories.

Just-in-Time delivery, despite its benefits in cost of parts storage and shipping, is proving to be an unreliable foundation for businesses when unexpected catastrophe hits. Speaking to Forbes, Mr Razat Gaurav of LLamasoft ‘delays in production in China caused by [COVID-19] will ultimately have impact on plants in the US as well once the buffer inventory is consumed’. This buffer inventory (anywhere between two to twelve weeks’ worth) is a contingency based on the regular Lunar New Year event. However this is unlikely to hold major manufacturers for long and sales will soon begin to suffer. Mr Gaurav states ‘on average it takes 30,000 parts to make a finished automobile’, which is why Renault and Fiat Chrysler have suffered the same setbacks as Hyundai. The former of the two has shut down a South Korean plant while Fiat Chrysler has announced it may have to shut down its European factory for lack of parts.

For the short- to medium- term future the recommended strategy coming from experts is to diversify their parts production, which has seen increased interest in countries like Mexicó for alternative sources as well as Asian nations other than China. Like Hyundai, companies are looking at Cambodia, Thailand and Vietnam.

We continue to follow the COVID-19 epidemic and its impact on the Global Supply Chain. Check back regularly for more updates.

Please see below for sources used in this article.