The coronavirus outbreak has disrupted supply chains worldwide regarding parts, labour and government restrictions. The last large-scale health scare came in the face of the SARS outbreak in 2003, which had a significant impact on the supply chains of China. However, since 2003, China’s supply chains are contrastingly gargantuan in size and now account for 16% of global GDP, overshadowing 2003’s figure of just 5%. China is now the world’s second-largest exporter, produces a third of the world’s chemicals, half of its LC screens and two-thirds of its polyester.
Today, the worst for China seems to be over. Stringent containment methods have been effective, and factories are beginning to return to business-as-usual operations. However, many workers remain at home and the impact of disruption has been felt far and wide.
“After speaking with multiple leaders across the procurement and supply chain functions in various industries, an estimate 20-35% of their workforce will return in China this week,” says Randy Chan, Head of DSJ Global, Asia Pacific. “Productivity losses have been mammoth, and the ripple effects have already been felt across global supply chains. China’s manufacturing is of significant importance as it is linked to the rest of the world’s supply chains.”
What Areas Have Been Impacted?
Here are the main areas of the supply chain that have been affected. To ensure a timely resolution once the virus has passed, these areas must have restoration plans in place.
Travel is an enormous obstacle to overcome during times of crisis, with people reluctant to utilise public transport due to fear of infection. A lack of travel options leaves many employees in a precarious position, workforces may look to explore options surrounding leave of absences as many have already done. A survey conducted by the American Chamber of Commerce uncovered that 90% of companies in Shanghai have employers working from home. Additionally, provinces that account for a total of 90% of Chinese exports are operating at a low capacity or have shut factory doors entirely since January. Famous global brands are no exception to these issues, with Hyundai halting some car production in South Korea due to a lack of parts and Foxconn, parts manufacturers for Huawei and Apple, have resumed manufacturing efforts but with a skeleton staff of around 10%.
“As the country is working tirelessly on containing the spread of this outbreak, Chinese authorities have encouraged people to work remotely. However, that’s not possible for factory workers,” comments Randy Chan. “Therefore the production output will be running at lower levels than usual for an extended period of time.”
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A lack of labour presents obvious transportation issues; however, sanctions implemented by government and borders are also having a significant impact on supply chains. Presently, governments and health officials are concerned most with the containment of the coronavirus and very limited border crossings are a part of that containment effort.
“Logistically, transport options are far and few between as airfreight has been significantly reduced. In fact, the cargo and passenger airline, Cathay Pacific, has asked all of their 27,000 employees to take turns on three weeks of unpaid leave,” says Randy Chan. “They too, are struggling in the midst of combating this deadly virus as 90% of the Mainland services were cut. The regional lock-down in China and many other countries in Europe have already caused severe disruptions to both inbound and outbound shipments.”
Customer and Supplier Relationships
Businesses are at risk of breaching contractual commitments to their customers unless prior agreements have been made regarding a potential global crisis. For companies to maintain a good relationship with their customers, they should review and consider the following:
How will your business address any lack of supply claims from their customers?
How will your business respond to relief claims from suppliers for the contract you have in place with them?
Is there any possible way to meet the obligations of either contract in the face of the current economic situation?
Of course, the exact position you find yourself in depends entirely on the specific scenario, governing law and contractual obligations for your company. However, by considering the points above, you can begin to create a plan for overcoming the issues with both your customers and suppliers, preserving the working relationship during these difficult times.
Force Majeure and Relief
Force majeure is the official term for an unforeseeable circumstance that prevents a person or an entity from fulfilling a contract based on situations beyond their control. If your business includes this in its contracts with customers, suppliers or employees, you should explore the exact remits of it and what your lawful obligations are. Your firm’s position will depend on the wording of the contract and also the governing law, but even if it’s unlikely to be executed, it’s worth knowing what your options are.
Back in 2003, the SARS outbreak was an epidemic very comparable to the current coronavirus situation. Interestingly, during this outbreak in 2003, Chinese officials deemed the epidemic worthy of force majeure execution and contract relief was granted to many businesses. With this in mind, the coronavirus is likely to fall under the same remit.
Preparation is key to mitigating risk
The impact of the coronavirus may have affected your suppliers and customers in equal measure, and some business interruptions are entirely unavoidable. However, by taking measured actions on the appearance of these issues, you should lessen the impact.
“Whether it’s medical goods, auto parts, household products, hi-tech goods, apparel, or others, China plays a very critical role in the global supply chain. Large or small, companies would find it challenging to locate alternative suppliers in this unordinary disruption,” says Randy Chan. “However, despite quarantines, travel bans and what have you, companies will need to find new normality to minimise the impact on their global supply chains.”
The coronavirus, much like SARS in 2003, will impact businesses around the world and supply chains are unfortunately some of the most affected. However, with a proactive approach to meeting obstacles and building contingencies to overcome them, you can protect yourself during this time of uncertainty. Labour, transport and provisions will be limited, and the effect will last longer than the virus. However, by ensuring the relevant action is taken at the earliest opportunity, you will be able to restore yourself to standard operation procedures in ample time. In addition to the steps required to protect your business operations, your employees must also be considered. While working remotely, you must ensure they are well supported and are kept regularly updated with any business changes. Once you find yourself in a position to bring staff back to their regular workplaces, ensure the integration back into their previous roles is monitored and, again, supported.
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