Global Manufacturing During The Coronavirus Crisis: Supply Shock Meets Demand Shock
The announcement by major U.S. and European automakers that they will suspend production highlights how hard it will be to get the supply chains and the global economy back in synch. Many factories were already facing looming parts shortages of one sort or another, as they received their last shipments from China that departed before the traditional Lunar New Year shutdown. In some cases, this was because of a 40 day delay for goods arriving at U.S. East Coast ports. Sometimes this was because they crossed the Pacific and transited the Panama Canal,or they might have come via the Straits of Malacca, the Suez Canal, and the Mediterranean.
In the last month, there has been a lot of scrambling to avert parts shortages in numerous supply chains. Many automakers impose fines on their suppliers if they cause a parts shortage that shuts down a production line. Shortages were exacerbated by the blank sailings and the dramatic reduction of air travel, as a substantial amount of international cargo travels in the bellies of commercial passenger flights. It was telling that large freight carriers such as Korean Air, Cathay Pacific, and Lufthansa were either flying or planning to fly passenger aircraft with no passengers – just to increase capacity and keep air cargo moving.
Ironically, China is now getting back to work. The Chinese Communist Party (CCP), recognizing the economic damage of the extended shutdown, has been mobilizing workers and factories to get back to work. Regions and municipalities even chartered transportation to bring workers back from rural provinces, and factories have installed new safety precautions including temperature checks, masks, cleaning procedures, and quarantines for returning workers. There is a lot of pressure to fill backlogged orders from around the world, and “catch up” to meet the CCP’s growth targets.
Meanwhile major markets in Europe and North America are shutting down. Just as Apple reopened all of its China retail stores, it closed all of its stores in the rest of the world. Nike, Abercrombie & Fitch, Lululemon Athletica, and Under Armour announced closings as well, and then the coup de grace with Simon Properties, the largest retail mall operator in the U.S., closing all properties. And then of course all the auto makers have shut down for several weeks. So just as those waves of catch-up inventory from China start landing on our shores, we’ll be faced with a temporary drying up of demand. The Journal of Commerce recently reported that shipments of fashion footwear have ground to a halt. And stores have gone from franticly trying to stock up on inventory to closing and not needing any. As I pointed out earlier, all of this sets up for a gigantic bull whip effect in which supply chain managers chase their tails trying to match supply with demand. Just as supply catches up, demand dries up.
This highlights how complicated the supply chain for so many products has become, and the importance of time lags that naturally occur because of shipping transit times. When we teach about supply chains in our MBA classes, we emphasize the importance of these time lags and how they impact ordering and fulfillment cycles. We have to remember that when you have a 40 day pipeline of goods coming at you, you can’t turn it on or off instantly. Get ready for the collision between catch up supply and collapsing demand, because here it comes.