The coronavirus pandemic is causing the largest disruptions to supply chains since at least World War II. Even when the virus was only primarily in China (before major shutdowns in the rest of the world), the closing of factories in China led to the largest disruption in container shipping ever seen. Now it has created a global recession, which is looking increasingly likely to become a global depression. It is testing the mettle of everyone and all companies, but in different ways. Companies that improvise and think outside the box have a better chance of surviving.
The disruption is different in different sectors, depending on a number of factors, first and foremost having to do with how the outbreak has impacted demand for each sector. Here we can broadly group sectors into three major categories, according to what the pandemic has done to demand in that sector:
- Extreme-increased-demand Sectors — These are sectors and products for which demand has skyrocketed to many times normal. Examples include medical PPE (i.e. personal protective equipment — especially N95 masks), ventilators, disinfectants, home grocery delivery services, and of course medical services and hospitals. In some areas, such as ventilators, the demand is nearly 100 times the normal rate of production. Unfortunately, hospitals are also seeing demand that is many times normal, overwhelming existing capacity. In other areas, such as overall ecommerce and parcel delivery services, demand is up significantly, but less than 2X normal.
- (Almost) Normal and (Mostly) Diminished-demand Sectors — Most of the economy is in this middle category, mostly with diminished demand. Some sectors, such as farming, are seeing nearly normal demand but for many more sectors demand has diminished, in many cases quite painfully.
- Decimated Sectors — For a non-trivial portion of the economy, demand has fallen off a cliff (i.e. by 50% or more). This includes airlines, hotels, cruise ships, and other travel-related industries, casinos, sports, festivals, event venues (e.g. convention centers) and event-related service providers, bars and restaurants and their suppliers, malls and in-person retail, service providers to educational institutions, mass transit and other commuter services, and so forth. Some of these sectors will not survive without some kind of outside help.
Each of these categories is coping differently. In almost all cases, the pandemic is testing the limits of a company’s preparedness, ingenuity/improvisational skills, and tenacity.
Fast Paced, Wide-spread Innovations and Partnerships Help Extreme-increased-demand Sectors Cope
In some sectors, demand is 10X to 100X more than normal. Here extraordinary innovative efforts are happening. For example, several automotive companies have stepped up to bring in their supply chain management and manufacturing capabilities to build ventilators at a pace that is about 100X the normal production rate of the industry — and ramping up production in unheard of short timeframes.2 This would not have been possible with existing manufacturing and supplier resources.
In addition, we are seeing massive innovation efforts to develop newer, simpler, easier to manufacture ventilators or alternative devices to accomplish the same thing. For example, Virgin Orbit developed a mass-producible ‘bridge’ ventilator; Dyson designed a new ventilator in 10 days; Medtronic is sharing full design specifications and documents, manuals, and software code for its PB 560 portable ventilator; and as a last resort, there are several efforts designing 3D-printable open-source ventilators.
Educational institutions and ordinary citizens are also stepping in. A team from MIT designed a disposable face shield for quick and cheap mass production to help frontline healthcare workers. They tested it at local hospitals and adjusted the design based on feedback. Polymershapes, a Boston-based distributor of plastic sheet, rod, tube, and film, will do initial production of 50,000 masks per week, with plans to expand production across the country.
Various federal, state, and local government agencies are stepping in as well. FEMA has started chartering flights from around the world, paying for planes to bring in medical supplies such as gloves, masks, hand sanitizer, and thermometers. The government is buying some of the supplies, but the bulk are going to distributors who are already selling these supplies in the US trying to meet the extraordinary demand. FEMA is expecting to bring in a flight a day, mostly from Asia. They are using distributors and the existing distribution channels to get the supplies to hospitals and other organizations that need them.
Counterfeiting and Price-gouging
Unfortunately, unscrupulous individuals and companies are also taking advantage of the desperate need for certain medical supplies. Two leading N95 mask manufacturers (3M and Prestige Ameritech) have issued fraud alerts about people selling counterfeit masks or worse yet people claiming to have masks for sale when they don’t have any (taking the money and disappearing). A very active pop-up market of N95 mask brokers has emerged, sometimes charging outrageous prices for helping desperate buyers find much needed masks. When demand is this high, we expect a rise in prices (though 3M said they are not charging any more than usual for N95 masks). Nevertheless, when these N95 masks are desperately needed to save the lives of the selfless frontline nurses and doctors working tirelessly around the clock, putting their lives on the line like the bravest of soldiers, then it is disheartening (even if not surprising) to see shameless opportunistic price gouging.
Majority of the Economy in Recession, Adjusting to Dramatic Disruption to Normal Demand Patterns
While the overall economy is in recession, in some sectors overall demand is at or close to normal levels in aggregate, but the pattern or channel of demand has shifted dramatically. Food is probably the most high-profile example of that. In normal times, about half of all food is consumed away from home, mostly in fast food and full-service restaurants. We are rapidly approaching a period when almost all food will be consumed at home. That is an enormous shift, with huge impacts for two sectors: it has decimated restaurants and providers of supplies and services to that sector, while putting extreme stress on groceries and delivery services to nearly double their capacity overnight. One example of businesses adjusting to this change: a number of distributors to restaurants have shifted to supporting and supplying grocery stores and/or selling direct to consumers online. Those businesses will still see enormous reductions in revenue — but by being agile enough to make that shift rapidly, it could make the difference between their survival vs. going out of business. Restaurants too are adjusting by offering take-out service.
Rapidly Shrinking and Shifting Labor Markets
During the week of March 16-22, 3.3 million Americans applied for unemployment, nearly five times the next highest week ever on record (695,000 claims in one week in 1982). That was already a scary and shocking number; then yesterday (April 2) we heard last week’s numbers — 6.6 million new filings for unemployment. That is 10 million people let go in just two weeks — mind-boggling. It looks like a global depression is likely.
At the same time, certain sectors, such as ecommerce and home delivery, have seen huge increases in demand, with a need for hundreds of thousands of new workers immediately. Walmart plans to hire 150,000 new workers. Amazon announced plans to hire 100,000 new workers. Lowe’s and Albertsons each have 30,000 job openings. CVS plans to add 50,000 jobs. Some of these companies are responding in innovative ways. For example, Amazon is teaming up with Lyft to recruit the ride-hailing company’s newly idled drivers to deliver packages and groceries.
Reductions in Logistical and Production Speed and Capacity
Supply side is being affected in various ways. While we are not there yet, there may come a point in the coming weeks where factories are ordered to shut down, as happened in Wuhan at the height of the crises in China. Automakers and others have already voluntarily shutdown factories to slow the spread. Factories that are still open are working at diminished capacity due to mitigation measures being taken. One factory worker I talked to said they are disinfecting their factory three times a day, requiring workers to wear masks and gloves, and practice distancing to the extent possible. Similar measures are also extending loading and unloading times at dock doors. The same kind of impacts are happening at distribution centers, ports, and throughout the supply chain. Almost everything is slowed down, like putty sticking in the gears of the supply chain. When deaths climb even more, we expect some workers will be scared to show up for work, further diminishing capacity.
Increase in Blank Sailings Creating Uncertainty for Shippers
The reductions in trade flows has led to a dramatic increase in blank sailings (i.e. cancellation of a sailing by the ocean carrier, due to lack of cargo to fill the ship sufficiently). During the outbreak in China, over 100 sailings were cancelled. Experts believe even more will be cancelled now that the pandemic has hit Europe and North America. Because carriers are cancelling more frequently on such short notice now, it creates uncertainty and delays for shippers who have to scramble to find another sailing for their shipments.
Fresh Food Supply at Risk?
Some experts have said our food supply is not at risk, since it is mostly grown within the US. It may be true that our grains and beans are fairly secure, where planting and harvesting are highly mechanized. However, it may not be true for produce, where the US is heavily dependent on migrant farmworkers from Mexico. Farm workers are designated as “essential” travelers under DHS current rules, but only if they have the right paperwork. Estimates of the percent of farmworkers that are undocumented immigrants range from about 45% to nearly 70% of all farmworkers. While many of those are already in the country, many others migrate back and forth. Will they be allowed into the country to plant and harvest our crops? If not, there will be a severe shortage of farm labor.
There is also the issue of severely over-crowded housing for many farmworkers, often with substandard sanitary conditions, such as the lack of running water. For some of them, it is nearly impossible to wash their hands often and maintain social distancing. Under those conditions, signficant numbers of farmworkers may contract the virus.
And we learned during the Great Recession that we can’t count on unemployed Americans to fill that gap.3 An in-depth study by the Center for Global Development found that “no matter how bad the economy becomes, native workers do not take farm jobs.” In 2011, North Carolina had about 489,000 unemployed residents and 6,500 farming jobs available via the North Carolina Growers Association. Only 268 U.S. natives applied for those jobs; only 163 showed up for the first day of work; more than half quit by the end of the first month; and only seven completed the growing season. In contrast, 90 percent of the Mexican farm workers hired there in 2011 remained through the end of the season. As one farmer put it succinctly, “There’s no doubt in my mind, we [U.S. citizens] complain with our mouths full. We want to eat it, but we don’t want to pick it.”
Bigger Disruptions Yet to Come
In this article, we have only scratched the surface of what is going on in our supply chains during this crisis. And we are just starting to enter the peak of the pandemic in the US over the next few weeks. As bad as things are now, more severe disruptions are looming. We will continue to report on how the country is coping and provide more ideas and insights to help individual companies adapt and survive during these trying times.
1 See Black swan theory — Return to article text above
2 Planet Money did an excellent podcast (The Race To Make Ventilators) on the partnership between GM and Ventec Life Systems in swiftly building production capacity. The podcast starts from the perspective of one of the hundreds of brand-new suppliers (new to the ventilator supply chain) that have been recruited for this effort. Many of these suppliers have never made ventilator parts before. — Return to article text above
3 According to an AP analysis, during the first six months of 2010, California farmers posted ads for 1,160 farmworker positions open to U.S. citizens and legal residents. Only 233 people applied and of those only 36 were hired. — Return to article text above
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