Article

Coronavirus sends supply chains into crisis

As of the writing of this article, there were 83,647 confirmed cases of the Coronavirus (COVID-19), spanning 52 countries. From the time of our full situation overview one month ago the impact to supply chains has expanded, and we are beginning to see additional complications as the disease spreads beyond China.

18% of U.S. imports at risk as South Korea faces 2,300 confirmed cases

The most significant recent developments relating to the spread of disease are in South Korea. This development comes after many factories in the country already closed or reduced production two weeks ago due to a lack of parts from China. South Korea's manufacturing giants maintain lower safety stocks of Chinese parts than North America and Europe due to 4-week lead-time advantage. North America and Europe can expect to feel the effects of Chinese closures within two weeks. With the recent Korean development, countries responsible for 18% of U.S. imports are now effectively closed for business (South Korea is the 6th largest source of U.S. imports). In nearby Japan, Prime Minister, Shinzo Abe, has ordered schools closed until mid-April, if quarantine measures are imposed by Tokyo, over 23% of all imports at risk.

According to reports, China has managed to control the spread of COVID-19 at the cost of mass quarantine and prolonged closure of businesses. It is still unclear if other countries can or have the capability to mimic the efforts of the Chinese state. While experts debate China's approach, the World Health Organization (WHO) praised China for this decisive action, claiming the measures prevented hundreds of thousands of additional infections. If other countries are to follow suit, the operational challenges will become exponentially more difficult. Cascading effects in China include the effective collapse of the trucking network, congestion at the ports (especially for refrigerated food imports), and farmers unable to get seeds and grain to plan for next year's harvest.

Containment is becoming increasingly difficult

Risk of whiplash-like spreading effects for the novel Coronavirus increase as the number of countries with cases of the disease rise. Infected patients may take up to two weeks to show symptoms, and about 20% of cases are severe. This combination decreases the risk of detection and contributed to a recent U.S. case in Northern California. Within the United States, "California is monitoring 8,400 people who may have been exposed to the coronavirus after traveling to Asia. U.S. workers without protective gear assisted the first Americans coronavirus evacuees," after workers from the Department of Health and Human Services did not use proper protection when assisting the repatriation of Americans on a flight returning from Wuhan. 

As a containment measure, the U.S. Center for Disease Control (CDC) recommends that travelers avoid all nonessential travel to China and South Korea and discouraged the elderly and those with chronic medical issues to avoid Japan, Italy and Iran. We can expect these travel advisories to escalate as the disease spreads.  This will reduce the ability for workers to cross-borders and potentially impact air-expedites for parts if deemed nonessential by the government. President Trump announced that he believes further measures will not be necessary but acknowledged, "We do have plans of a much — on a much larger scale, should we need that. We're working with states, we're working with virtually every state."

Chinese imports are impacting North American factories

"Automotive suppliers are warning car companies they could run out of certain parts used in North American factories in the coming weeks, with particular concern over potential shortages of electronic components." This shortage will be beyond what arrives directly from China. In Vietnam, a country that has benefitted from the 2019 U.S. - China trade war, assembly lines are stopping due to missing parts. As a significant portion of their component manufacturing is still sourced from China many factories in Vietnam are expected to run out of parts in the coming weeks. 

This same effect will be seen throughout the world as very few finished goods are without some Asian origin. Markets are beginning to understand the full implications of global interdependence in a viral epidemic. Wall Street has already reacted negatively to the recent epidemic, and stock prices should be expected to fall. We are seeing the global economy fall into a recession.

Open communication is essential to understanding business risks

Running businesses with high interdependence in a crisis requires clear communication between all stakeholders. Forecasts will be made, and forecasts will be wrong due to the rapidly evolving situation. In addition to our recommendation that companies form a core crisis response team focused on this issue, we strongly encourage teams to open up lines of communication with their customers and suppliers. This is a global challenge that will become much worse before it gets better. For a crisis of this scale, companies and governments will need to work together to remain functional.

Reports should be revised frequently and traditional formalities cast aside for a more fluid and ad-hoc approach. Seraph developed Production.Net, a cloud-based analysis tool, for manufacturers to track production and OEE within their factories. We built in an additional feature that allows factories to quickly share dynamic production data through their organization. In a crisis, companies have the option to share data externally with their customers and suppliers. This will eliminate data formatting issues and supplement robust phone and email communication.

If you want or need help with how your business can prepare, email us at CrisisHelp@seraph.com.

About Us:

Seraph’s team of operational managers and senior consultants intercede on our clients’ behalf to fix a crisis that is putting the business at immediate risk; turnaround a situation that is damaging the bottom line; or restructure to improve the balance sheet. Seraph specializes in Engineering Program Management, M&A Advisory, Crisis Management, Relocation/Consolidation, Leadership and Employee Development programs and Value Chain Management.
Seraph has successfully delivered projects in the following regions: Americas, Europe, China, and India. Seraph's Industry Expertise includes Aerospace, Automotive, Energy Infrastructure, Healthcare and Medical Devices. Through our other operating companies, we are constantly looking for distressed situations where we can put our expertise and capital to work in order to create value.

28 February 2020