Gartner Research

Coronavirus Alters Supply Chain Dynamics Impacting People, Products and Costs

Published: 24 February 2020

ID: G00467204

Analyst(s): Sarah Watt, John Johnson, Koray Kose

Summary

The new coronavirus, officially named COVID-19, has become an epidemic disruption, affecting supply chains through lack of access to markets, materials and most importantly staff. Supply chain leaders can use this research to put in place strategies to assess and respond to an epidemic disruption.

Overview

Impacts
  • Access to the workforce has been restricted due to mass quarantines, mainly in China, to prevent the spread of the coronavirus, resulting in lack of worker availability and reduced productivity impacting on the availability of goods. As workers start to return to work when quarantines are lifted, companies will need to take action to prevent these workers from becoming infected with the virus.

  • Global supply chains are starting to slow down as access to finished goods and intermediates becomes increasingly constrained, impacting markets local to China first, followed by the rest of the world.

  • Supply chain’s strategic plans will be challenged with potential escalation of costs as organizations adapt to and then return to business as usual.

Recommendations

Supply chain leaders responsible for direct sourcing material and supply risk management should ensure their strategy for crisis management should:

  • Track geographic transmission of the virus, communicating with employees about new ways of working, protective actions and travel restrictions. Put in place measures to prevent the spread of the virus.

  • Adapt and adjust global demand and supply plans and manage customer expectations regarding product access while also identifying opportunities to continue supply through alternative manufacturing and use of alternative suppliers.

  • Proactively track additional costs resulting from crisis management and business continuity activities related to the virus, preparing for budget impacts and margin pressure. Adjust overall business and supply chain plans in response to this new operating environment. Assess expenditure against risk appetite to improve future resilience.

Strategic Planning Assumption

By the end of February 2020, major manufacturing locations in affected areas within China will not have resumed full production, impacting global access to raw materials and finished goods. It is estimated that over 100,000 people will be infected with the virus.

Analysis

As of 19 February 2020, the coronavirus has resulted in more than 75,000 confirmed cases of infection and mass quarantine in several Chinese cities as an effort to ensure containment. Mark Carney, the governor of the Bank of England, stated that magnitude of the macroeconomic impact from the coronavirus exceeds SARS. The coronavirus resulted in the quarantine of cities and the extension of the Lunar new year holidays, which has slowed productivity from China. This, in combination with the trade difficulties with the U.S., and often national inflated GDP numbers from China has resulted in the Chinese Central Bank injecting 1.7 trillion yuan ($242 billion) into the economy to stabilize markets.

The quarantines and travel restrictions mean that the impact of the epidemic goes far beyond those who are ill or who have died. China has stepped up quarantine efforts with door-to-door health checks and compulsory quarantine of suspected cases in affected areas. From a supply chain perspective, the virus has broader impacts for logistics, materials and sourcing as described in

Although companies have enacted their crisis management plans as part of a wider business continuity approach, the dynamic nature of the event means that many organizations are still focused on their immediate response. This includes a limited focus on recovery, due to the dynamic nature of the event (Figure 1).

Companies which do not have a well-defined risk appetite statement and/or weak crisis management and business continuity processes in place are at elevated risk of delayed response and recovery. A lack of a structured approach and decision-making processes along with misaligned organizational exposure exacerbate the impact. See for more information about decision making during a crisis.

In this research we will examine three impacts from the event: workforce, products and costs (see Figure 2). We will specifically examine short-term responses, recovery actions and what to watch out for when working through the response.

Impacts and Recommendations

Proactively Manage Employees

The coronavirus has had four impacts on workers within the supply chain:

Organizations have an obligation to ensure the health, safety and welfare of their employees. This has resulted in companies advising employees in impacted areas to stay at home in an effort to limit the spread of the virus.

The supply chain impact is that goods are not being produced or exported to dependent markets. Supply chains that operate just in time (JIT), or hold limited inventory are likely to be disproportionally impacted.

  • Employees in geographies which have not yet been impacted either may be faced with increased workloads or are part of a crisis management team assessing options and responses to the event. Companies need to be mindful of the pressure on these employees if the coronavirus crisis continues for an extended period and put plans in place to counter the risk of fatigue and burnout.

  • Face-to-face contact with supplier’s personnel will be restricted in impacted areas for a period, which makes supply chain relationships more difficult to build.

  • At some point, the quarantines will be lifted if the virus subsides and/or a vaccine is created; however, organizations have the obligation to ensure that those returning to work do not spread the illness across the workforce. This may be through the provision of additional personal protective equipment or changes in working practices.

Case Studies: Business Responses

  • Ford Motor, Fiat Chrysler, Dongfeng PSA and Nissan Motor have suspended their operations in Wuhan in accordance with the Chinese government’s advice. HIS Markit estimated a loss of 1.7 million units of production for the auto industry in the first quarter.

  • Companies such as Amazon, Apple, Google and Airbnb took proactive steps to suspend employee travel to high-impact areas; this was in advance of nations and airlines putting travel restrictions in place.

    Take Charge of the Product Portfolio

    The coronavirus will have four potential impacts on product portfolios, therefore, requiring an adjustment to supply chain strategies and tactics. The impacts are as follows:

    • The virus has the potential to change the competitive landscape with commoditized products being put at an increased disadvantage. For goods that are already commoditized, suppliers’ market share may be lost as organizations look to substitute raw materials to ensure that supply chains can still deliver products and services.

    • Products which have a higher degree of brand loyalty are likely to face less of an impact in the short term if consumers are willing to wait for these products. The degree of impact is dependent on the consumer demographic and values associated with the product.

    • Consumers that focus on product functionality, as opposed to brand, will buy products that are available and meet their requirements. A lack of product availability may upend the competitive landscape with consumers focusing on requirements being met and product availability.

    • Consumer sentiment within the epicenter of the virus, Wuhan and other quarantined cities, has changed. Due to the shutdown, only essential goods are available along with food and medical supplies. However, uncertainty about the length of quarantine, availability of supplies and the broader societal impacts has led consumers to stock up on essentials. Continued “panic buying” will potentially lead to shortages as logistics networks to move goods have become constrained.

    To understand the impacts of the disruption on logistics activities, see

    Case Studies: Business Response

    • Disney has closed its theme parks in both Hong Kong and Shanghai to contain the spread of the virus. The company is still assessing the profit implications, although the Lunar New Year holidays represent a peak season.

    • Foxconn, traditionally known for the manufacture of electronics such as the iPhone, has started to produce personal protective facemasks for its employees and the wider market to offset the shortage. Automotive and energy companies are adopting a similar approach.

      Budget for Recovery and Invested Funds for Risk Management

      There are three direct financial impacts to organization with supplies and customers in areas which have been impacted by the virus. They are as follows:

      • Companies’ profitability may be impacted as supply to global consumers becomes constrained as goods cannot be accessed from quarantined areas within China. Organization with a large market share within China will be impacted as quarantines have encouraged citizens and consumers to stay indoors as all but essential shops have been closed.

      • As supply of resources is constrained, the supply-demand dynamics will work to increase price. Prices and quantities of materials previously locked into contracts may no longer be valid as supplier may invoke force majeure clauses or look to pass on additional costs up through the supply chain.

      • When manufacturing resumes, there will be a spike in demand for access to materials and shipping to get products to market as quickly as possible. Shipping costs will increase as companies seek to expedite products by air. Cargo capacity is already constrained with a reduction in passenger flights, likely driving up cost, too.

      Beyond these direct costs, there may be additional costs associated with the workforce. This includes costs for increased protective measures and costs for sourcing additional labor — where illness keeps employees from the workplace or costs to replace employees if they do not return to work due to anxiety about their health and welfare.

      Case Studies: Business Response

      • Bloomberg has indicated that at least 20 companies in China have issued profit warnings due to the virus.

      • Several companies have invoked force majeure clauses within their supply contracts. This includes using clauses around the foreseeability of the event, the lack of ability to prevent the event and that reasonable steps have been taken to mitigate and avoid the impacts of force majeure. For example, copper traders in China — the world’s largest buyer of the metal — have asked miners from Chile to Nigeria to cancel or delay shipments.

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