Supply Chain Disruptions and Covid-19

Recently, I taught my first full class in front of a computer instead of in front of my students. Like nearly all universities, Penn State canceled in-person classes and moved to remote/online instruction. My class is for seniors majoring in supply chain management, and it is (and will be) somewhat awkward to teach a case-based discussion course online.

Per the syllabus, the already-scheduled topic of supply chain risk management is taking on a whole new urgency for many firms, industries and society as a whole with the spread of Covid-19. It seemed like a good time to share some of what we are and will be talking about in class with our supply chain partners.

A caveat: My research expertise is in supply chain decision-making. With Christopher Craighead, now at the University of Tennessee and a Supply Chain Management Review, a sister publication of Modern, contributor, I co-wrote a popular case about how firms can deal with a supply chain disruption. Yet, that focused on the bankruptcy of a supplier and the impact on a Tier 1 firm.

Today the news is about Disruption with a capital “D.” So, what are some of the differences between Covid-19 and other disruptions? There could be more, but I discuss seven dimensions here, which are summarized in the table.

1. Geography

In most cases, a supply chain disruption is limited to a region or country. For example, we are used to hurricanes hitting Florida, or earthquakes in California. This past year, we saw massive wildfires in Australia. No one should discount the suffering after natural disasters like Hurricane Katrina on New Orleans and other areas. Yet one difference with a pandemic like Covid-19 is that it is hitting the entire world. This is important because under normal circumstances, resources from one region can support affected regions. For example, utilities send repair crews in from out of state, and even firefighters and equipment from the United States recently assisted in Australia. This is very difficult to do when everyone is simultaneously affected.

2. Scope

Beyond geography, Covid-19 has nearly unprecedented scope. In an ordinary disruption, we might see a few key industries knocked offline for weeks or months: Hurricane Harvey took much of the U.S. Gulf Coast petrochemical industry offline for several weeks, yet West Coast refineries were not affected.

Unique about Covid-19 is that it is affecting both goods and services. Clearly demand has increased for masks and hand sanitizer, so it is logical those items would be in short supply. However, there is fundamentally no increase in demand for toilet paper, so shortages there are unusual and related to human behavior. But, the impact of Covid-19 is that demand for services is greatly diminished. We cannot stockpile an inventory of services or experience goods, so those are, at best, delayed. This includes things like the cancellation of all sporting events, idled cruise ships, empty hotel rooms and the widespread cancellation of airline flights. In addition, most shops and restaurants are closed.

The week before I wrote this article and before the official shutdown, I went into my local barber shop (as yet we had no Covid-19 cases reported in my county or nearby). Six employees were standing outside; I was the only customer in the shop the whole time. Here in State College, much of the economy revolves around university students, all of whom are now staying home. All of this will have knock-on effects throughout the entire economy.

3. Demand vs. supply

Many supply chain disruptions affect supply. I have already mentioned several, and in my class the previously assigned reading was about a well-known fire in a Philips Electronics chip plant in 2001 and the impact on major mobile phone makers Nokia and Ericsson. At the time, Nokia had 27% of the global cell phone market and Ericsson had 12%. Lightning struck the Philips plant, causing a loss of chips, yet the real damage was that the plant was contaminated and could no longer produce chips for these and other firms.

However, how Nokia responded was unique—with fast communication, an all-hands-on-deck approach and coordination that saw them weather the storm with minimal disruption. Ericsson took a much slower approach and was far more vulnerable to this supply disruption.

In the end, Nokia gained 3% of the global cell phone market (mostly from Ericsson), and subsequently Ericsson ended up exiting the handset business. There have been some supply disruptions due to Covid-19, and there will be more disruptions in manufacturing, distribution and transportation in the upcoming weeks.

However, Covid-19 is (and will be) affecting demand. Perhaps you have seen news reports about major airlines canceling all international flights and 40% of their domestic capacity. Beyond this, demand will be affected even when there is virtually no disruption in supply. For example, look to the Fukushima Daiichi nuclear disaster following the earthquake and tsunami in Japan in 2011.

Shortly after the disaster, luxury goods maker LVMH closed 50 stores in Japan. The supply chain for high-end merchandise was relatively unaffected, yet few people wanted to be seen with a new Louis Vuitton handbag when tens of thousands of their neighbors were suffering. Other luxury brands were similarly affected.

In the case of Covid-19, the size and duration of the impact is not clear. For example, one can easily imagine that the demand for new cars will decrease, both because some individuals may lose their jobs or see hours cut and understandably reduce their spending. Yet demand will also decrease because the perception of conspicuous consumption of new goods is likely to mute demand in the face of a global disaster.

4. Prior planning and experience

For many disruptions, planning and prior experience are guides. For example, factories in the Midwest and elsewhere have tornado-safe locations for their employees. Elementary schools regularly practice fire and tornado drills. Refineries in the Gulf Coast plan for hurricanes, and hospitals have emergency generators. Yet, limited prior planning exists for a global pandemic such as Covid-19. Yes, the United States is supposed to maintain a strategic stockpile of ventilators and other supplies, yet, as we are learning, no amount of inventory would be sufficient under the worst-case scenarios.

Perhaps more important than inventory and planning is the lack of experience: Experts refer back to the 1918 Spanish Flu outbreak for guidance, yet no public health experts have personal experience with this type of global pandemic. The historical contrast between Philadelphia and St. Louis is telling, as the former went ahead with a large, public parade after which thousands of additional individuals became infected with influenza; St. Louis experienced far fewer cases and deaths after implementing quarantine procedures.

Of course, it’s a good thing that we do not regularly have pandemic events, yet that makes these unprecedented times for firms, world leaders and individuals who are learning in real time the best steps to take.

5. Financial system

Most often, when there is major disruption, the financial impact is relatively contained. Events such as Pearl Harbor and 9/11 saw a comparably small impact to the stock market. The closest thing might be the global Financial Crisis in 2007/2008. That crisis had a comparatively limited supply chain impact. If anything, there was more supply and less demand, yet there were no major, sustained disruptions to production or transportation networks.

In contrast, we have seen global stock markets crash and central banks and governments undertake unprecedented actions to support the economy. The reason for this is that the Covid-19 demand shock is leading to a financial disruption. If this continues, we will continue to see small businesses cut employees or close, and many firms will have difficulty raising capital or repaying loans—preserving cash will be crucial.

6. Term

For most disruptions, the term is limited—or is at least quantifiable. For example, most disasters see short-term demand for rescues or emergency services immediately after an event. However, the term for Covid-19 is relatively unknown. We have seen a significant spike in the demand for hospital beds and ventilators, and social distancing is working in some areas to keep the number of infections below the system capacity. While most large disruptions have a defined short- or medium-term that can be fairly accurately predicted, the term for a global pandemic is long and uncertain.

7. Human impact and behavior

For the majority of disruptions, the human impact is relatively limited. Naturally, immediate and consequential injuries follow a natural disaster. But, these are limited by location and are somewhat understandable: Natural disasters can be terrifying, but fear largely subsides when they are over. In contrast, Covid-19 has many unknowns. Most of us are not infected, but it is still very natural to be concerned for family members, friends, co-workers and heroic first-responders.

We do not know how long this will last, nor what the consequences will be. I doubt that many of us would prefer to live through a major tornado over practicing social distancing, yet we should not discount the impact on behavior. That is perhaps one reason for increased demand for toilet paper: People feel the need to do something to prepare, even if the underlying consumption of toilet paper remains constant.

Other impacts

There can more Covid-19 effects. For example, many pharmaceuticals and machine parts are made in Switzerland, and these are regularly shipped worldwide in the cargo space of commercial airliners. If the global air network is disrupted over the long-term, this could lead to shortages or other impacts.

In addition, firms and governments are likely to reconsider their supply chains to reduce systemic risk. It will be considerable work to re-design supply chains to improve resiliency. Much of the global pharmaceutical industry relies on materials made in China, and many industries (like automotive) have complex supply chains. All of these relationships will need to be re-examined.

What to do

Supply chain leaders should prepare for additional disruptions in supply and transportation. If you are a business chain leader, what are some things you could do right now? There are some strong resources on supply chain risk management, but most resources focus on developing a resilient supply chain and have less to do with facing an immediate crisis.

As I told my students, these are unprecedented times, yet we will get through these by working together and with flexibility. This is unlikely to be the last supply chain disruption, though it is likely to be one of the most memorable. Each of us should listen to public health authorities and do what we can keeping in mind the unique circumstances.

Beyond that, consider three additional steps: First and foremost, take care of your people, including employees and customers. Employees will likely need to be reassured about what is happening at your firm, so maintain effective communication. If anything, over-communicate, especially if you have significant changes to regular operations. Provide opportunities for employees to talk with you or their manager. Support your customer-facing employees and logistics personnel who must keep working when others are in quarantine.

Second, be flexible and encourage flexibility. Inevitable disruptions will surface as schools remain closed, and more individuals contract or care for those with Covid-19. Letting people know they should remain home if they feel ill or are in contact with someone who has the virus is key.

Third, this is a good time to review and update emergency plans and contact information. Make sure several layers of backup employees are available for key activities, and update emergency contact lists so these backup employees can communicate with others. Finally, months or years from now, employees and customers are unlikely to remember what you said, but they will likely to remember how they felt. Act accordingly.