China’s novel coronavirus (COVID-19) outbreak, which originated in the Wuhan, Hubei, province, has swept through the country’s major business and population centers and spread beyond its borders. While the coronavirus looms large, the impact on our region’s manufacturing and distribution sector and global supply chains hits closer and closer to home.
According to Dun & Bradstreet, the 19 hardest-hit provinces in China account for approximately 90% of all businesses operating there, and D&B researchers estimate that as many as 5 million businesses worldwide have a Tier 1 or Tier 2 supplier located in one these affected regions.
Slowly Coming Back Online
Some provinces outside of Hubei have started reopening their factories. Most, however, continue producing well short of capacity as travel restrictions hinder worker movement and access to raw materials. Even if suppliers can produce their goods, transportation and logistics challenges can keep products from going out the door. Maersk, the world’s largest container shipping company, recently cancelled more than 50 sailings to and from Asia due to low demand caused by the outbreak.
As travel restrictions are lifted and people get back to work on factory floors, there are concerns that the infection could start spreading again, leading to more quarantines and shutdowns. If a factory comes back online only to have a worker confirmed with COVID-19, then the factory will be shuttered for two weeks to contain the outbreak. China is walking a fine line between containing the virus and preventing a slump in the world’s second-largest economy.
Continued Stress on Supply Chains
For many American manufacturers, the U.S.-China trade war has already caused significant stress on their global supply chains. The added stress of the coronavirus outbreak, increasing worker wages in China and the potential for disruption from natural disasters, has many manufacturers taking a hard look at their value chain strategy. Many manufacturers are diversifying their supply chains, distancing themselves from single geography sourcing by looking beyond China for component parts and raw materials. At this point, we haven’t seen many of our clients make drastic changes to their supply chains, but many are reviewing their suppliers and evaluating alternative options.
What Manufacturers Can Do
It’s always a good idea for businesses to evaluate their supply chains to mitigate potential risks. A few steps to take include:
- Develop a process for continuously identifying and monitoring risks in your supply chain
- Assess your suppliers—at least Tier 1 and Tier 2 suppliers—to ensure you have a clear picture of your entire supply chain
- Identify alternative suppliers to add diversity to your supply chain (diversity in the number of suppliers as well as geography)
- Regularly test and revise your supply chain strategy as needed
With Chinese factories slowly coming back online, the next several weeks will be critical. If the coronavirus outbreak slows, and there is no resurgence of infections, normal economic activity will hopefully be restored. If the outbreak worsens in China, however, the global economic impact could be severe. Containment of the virus outside of China is the X factor, with countries such as South Korea, Italy and Iran racing to minimize the effect of outbreaks in their own territories.
Eric Schnieber is a shareholder and chair of Clark Schaefer Hackett’s Manufacturing and Distribution Industry Group. If you’d like discuss ways to reduce risk in your supply chain, contact him at [email protected].
Visit our Coronavirus Resource Centerfor more information.