With the COVID-19 virus disrupting the global economy, what is the effect on the international supply chain? This combined article examines core supply-chain issues, in terms of affected industries and the timing of unfolding interruptions.

The rapid spread of the COVID-19 virus is already having a huge impact on the global economy, which is rippling around the world via the long supply chains of major industries.

MIT supply chain expert David Simchi-Levi has been watching those ripples closely in 2020, as they have moved from China outward to the US and Europe. His tracking of supply chain problems provides insight into what is happening in the global economy — and what could happen in a variety of scenarios.

Significant challenge

“This is a significant challenge,” says Simchi-Levi, who is a professor of engineering systems in the School of Engineering and in the Institute for Data, Systems, and Society within the MIT Stephen A Schwarzman College of Computing.

The global public health crisis, he adds, “is not only affecting the supply chain. There is a significant impact on demand, and as a result, a significant impact on the financial performance on all these businesses”.

In late February, Simchi-Levi and technology executive Pierre Haren issued a short-term forecast, in a Harvard Business Review blog, that the effects of COVID-19 in China would lead to a manufacturing slowdown in the US and Europe by mid-March.

Why? Because many Chinese manufacturing suppliers temporarily, but drastically, cut production in late January, due to the problems caused by the virus. Given the timetable of global shipping, that meant major manufacturers would be low on supplies about six weeks later.

“The last shipment to deliver products arrived at the end of February, because it takes about 30 days from Asia to North America or Europe,” says Simchi-Levi.

Two weeks of inventory

“Most manufacturing companies will keep about two weeks of inventory. That means they were able to cover demand for the first two weeks of March. After that, [given] no more supplies, there will be disruption of manufacturing. And we see this right now.”

Indeed, most major automakers have cut production in the days since mid-March, with Volkswagen and Renault shuttering facilities in Europe as a result.

In the US, most major automakers announced last week they were temporarily closing plants due to health and safety concerns, with Honda explicitly stating on March 18 that they would enact a temporary shutdown “due to an anticipated decline in market demand related to the economic impact of the COVID-19 pandemic”, as well as in response to health concerns.

“Our prediction that was made in the last week of February has been realised now,” says Simchi-Levi. “Automotive manufacturing companies are closing facilities. Not only are they reducing production — they are closing facilities.”

Normal manufacturing output

However, China’s public health situation has been improving in recent weeks, with a reduction in the rate of new COVID-19 cases and fatalities. If the public health situation in the US and Europe did not worsen, then a return to something like normal manufacturing output would be conceivable by the end of the second quarter, says Simchi-Levi.

Looking at survey data from more than 3,000 suppliers in China, Simchi-Levi notes that about half of employees at Chinese suppliers were not anticipating being at full capacity until the end of March. The remaining suppliers anticipate a much longer recovery to full capacity.

“These suppliers are starting to come back,” says Simchi-Levi, noting that in the best-case scenario, “We will not see significant volume [from China] before the end of April.”

However, with the US and many European countries continuing to see a rapid increase in COVID-19 cases and deaths throughout March, and curtailing social and economic activity, the best-case scenario seems unlikely.

Demand side completely changing

“At the beginning the problem was reduction in supply,” says Simchi-Levi, referring to China’s production issues. “But now it is not only a matter of supply from China; it is supply from everywhere. Second, the demand side is completely changing. Now there is a big drop in demand.”

With unemployment rising and consumer spending reduced, fewer large manufacturers can keep operating at full capacity or anything close to it.

“This also implies a third element, which is the financial impact on companies,” says Simchi-Levi. “It’s not just disruption in the supply chain; the significant drop in demand has a significant financial impact.”

So, even if China and other Asian countries rebound relatively quickly, businesses in the US and Europe might not have the capacity to ramp up production and rehire workers at their previous levels.

“You can see there are cascading effects that have an impact,” says Simchi-Levi. Clearly, without an abatement of the spread of COVID-19, a substantial economic uptick is hard to imagine.

“This is all fluid and dynamic,” he warns.

Supply chain landscape in US

By now, the media images are familiar: empty shelves in large markets where shoppers have loaded up on food, toiletries, and medicine. Many people, if they can afford it, have bought large quantities of goods to avoid repeated trips into public, in line with their state and local government guidelines. But others may be simply spooked by the unknown: will we run out of the things we need?

From the US perspective, it depends what those goods are, according to MIT supply chain expert Yossi Sheffi. While nothing is certain, the availability of food is less of a concern in the US, in supply-chain terms, while access to medical supplies is a much more problematic issue.

“People are worried about the food supply chain,” says Sheffi, who is the Elisha Gray II Professor of Engineering Systems at MIT, a professor in MIT’s Department of Civil and Environmental Engineering, and director of the MIT Center for Transportation and Logistics.

Food supply chain very robust

“However, the US food supply chain is very robust. There is unbelievable panic buying, but if you go to the [major chain] stores in the morning, most of them are well-stocked.”

That robustness is due to multiple factors, says Sheffi. The US supply chain is mostly domestic, because most of its producers are domestic. It is also organised around a relatively smaller number of wholesalers, who have the flexibility to expedite orders to large retailers as well.

“The great thing for the United States is that most of its food is procured within the United States,” says Sheffi. “Some is procured from Latin America, which is not suffering badly and still sending ships.”

Already, says Sheffi, there are cases of food wholesalers and adjusting orders to meet consumer demand. So while there is a chance, Sheffi notes, that the US could “go through some shortages” in some areas, the industry as a whole is not a sector where supply-chain experts have focused their concerns.

For similar reasons, bulk purchases of toilet paper in the US are not logistically vital, Sheffi observes. “The run on toilet paper is unexplainable,” he says. “This is a totally American-made product. Wood is grown in the United States. In fact the United States is exporting wood.” Even accounting for consumers’ desire to reduce shopping trips, Sheffi suggests there is likely a psychological factor at work: “It’s the need to get some semblance of control.”

Medical devices: Can manufacturing scale up?

Instead, Sheffi notes, the primary concern involves medical devices and medical supplies, which are not only produced using global supply chains, but have increasingly become dependent on China, where the COVID-19 virus struck first.

“The thing I am worried about is medical first responders and hospital supplies, in terms of even protective gear and masks,” says Sheffi. “And a lot of the intermediate goods used to make antibioics and other products are made in China.” That has been the case, Sheffi notes, for more than a decade.

Medical products from China, he adds, cannot easily be substituted using products from elsewhere, because they “are not only low-cost, they’re very good. So it’s not easy to replace a supply that has high quality and low cost. And now we see the unfortunate consequences of this”.

Already, hospital leaders, public health experts, and state authorities have been warning about imminent shortages, especially regarding ventilators for patients, and masks for medical professionals and the public — in addition to the need for increased production of COVID-19 tests. Some health care providers are now resorting to ad hoc measures to provide masks, and openly seeking donations of such materials.

And while the US is now beginning to increase test production, with some major pharmaceutical companies beginning to expand the supply, the issue of scaling up production of ventilators, needed to help patients breathe because COVID-19 can attack the respiratory system, will not be an easy process.

“A ventilator is a sophisticated machine,” says Sheffi. “Companies cannot very quickly move to start making ventilators.” Companies such as 3M and GE Healthcare have stated that they are increasing ventilator production.

However, he suggests, companies “who make real, industrial-strength goods” could also explore the rapid application of 3D printing for ventilators, and some manufacturers might adjust their production processes to make other, less complicated items.

“In World War II, the Ford Motor Company was even making tanks and airplanes,” says Sheffi. “We should redeploy the incredible manufacturing capacity in the United States and put it to good use making beds, protective gear, masks, and more. Some of these things are relatively easy to make.”

Crisis management for firms

Moving beyond the outlook for particular industries, Sheffi has a series of principles for firms to follow at moments when there is a potential supply-chain crisis.

He thinks big companies should have an emergency-management center with clear rules of decision-making authority; set priorities about which products to focus on if manufacturing is constrained; review all their suppliers to identify where all parts of products originate; focus on actions that generate cash flow; and communicate with government authorities

“Companies like Intel, Procter & Gamble, GM, and Walmart are very well prepared” for a supply-chain crisis, says Sheffi. “They have a whole protocol about who makes decisions.”

A non-trivial task

From the outside, people may not realise how many suppliers multinational firms may have; identifying the status of all the components needed to make a product is a non-trivial task.

For instance, as Sheffi details in 'The Power of Resilience', his 2015 book about supply-chain shocks, Intel had four layers of suppliers it needed to examine after the 2011 Fukushima tsunami and nuclear accident in Japan. (Sheffi also details these issues in a 2005 book, 'The Resilient Enterprise'.)

Still, even the most prepared companies can be vulnerable to unexpected shocks. China is recovering from its initial wave of COVID-19 cases, centered in the city of Wuhan.

However, Sheffi notes, there is no guarantee that COVID-19 will not re-emerge at some point as well, meaning that companies have to be prepared to make adjustments for a significant period of time.