Coronavirus Might Completely Alter Companies' Sourcing Patterns

The Wuhan-centered coronavirus has wreaked havoc within China, as the number of people affected and the body count continues to grow weekly. Global supply chains that touch the Chinese shores have all suffered as a result of the country's shutdown of factories, logistics hubs and transportation routes. FreightWaves spoke with ElMarie Hugo, senior director of industry strategy at Blue Yonder (formerly JDA), to gauge the coronavirus' immediate and prolonged impact on supply chains. 

"Wuhan is one of the centric areas for the Chinese automotive industry where there are huge investments at stake. Original equipment manufacturers [OEMs] have about 50% ownership of the industries in the province in terms of investment, so they are highly dependent on the supply chains in that area," said Hugo. 

Major automakers like Honda, PSA Group and Dongfeng Motors have a significant presence in Wuhan and surrounding cities. The lockdown of the city is a major blow to these companies; it will profoundly impact their earnings this quarter. The automotive industry is already in a tenuous state with auto consumption going down globally during 2019 – a situation that could worsen as inventories are expected to run dry after a few weeks of protracted inactivity. 

"Unless companies can source within the province, they are going to run out of supplies too. They can only continue to produce until they run out of inbound supply," said Hugo. "They could be stockpiling in the meantime. But I think we are going to see a huge imbalance in inventory and working capital at the end of this, as the shutdown could last longer than previously thought."

Ultimately, China's growth trajectory will have a visible slowdown. The 2003 SARS outbreak, which was much smaller in scale and magnitude than the coronavirus outbreak, had a $40 billion impact on the global economy. It is evident that by extrapolating from the SARS epidemic, the consequence of coronavirus will be more substantial and far-reaching.

In that context, Hugo spoke of the importance of companies to position their supply chains to expect disruption and have contingency plans in place to prevent them from destabilizing their network. 

"Supply chains should have flexibility and have the ability to deal with the fluctuation in demand and supply. It is about how quickly they can respond to disruption," said Hugo. "The current outbreak is, of course, of an exponential nature. But if companies cannot – in a matter of three months – create alternative supply chains by sourcing from other locations, they are failing to have flexibility."

This dramatic shakeup of supply chains could be a lesson for the future. Companies have long been accustomed to outsourcing and far-sourcing, reducing operational costs at the expense of flexibility. Hugo said that she expects to see an inversion of that model, as this situation will force companies to in-source and near-source by finding alternate suppliers closer to their assembly line. 

"The question is if they have the capital and the ability to execute this in a flawless manner. If they can, they've created an excellent and robust supply chain. But it is going to be challenging, as there are several companies with vested interests in Wuhan," said Hugo. 

The automotive segment apart, supply chains affected by the rise of ecommerce have already witnessed ample disruption. The "Amazon Effect" and the evolution of consumer expectations on expedited delivery have forced businesses to scramble and find ways to fail-proof their supply chains, while simultaneously looking to improve visibility and transparency into operations. 

The trade war with China created an uncertain trade climate, which led companies to expand their manufacturing footprint outside of China. Retail manufacturers are increasingly looking to position their inventories closer to their consumers over the past few years.

"In the end, if we focus on what is needed and necessary, we can weather the storm," said Hugo. "But, it is going to take rationalization of consumer behavior over time. That said, the current situation will be driven by the non-availability of stocks, and I think everybody will be affected in the near-term."