Coronavirus Creates Opportunity for Healthy Supply Chain Correction

Every day, the COVID-19 situation continues to evolve. Thousands of lives worldwide have been disrupted, and there’s no way to measure the human toll.

Alongside that is the incredibly difficult task of measuring supply chain effects throughout the rest of the year. Manufacturers, distributors and retailers are trying to understand what this will mean for their business and determine how fast they can restock supply to meet consumer demand. It is important to start critical conversations about protecting your business interests in this complicated import and export logistics environment. It is also helpful to understand how this situation presents opportunities for supply chain and inventory correction.

How Coronavirus is Affecting Manufacturing

The good news is that foreign manufacturing is coming back online. Across China, factories are slowly beginning to ramp up production as between 50 and 75 percent of workers go back to work.

The bad news is that two months of backlog orders will create bottlenecks in the system. With so much freight and fewer ships ready to load, significant delays are expected at the ports throughout Asia.

Today, it is impossible to predict what the shipping backlog will look like. We predict ocean shipping lines may go into a “wait and see” pricing approach. When contract rates are reconsidered on May 1, moving freight out of China could cost more due to increased demand.

How Coronavirus is Hitting Inventory

While Coronavirus has slowed manufacturing significantly, commerce has not yet felt those effects. Because companies prepared for the annual Chinese New Year shutdown by taking more inventory, we’re not yet seeing a slowdown in delivering goods to the final customer.

However, if you don’t have a product for the end consumer, total sales and revenue will go down. Some industries will experience this more than others. The cell phone industry, which thrives on constant demand for new products, may face inventory deficits of more than 15 percent for the remainder of the year. Other industries that could be directly affected include automotive and pharmaceuticals.

Inventory rationalization is good for companies, either through force or mandated by accident. While this situation provides an opportunity for healthy inventory correction, it also forces companies to plan for disruption. While some ships may be available, air freight is also an option to move critical items from Asia into the United States.

Increased levels of service come with a price. To move a low supply of freight across any possible channel, importers can expect to spend more money.

The Unknown Effects of Coronavirus

Because production is ramping up with fewer shipping options available, we can predict a “bottleneck” effect for inbound freight. It’s impossible to project how this will ultimately affect the consumer market in the third and fourth quarters of 2020. Good communications can help prevent major issues from arising when bringing inventory into North America.

Once a company understands when factories will be fully operational, order fulfillment can begin, and products can flow back into the pipeline. That’s why communication is critical now: Companies that plan for the manufacturing surge can line up shipping early and lock in the best rates.

Critical Questions Your Company Needs to Ask

Understanding that there is still so much unknown, leadership teams need to start crucial conversations today. The most important issues include:

How diverse is your supply chain ?

Many companies are diversifying their sourcing to other Asian countries, including Cambodia, India and Vietnam. Now is the time to consider where your sourcing plan stands and where you should add sourcing lanes to your network.

Are you getting critical information from suppliers?

If your team isn’t getting weekly updates from overseas suppliers, they need to. Understanding current factory status and operational plans give you time to plan for both order fulfillment and shipping costs.

Are you planning for shipping rates and availability?

As the status reports and orders become available, use the information in discussions with your import logistics partners. The earlier you can solidify routing, the better your pricing may be.  

While these may be difficult decisions, having the right clarity can help you act confidently. Using intelligence and action, you can master your supply chain through disruptions.

Rick Brumett is Vice President of Client Solutions for Transportation Insight. With more than 35 years spent immersed in retail supply chains, multi-modal transportation solutions and efficient warehouse network design, Rick understands shipping challenges of retailers, manufacturers and distributors – from foreign port to customer door. He is International Trade Compliance Certified for import/export and regularly offers his perspective to the marketplace through Transportation Insight’s blog.