By Jeff Pratt, Sean Murphy
The novel coronavirus (otherwise known as COVID-19) crisis has struck a serious blow to the manufacturing industry, which was already battling trade policy turbulence, a slowdown in global manufacturing growth and broader economic uncertainty. The virus’ disruptive impacts are rippling throughout global manufacturing supply chains, particularly in the auto sector. Automakers rely heavily on China for auto parts, and some major automakers have temporarily closed plants in South Korea and Japan due to supply shortages, while others are racing to find alternative sources of supply in Europe or elsewhere. Not all parts can be easily sourced elsewhere, however, and some automakers may not have any other option but to wait out the crisis.
COVID-19 isn’t the only issue plaguing supply chains. Even before the virus became a global crisis, manufacturers had to contend with the disruptive impacts of U.S. trade policy. According to BDO’s Manufacturing CFO Outlook Survey, 21% of manufacturers say they’ve experienced a disruption to their supply chain as a result of government restrictions in the last 12 months.
We’ve summarized some of the crisis’ specific impacts to manufacturers below:
- Supply shortages and increased prices: Until affected factories can resume production, manufacturers will need to rely on inventory stockpiles. However, these resources are limited and will run out eventually. When existing inventory runs dry, we can expect to see shortages and / or price increases throughout supply chains if alternate sources aren’t secured.
- Fulfilment delays: Quarantines, travel restrictions, and workforce shortages can make it difficult or impossible for impacted manufacturers to fulfill their contractual obligations to their customers. A shortage or delay of products can seriously impact a company’s reputation and may result in lost customers or even legal consequences.
- Increased transportation prices: Once factories can resume production, companies will likely rush to get their operations back online and make up for lost time, which could cause a sharp increase in transportation prices.
- Economic impacts: The COVID-19 crisis does not end when the outbreak is finally contained. How fast the economy—and the Chinese economy in particular—will be able to rebound from the crisis is yet to be seen, and any slowdown in global demand may exacerbate existing headwinds for U.S. manufacturing, which was already nearing a slump at the end of 2019. The Phase 1 U.S.-China deal provided some relief to manufacturers, but the coronavirus crisis could impede China’s ability to fulfil its end of the trade agreement and delay any Phase 2 deal negotiations.
- Reputational impacts: A brand is a promise, and a company needs to consistently deliver on that promise to keep the brand strong. When a company fails to deliver on that promise—even if that failure is due to forces beyond the company’s control—reputation can take a serious hit. The way manufacturers respond to COVID-19 delays or shortages will be an important dimension of longer-term brand preservation. Viewed with the right lens, manufacturers’ response to the novel coronavirus is an opportunity for competitive differentiation. During times of crisis, demonstrated leadership, transparency and communication are highly valued and can earn customer loyalty.
- The virus and last two years of trade turbulence have uncovered a prevalent problem in the manufacturing industry: a lack of geographic diversification in supply chains. The combined disruptive impacts of U.S.-China geopolitical tension and the coronavirus crisis have made it clear that manufacturers cannot be so dependent on one location for supply—namely, China.
1. Geographic diversification
2. Increase visibility
3.Sales and operations planning
4. Conduct a business continuity risk assessment
5. Review your insurance coverage: Manufacturers should familiarize themselves with their insurance policies so they are aware of the extent of their coverage. In the case of a public health crisis such as the coronavirus, companies should pay close attention to whether their insurance coverage contains a Communicable Disease Exclusion or not.
6. Engineer resilience and introduce agility for the future