COVID-19 Impacts on Supply Chains

COVID-19 Impacts on Supply Chains

Supply Chain
The global spread of COVID-19 and resulting quarantine measures have disrupted manufacturing supply chains and dramatically reduced business and household consumption.

These disruptions have taught important lessons and highlight how supply chains need to transform and adapt to a new environment.  Transportation planners can benefit from understanding these changes within the context of current trends.

  1. Reshoring and Regional Supply Chains

A globally connected economy means that disruptive events now affect supply chains worldwide. It is not uncommon for raw materials and components used in a single product to be sourced from several places around the world. As China sent workers home and closed businesses in January to contain the coronavirus outbreak, the flow of vital parts to global supply chains slowed or stopped. Given that Chinese exports were valued at $2.5 trillion in 2018, global supply chains were highly exposed to disruptions to Chinese production, which dropped 13.5% in January and February combined (Figure 1) including a 17% drop in exports[1].

Figure 1: Industrial Production in China

Source: World Bank. GEM database

Global supply chains have been structured around cost effectiveness with an emphasis on just-in-time deliveries, low safety stock, and lean inventory.  Despite the allure of cost-effectiveness of international production, U.S. companies are now recognizing the benefits of regional domestic production.  Beyond the narrowing of U.S. and Chinese labor rates, regional production enables additional control over production schedules, a diversity of suppliers, high production quality, and reduced risk of logistic bottlenecks.  These trends in addition to recent trade agreements and tariffs enacted by the current administration continues to drive this shift.  The Reshoring Initiative has claimed that an estimated 145,000 jobs were created in the U.S. due to Foreign Direct Investment (FDI) and Reshoring in 2018 with over 757,000 jobs created cumulatively since 2010[2] (Figure 2).

In addition, the impacts of COVID-19 have also highlighted the benefits of regional production and will likely lead to demand for site selection services, workforce training, and supply chain/logistics support. Anticipating these needs for the future will facilitate transitioning jobs back to the U.S. in a timely manner and enable companies to ramp up their operations quickly.   

Figure 2: Jobs Announced, Reshoring + FDI (2010-2018 cumulative)

Source: Reshoring Initiative’s 2018 Data Report

  1. Resilient Supply Chains

COVID-19 has highlighted the importance of resilient supply chains to weather disruptions in production and changes in consumer demand.  As of May 15th, 2020, 15,744 workers across 213 meat packing plants have tested positive for COVID-19.  This poses a significant risk to the industry given the four large companies Tyson, Cargill, JBS, and National Beef process 80 percent of U.S. beef.  This highlights the need for protective, healthy, and safe working conditions and production schedule modifications given the transmission risks of COVID-19.

Evaluating the resiliency of supply chains includes estimating the wider social and economic costs in comparison to mitigation strategies.   Because of the surges and declines in demand for specific goods driven by the pandemic, flexibility to adapt to these changing conditions are paramount to ensuring a resilient supply chain.  For example, the government-imposed restaurant closures (food services & drinking places) significantly impacted the food production industry for perishable goods.   The impact on food sales from the rapid drop in customer demand could have been cushioned by redirecting perishable goods to other channels experiencing increased demand such as grocery stores (food & beverages stores), food manufacturing plants, food banks, and other non-profit organizations. Although these strategies would require coordination with customers and modifications to distribution channels, packaging requirements, and other adjustments, they present a viable alternative to food waste by directing perishable goods to where they are needed most.

Achieving resilience in supply chains will also require shorter supply chain connections and expanding the diversity of suppliers to reduce risk and increasing adaptability.  To justify the resources necessary to drive these transformations may require quantifying the social and economic impacts of disrupted supply chains.   It is also important to consider the social equity implications for low-income and minority populations and threshold effects (e.g. tipping point of financial sustainability).   

  1. Customizing Workforce Training to Meet Shifts in Industry Employment

The stay-at-home orders enacted by states have significantly impacted the retail industry, which according to National Retail Federation is responsible for 52 million jobs[3]. According to the U.S. Census Monthly Retail Trade Report, overall retail sales declined by 5.7% in March 2020 compared to March 2019 and declined by 21.6% in April 2020 compared to April 2019.  Figure 3 presents the percentage change in March and April sales in 2020 versus 2019 by retail sector.  

Figure 3: Estimated Change in Monthly Sales for Retail and Food Services by Sector

Source: U.S. Census Monthly Retail Trade Report

The rise and decline of certain industries shift the demand for certain occupations.  Some companies have furloughed or laid-off workers while others are desperately looking to fill new positions.  An awareness of labor market trends, services to match prospective employees with available positions, and occupational training are different ways to support workforce needs.

The impacts of COVID-19 have highlighted weak and vulnerable points in current supply chain structures. These vulnerabilities can be mitigated by expanding domestic and regional supply chains, increasing the diversity of suppliers, and adapting to new distribution channels based on changes in consumer demand.   Although these changes require initial investment, they can significantly reduce the risk of supply chain disruptions, lower excess inventory, and avoid missed sales opportunities.   There are still many unknowns, but these perspectives can be helpful to create more resilient supply chains and support the economic recovery.  

Beyond the impact on supply chains, at EBP, we have also recognized how COVID-19 has raised equity concerns regarding working at home, impacted tourism-dependent economies, significantly reduced vehicle travel, and affected revenues and funding needs for public transit nationwide.