Article Summary: The Modern Supply Chain Is Snapping, The coronavirus exposes the fragility of an economy built on outsourcing and just-in-time inventory

Can’t find your favorite shampoo or toothpaste in the store anymore? Blame the modern supply chain. Indeed, the coronavirus crisis has revealed how fragile our global supply chains have become. Find out why so many Western manufacturers today are left scrambling to find crucial ingredients and components for their products in today’s summary:

The Modern Supply Chain Is Snapping - The coronavirus exposes the fragility of an economy built on outsourcing and just-in-time inventory
The Modern Supply Chain Is Snapping – The coronavirus exposes the fragility of an economy built on outsourcing and just-in-time inventory

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Take-Aways
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If you can’t find your favorite shampoo or toothpaste, blame the modern supply chain. The closing of major Chinese manufacturing sites for only a few weeks during the coronavirus outbreak laid bare how much the availability of products depends on just-in-time deliveries from the world’s manufacturing powerhouses in Asia. Writing for The Atlantic, Lizzie O’Leary explains pandemic-related weaknesses in the global supply chain and its consequences.

Take-Aways

  • As the coronavirus crisis unfolds, US health systems are turning to the government to address shortages in health-care supplies.
  • The coronavirus crisis reveals the fragility of the modern supply chain system.
  • Offshoring and “just in time” delivery make modern supply chains vulnerable to disruption.
  • The COVID-19 pandemic will create temporary shortages of certain goods.
  • The pandemic may prompt changes in the future operation of global supply chains.
  • The food supply chain is strong and unlikely to suffer disruption.
  • Remember that you are part of the supply chain.

Summary

As the coronavirus crisis unfolds, US health systems are turning to the government to address shortages in health-care supplies. In February 2020, due to a contamination issue unrelated to the coronavirus, the Medical University of South Carolina’s health system did not receive surgical gowns it had ordered from a Chinese manufacturer. As the coronavirus began to spread and demand for protective equipment surged, the health system struggled to find a supplier to fill the gap.

Hospitals in the United States usually order supplies in bulk through a group purchasing organization (GPO). Such GPOs – which “aren’t nimble” – can’t quickly find substitute vendors for their huge bulk orders. Vendors, in turn, operate with a narrow profit margin, so they don’t retain large backup inventories. Consequently, the South Carolina health system had to turn to the federal government for help. The national government has the power to invoke the Defense Production Act, which authorizes it to ramp up manufacturing and to tap the country’s strategic reserve of health-care supplies.

The coronavirus crisis reveals the fragility of the modern supply chain system. Many other industries cannot turn to the federal government, or any other entity, for help. Modern supply chains are extremely fragile – not only in regard to health-care supplies but also as they relate to most nonperishable goods. The Institute for Supply Management (ISM) reports that three-quarters of the companies surveyed faced supply-chain disruptions due to the coronavirus outbreak. Fully 44% of those businesses did not have a contingency plan to deal with these shortages.

One reason this disruption has such far-reaching consequences is that – according to ISM CEO Tom Derry – almost every sector of the US industry, whether “manufacturing or non-manufacturing,” depends on China and supply chains running to and from China.

Offshoring and “just in time” delivery make modern supply chains vulnerable to disruptions. Consumers in the United States have scant understanding of the degree to which Chinese components are present in the products they use daily or of how much American companies rely on these components. To save costs, Western companies depend on China and other Asian countries for their manufacturing. Contracting with Chinese entities to serve their manufacturing needs is simply less expensive for most US companies, so most of them take that path.

For example, automobile manufacturers, technology corporations, clothing designers, wholesalers, retailers, medical equipment producers and pharmaceutical companies all purchase crucial components from China and other Asian countries. If production slows in one or more of these outsourcing nations – as has happened and continues to happen in China due to the coronavirus outbreak – the constraints that affect the supply chain manifest quickly.

To boost profitability, companies worldwide operate under “just in time” delivery systems that discourage them from holding large inventories. This makes them more profitable but, as events are demonstrating, it also renders them considerably more vulnerable to disruptions. In the event of a supply disruption of only 15 to 30 days, these companies may rapidly run out of critical components.

The COVID-19 pandemic will create temporary shortages of certain goods. The supply chain disruptions due to the COVID-19 pandemic may lead to temporary shortages of products that depend on components from China. Examples could include certain consumer products, such as toothpaste and shampoo, toilet paper and cleaning supplies.

The pandemic may prompt changes in the future operation of global supply chains. The pandemic may spur companies to diversify their supply chains. For example, clothing companies would face few difficulties and no loss of quality if they switched manufacturing from China to Vietnam, Malaysia or Cambodia. Technology and auto parts manufacturing could move to Mexico or Brazil. However, certain drug manufacturers – for example, those dealing with heparin, a blood thinner – may find it more difficult to abandon their Chinese suppliers.

The food supply chain is strong and unlikely to suffer disruption. Consumer goods may become harder to find due to supply chain disruptions. But American food supply chains are vigorous. Foods that are selling out today will likely be available in another day or two.

Remember that you are part of the supply chain. Tom Derry, CEO of ISM, believes that the panic-driven purchasing of consumer goods, such as toilet paper or cleaning supplies, only increases existing supply chain problems. He urges everyone to regard themselves as components in the supply chain and to consider how their behavior might disrupt it.

[Editors Note: Coronavirus disease 2019 (COVID-19) is an infectious viral respiratory disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), also known as “novel coronavirus.” Reports in December 2019, from Wuhan, China, first cited the disease, which has spread globally, resulting in the 2019–20 coronavirus pandemic that affects people and businesses worldwide.]

About the Author

Lizzie O’Leary is a writer based in New York City.