covid19

Covid 19 and its impact on the Global Supply Chain.

Article number 35 , Total number of words: 900

The outbreak of Covid-19 caused by the novel coronavirus is now a worldwide crisis. The growing fatalities, rapid rate of the spread of the virus, and the structural inadequacies and unevenness in healthcare systems world over, point to it emerging as possibly one of the worst peacetime crises faced by humanity in recent times.

One way the virus hurts the economy is by disrupting the supply of labor, goods and services. People fall ill. Schools close, forcing parents to stay at home. Quarantines might force workplaces to shut entirely. This is accompanied by sizable demand effects. Some are unavoidable: sick people go out less and buy fewer goods. Public-health measures, too, restrict economic activity. Putting more money into consumers’ hands will do little to offset this drag. Activity will resume only once the outbreak runs its course.

The market is wrestling with three fears. First, that the virus will (and may already have) spread widely across the rest of the world. Second, that fear of covid-19 and measures to stem its spread, like advising workers to stay home, will have severe consequences for economic activity. And third, that policymakers may be unable to keep short-term disruption from becoming long-term damage.

The global economy has changed since 2003 when SARS struck. China now accounts for 16 % of global GDP, up from 4% back then. And it is world second biggest importer so any weakness, however temporary is felt far and wide.

Further just in time production save little room for delays. Many firms cannot trace all their suppliers making it hard to predict the impact of work stoppages in china on their output, Let alone on global GDP. Some problem have already emerged, Hyundai has halted some car production in south Korea because parts are short. so has Nisan in japan. Facebook has stopped taking orders for its new virtual headset. China churns out a third of worlds chemical, half of world LCD screen and two third of polyester. Companies that think are isolated from china could be in for a surprise.

The crises has a potential to change how global supply chain works, This can be better explained through a example “A strike on the London Underground offered management theorists a lesson in resilience and adaptation. Because the shutdown closed some but not all Tube lines, frustrated Londoners were forced to rethink their commutes to and from work. Researchers at Oxford and Cambridge universities subsequently found that around 5% of passengers stuck to their new itineraries even after normal service resumed. The long-term economic gains of one in 20 travellers adopting new and improved ways to get to work turned out to be greater than the short-term costs of the disruption.”

The current crisis will definitely make companies rethink their business with respect to do with supply chains. Since the 1980 these have become more complex and global, with large firms now now dependent on thousands of suppliers. The embrace of lean manufacturing and just in time delivery of component, pinoeered by toyota in the 1970, has made production more efficient but more vulnerable to distribution, as companies stock pile fewer and fewer necessary materials. The median firm in the S&P 500 carries only 66 days of inventory, and some have far smaller buffer-Apple has just nine days. When natural disaster strikes, big companies usually get by, shifting production temporarily from afflicted areas to those that are not. But unlike a flood , an earthquake or trade war, all of which companies have some experience in planning for , Covid -19 could effect all of the firms actual and potential subcontractors simultaneously. In such a scenario carrying bigger inventories and having suppliers at home may no longer look wasteful. It may come to be seen as necessary.

Reference

https://www.economist.com/finance-and-economics/2020/03/05/what-the-markets-imply-about-the-economic-impact-of-the-coronavirus

https://espresso.economist.com/b0b9da81cf357c8884a06de8ef72bea0

https://www.economist.com/leaders/2020/02/15/how-chinas-coronavirus-epidemic-could-hurt-the-world-economy

Disclaimer: Ideas, views and opinions expressed in the article represent my own views in my private capacity and not those of any of my current or previous employer, any institutions. The article is a research work based only the limited, dated and open source information. For the sources the statements have been quoted with the authors name. This article is only for the reading pleasure and while I invite the feedback and comments on the article, I will not be responsible or liable to any such comments as the same belong to the responder.


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