In late February, MIT’s David Simchi-Levi, Professor of Engineering Systems and a specialist in supply chain management, predicted that the peak of the impact of COVID-19 on global supply chains would occur in mid-March, “forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the U.S. and Europe.”
As we near the end of March, Simchi-Levi’s prediction has been realized. Because many Chinese manufacturing suppliers temporarily but drastically cut production in late January due to the virus, the ripple effect has impacted the production and distribution of countless global commodities. For example, in mid-February, Chrysler Fiat Automobiles NV announced that it had to halt production at a Serbian factory because they couldn’t get parts from China.
The good news is that China’s public health situation has been improving in recent weeks, with a reduction in the rate of new Covid-19 cases and fatalities. Simchi-Levi says that if the public health situation in the U.S. and Europe did not worsen, then a return to something like normal manufacturing output would be conceivable by the end of the second quarter.
But here’s the bad news—there are countless other factors to consider. Supply is now impacted everywhere, not just China. And the demand side is completely changing as well. With unemployment rising, consumer spending reduced, and labor shortages resulting from self-quarantines and “safer-at-home” policies enacted by various levels of government, fewer large manufacturers across the world can keep operating at full capacity.
There is also the issue of moving goods. According to Yossi Sheffi, director of the Massachusetts Institute of Technology's Center for Transportation and Logistics, belly cargo in passenger airlines accounts for 52% of air cargo capacity. Thousands of flights have been canceled as a result of the outbreak, resulting in shippers having fewer options for moving goods across the Pacific. This also triggers massive jumps in rates.
And, of course, there is the issue of stockpiling. As Americans are increasingly asked to self-quarantine, panic-driven shopping is far outstripping the food industry’s ability to deliver and restock goods.
“You can see there are cascading effects that have an impact,” Simchi-Levi says. “This is all fluid and dynamic.” We could also see a second wave of virus transmission, which could indicate continued supply chain disruptions in the coming months across the world. And in the U.S., we’re still expecting a surge of demand for pharmaceuticals that could be impacted if China isn’t back to some capacity this year. All told, it’s a very tough time for supply chains.
Our best strategy in the meantime? Stay home and stay safe. We will continue to track global supply chains and post to this blog as the situation continues to evolve.
David Simchi-Levi teaches in the MIT lLoan Executive Education program Supply Chain Strategy and Management.