COVID-19’s Supply Chain Challenge

McKinsey report suggests that one of the biggest challenges that has manifested during the COVID-19 events has been the effect on world supply chains that begin or go through China. The shutdown of factories during Q1 has caused a big disruption, and the effects are still unfolding and not 100% clear.

It is still the early stages of Hubei’s recovery process: the number of positive test cases is down, but fatalities are high. The rest of China is moving along quite quickly, with a large number of organizations reporting they are back to +90% capacity (as of 3/1/20). Other than a smaller migrant labor pool, the typical plant is very quickly heading back toward full capacity.

There continue to be delays in trucking throughout this. The capacity for trucks to bring goods from factory to port is around 60-80% of its normal capacity. Goods continue to face delays of over a week throughout this (typically between 8-10 days from factories to ports).

There has been a 15% drop in the Baltic Dry Index since the virus proliferated. This index measures the freight rates for worldwide dry goods including grains. The TAX Index (measuring the price of air freights) has risen 15% since the beginning of February.

We are going to see in the next several months if the restarting of plants leads to more challenges. The main challenge will be getting access to critical parts, because of the parts shortage that led to many of the early supply chain issues. This may lead to many factories being unable to operate at full capacity for a while. Plants that depend on the output of Chinese factories (nearly every factory around the world) has yet to experience the brunt of the Chinese factory shutdowns, and this brunt will be most fully felt in the weeks ahead.

The greatest source of uncertainty, for managers and leaders in charge, is consumer demand. There may be an enormous amount of unused production capacity that has already been booked, and many customers may be competing for the priority of the factories’ output. It is going to be very unpredictable in the coming weeks, only after which we will know the full extent of this.