Coronavirus causes significant production and delivery difficulties

What do you research and why?

I am Katri Kauppi, Associate Professor of Logistics from the Department of Information and Service Management at the Aalto University School of Business. My research focuses on purchasing and supply chain management. At the moment, my primary research project examines the asymmetry of information in supply chains. This project is funded by the Academy of Finland. I am also carrying out other research covering subjects such as public procurement and social responsibility in supply chains.

How does the coronavirus affect supply chains?

The coronavirus is causing significant production and delivery difficulties in several sectors. Companies whose supply chains rely heavily on Chinese subcontractors began to notice the effects of the virus in March. Due to long delivery times, companies typically have at least 15–30-day stocks for products shipped from China, so the effects are now beginning to intensify. 

To begin with, news articles compared the new coronavirus to the SARS virus, but the effects of the new virus will be more extensive. One of the reasons for this is that China's role in global production and the global economy has grown enormously in recent years. Many companies will probably have to curtail or temporarily suspend production. I expect that production interruptions will soon occur not only because of the lack of imported components and materials but also because of the local effects of the COVID-19 epidemic. 

How have companies prepared for the effects of the coronavirus?

Many companies, large ones in particular, have been using a variety of risk management methods to protect their supply chains for a long time. These methods can include reserve stocks in different parts of the supply chain for avoiding supply problems, extra capacity, and alternative suppliers to whom additional demand can be transferred if necessary. 

However, normal risk management is typically designed for individual incidents, such as a fire at a supplier's plant, a strike at a single port, a natural disaster interrupting production in a specific area, or the transferral of production from one country to another due to currency risk. 

In the current situation, the materialised delivery risks are of an entirely different scale, and they affect almost all companies as the epidemic simultaneously rages in different parts of the world. It is almost impossible for any company or supply chain to prepare for multiplier effects of this extent.

How can companies try to mitigate the effects of the coronavirus in their supply chain?

Often the largest producers of a particular component or technology are clustered in a specific area, and if the epidemic strikes there, a large part of the global production capacity may become paralysed simultaneously. In this case, it may not be possible to find a supplier who can provide a corresponding component. Instead, it may be necessary to look for suppliers with similar capabilities, i.e. the possibility of using their employees and production lines to manufacture the required component. This type of production capacity could be found in areas that the epidemic has not reached yet or in areas where the epidemic is already subsiding. This approach is already being used in public healthcare: in the UK, the prime minister has been in contact with various engineering companies to ask them to shift their production capacity to the manufacturing of ventilators.

How will supply chains change in the future as a result of the coronavirus pandemic?

Businesses have begun to take supply chain risk management more seriously in recent years due to major incidents, such as the eruption of the volcano in Iceland, the tsunami in Japan, and trade wars. Despite this, various studies show that most companies do not have visibility beyond the first tier of their supply chain. This means that they do not know the risks of subcontractors in the second, third or subsequent tiers of the supply chain.

For many companies whose first-tier suppliers are not in China, there may therefore be a small delay before the effects of the coronavirus materialise when the subcontracting chain of a supplier breaks. In the future, companies will no doubt invest in technology, closer cooperation and more detailed mapping of supply chains to improve transparency further down the supply chain. 

We may also see changes in supply chain structures. To save on costs, many companies have outsourced production to one large supplier, for example in Asia, and kept stock values low in different tiers of the supply chain. After the epidemic, having larger reserve stocks and distributing purchases between several suppliers is likely to become more common, and suppliers will be selected from different parts of the world. The number of local and neighbouring suppliers may grow. Companies have begun to understand the importance of local suppliers in recent years as a result of trade wars and the threat of Brexit, but the importance of local collaboration will further increase when borders close and logistics becomes more complicated due to the pandemic.