Supply Chain in the Time of Coronavirus
Supply Chain in the Time of Coronavirus
Coronavirus (COVID-19) has been and continues to be a cause of global concern. From the impact it has had on everything, starting, unfortunately, with thousands of untimely deaths and severe illnesses, to more prosaic concerns such as the effect on stock markets and sporting events, COVID-19 has left no region or person untouched with no end in sight. An area that continues to be impacted is supply chain and retail, beginning in China and now continuing into Europe and the United States.
THE WARM-UP: SUPPLY CHAIN DISRUPTIONS
When what is now known as COVID-19 began in China the disease hit when business in the country was shut down for weeks for the annual Lunar Holiday, and, as is standard practice, most brands and retailers as well as manufacturers outside of China who utilize Chinese textiles had stocked up on materials and goods. However, as the disease worsened, delays in workers returning to sites caused significant interruptions both in readymade garment (RMG) and other manufacturing occurring as well as getting needed textiles to factories around the world with countries such as Cambodia, Myanmar, Bangladesh, Sri Lanka and others even in Central America such as Guatemala threatening factory shutdowns or significant layoffs due to a lack of textile supply. This was the initial supply-side impact of the disease’s spread.
Based on these supply issues, many brands and retailers initially anticipated shortages especially around the popular back-to-school fall season and even potentially into the holiday season. This is due to two factors, the first of which is the inability to get RMG out of China where ~31% of the world’s clothes come from and secondly, the inability to get textiles to manufacturing sites outside of China as China represents ~38% of the world’s share there. Compounding both of these issues is the backup now occurring at ports in China as well as at ports in countries such as Vietnam where manufacturing has shifted, both out of current necessity as well as from US-China trade war purposes.
THE MAIN ACT: DEMAND DECREASES
Manufacturing issues alone are not good for business. What makes COVID-19 even worse is the deleterious effect it is having on consumer sentiment and psychology as well. Chinese automotive sales fell 79% in February YoY per Just-Auto.com and 80% in luxury apparel, per Bloomberg. Now that much of Europe and the US are affected and here in the US schools, stores, municipal facilities, and businesses are shutting at a rapid pace, it is reasonable to expect a similar percentage decline which would correlate to an even greater net revenue impact than was seen in China alone. Add in the likely contraction in spending even on online purchases which per the 2019 Online Apparel report amount to 34.4% of all apparel purchases in the US, and it is very likely that apparel and automotive companies will see very significant reductions in income for the foreseeable future. This is also reflected in stock price changes, with some brands and retailer stocks down more than double the overall Dow decrease of 31% over the last month as of March 19, 2020 (per yahoo! finance) with companies also now advising the impact of COVID-19 will have a significant negative impact to their sales through the rest of 2020, at least.
Suppliers will not avoid this issue either. As has been noted in multiple recent articles, manufacturers are seeing their orders cancelled or reduced as brands decrease their needs based on projected short-term sales. The entire chain will be impacted by curtailed and weakened consumer sentiment across key discretionary markets such as automotive and apparel, with the shutdown of Ford, GM, and Dodge plants in the US a significant sign of anticipated demand-side distress.
THE FINALE: WAYS TO SAVE YOUR BUSINESS
So what can be done? Firstly, obviously, is hoping that COVID-19 can be contained and eventually eliminated around the world. China, as shown below, has seen a slowdown in reported cases and while not back to normal, now, per the Institute of Supply Chain Management as reported by CompositesWorld, as of March 12 is reporting that 50% of facilities are at or near normal capacity and 56% at or near normal employees.
The logical things brands, retailers and others in the apparel, furniture and automotive industries can do is to continue to diversify their supply chains as best as able, including continuing to look at non-standard manufacturing countries and regions such as in Africa or South America, especially those countries with homegrown textile industries or where Chinese textile imports represent a lower proportion of imports as can be found via World Bank statistics. Admittedly this takes time to complete and there are limiting factors such as skills, labor costs, and factory availability, however. Similarly, manufacturers can look to diversify their direct textile sources. Additionally, for apparel brands, as consumers avoid brick and mortar, what sales they get from Europe and the US are likely to be online and in smaller quantities, allowing for smaller batches and more personalization such as can be produced in a digital printing or microfactory environment which may help assuage otherwise inevitable inventory and storage costs of unsellable goods.
Considering the dearth of textiles and the shutdown of design offices in Italy, the US, and elsewhere, virtual ways of designing and manufacturing clothes should be considered such as 3D sampling, something that all brands and manufacturers, even SME’s should consider to stay competitive, and indeed it is SME’s who are most at-risk during this time. Lastly, for manufacturers, investing in top of the line equipment while rates are at extremely low levels is something they will need to do to stay competitive and survive in a world where brands will be cutting back their orders due to demand issues in the short-term. For manufacturers, the ability to mass produce, and mass produce goods quickly for brands as they re-open to fulfill their seasonal needs will be critically important, and only those with the technology to fulfill those needs will last.
COVID-19 is a problem with unclear solutions for supply chain professionals across all industries. With forethought, analysis, and diligence however, sourcing from design to textile to finished product can be done to meet whatever demand occurs over the next months in a way that avoids losses, is properly supplied and meets the new normal of reduced demand around the globe. We at Gerber hope you stay safe, healthy, and prosperous during this time and we continue to stand ready to help you maintain and grow your business during this challenging period.
For more information about COVID-19 and Gerber's efforts to transform manufacturing for Personal Protective Equipment (PPE), please see our COVID-19 task force page.