The Vulnerability of Modern Supply Chains to Pandemics

Whilst the likelihood of a global pandemic caused by the coronavirus Covid-19 should not be overstated, there are serious concerns that modern supply chains are innately vulnerable to disruption from such an outbreak.

Inevitably the spread of the disease would have an immediate and severe impact on the financial performance of all companies which operate within any sort of extended international supply chain. The logistics industry, the fortunes of which are directly proportional to economic activity, would be affected by a slowdown in global demand and global supply. This may occur in any case due merely to the fear of a pandemic, even if in reality a widespread outbreak fails to materialize.

Evidence of this occurred in Mexico, where the Swine Flu outbreak of 2009 was first identified. The authorities cancelled sporting events, and people avoided non-essential socializing, with a corresponding impact on the trade of hotels, bars, restaurants and clubs. This is the situation that is occurring in China, Singapore, South Korea and now, most recently, in Italy.

The Mexican government also suspended production at many industrial locations in order to prevent the disease from being transmitted throughout the workforce. This impacted supply chains, particularly those of US manufacturers producing components in the country. The Mexican government estimated that GDP fell by 0.3–0.5% and was responsible for delaying the recovery from the global recession of the time. Luckily the disease did not spread to the extent that many governments and health agencies feared.

If China is impacted to a similar extent by Coronavirus, there will be much more severe implications for the global economy.

One of the main problems for the logistics industry (and the wider economy and society) is the possibility of the spread of disease to drivers and other logistics staff. In a worst-case scenario, even those manufacturers which are able to keep working would not be able to ship outbound goods as authorities place restrictions on truck movements.

Many manufacturers would also find that lack of inbound materials and spare parts delivery would lead to the suspension of production, a situation made more critical as many manufacturers now keep only a few hours inventory on hand and rely on a continuous supply of components.

The air cargo industry is especially susceptible to the fear of a pandemic as much as reality. Even if no ban is imposed on air travel, passengers may choose not to visit infected regions. As so much freight is transported in the holds of passenger aircraft, capacity would be severely affected should airlines reduce or suspend services completely. In the case of Covid-19, one freight forwarder has even started up its own all-cargo freighter services to China as so much passenger capacity has been eliminated.

Aside from the economic impact of a pandemic, there is the risk that supply chains may not prove robust enough to deal with the humanitarian consequences of such a widespread disaster. The supply chains which have been engineered to suit the needs of business may prove too fragile to face the stress of a major disruptive event such as a pandemic. In effect, modern supply chains may prove to be part of the problem and not the solution.

Consumers are increasingly dependent on sophisticated supply chains to provide them with a whole range of essential everyday products, the most important being food, fuel, pharmaceuticals and medical peripheries. Over the last two decades, the industry mantra has been to drive down stock levels through techniques such as just-in-time deliveries. This has placed increasing reliance on the physical distribution elements of the supply chain, to deliver the goods when and where they are required. If transport systems break, so do supply chains.

Although it is far too early to assess the supply chain implications of the coronavirus Covid-19, there will inevitably be an economic as well as societal impact, at least in the first six months of 2020. Authorities in China and other affected countries are working hard to contain these consequences and as yet the outbreak has not become a pandemic. Only time will tell if they have been successful or not.