Effects of the COVID-19 crisis on the supply chain – Part 1: A summary

This blog post is the beginning of a small series. We are still in the middle of a development, so many observations are a snapshot. Since the crisis continues the full extent of the COVID-19 related supply chain disruptions remains to be seen.

To give it a start let me summarize a bit the disruptions that are already known and predicted:

• Production rates in China went down 13.5% in Jan and Feb whilst export rates slowed even up to 20% in the same timeframe
• Global trade values are down 3% with an expected decline of 27% in the upcoming quarter
• Global Freight Volumes are projected to decrease by approx. one third in 2020
• Consumer spending intents are severely impacted by the coronavirus crisis, in some areas leading to 50% less intended spend on certain goods

As seen in these posts, social distancing rules, isolation measures and full shutdowns in production plants affect Service and Manufacturing industries alike. Global trade volume is already showing a decline. Consumer behavior changes based on the new living and financial reality consumers find themselves in.

However, change in this regard does not always necessarily mean decline. The demand in medical supplies and consumer goods for example are not surprisingly at a record high. So whilst some industries like the tourism or automotive sector face steep declines in revenue, others struggle to keep up with customer demand whilst being faced with an uncertain supply situation.

In terms of investments of households and companies I have 3 observations out of the beforementioned facts:

1. The situation per se restricts consumption since people could and sometimes cannot take advantage of many services (e.g. travel, restaurants) and hence purchases have been restricted to the absolute essential.
2. Highly affected companies had to interrupt their business which led to a wave of layoffs. This restricted many people’s available spending. Even people who were not directly affected felt uncertainty and therefore postponed none critical investments. Cars are a prime example for this point.
3. The willingness for companies to invest fell as a result of the bleak outlook, which I can feel in my current role as well, as decisions and meetings are postponed.

Many of the effects on this for the supply chains, we will see only when the ripple down effect of changed demand hits. Some are becoming visible already as outlined in the articles mentioned above.

Even if the companies ramp up their business right now, Freight Rates for international transport did not decline and in some cases even rise, which puts additional strain on companies:

• Ocean Freight Rates either remain stable or increase due to reduction of capacity from carriers. In the DHL Oceanfreight market update capacity removals of up to 30% on affected routes are reported.
• Airfreight rates face a steep rise, due to urgent demand for example in medical supplies and at the same time limited supply, as passenger flights belly capacity cannot be utilized due to travel restrictions and that certain flights were completely suspended in some countries. As an example the freight rates from China to Germany rose from 2.46$ on march 9 to 9.46$ per KG on April 13.
• Roadfreight transportation could be the silver lining, as a competitive base situation and rapid shifts in capacity demand lead to a decline in prices. Some of the service providers will not be able to cope with this situation for long, especially those relying on affected customers for their business. I therefore predict further consolidation in this market and rising prices in the second half of the year. By now freight rates on the spot market for FTL are down up to 20%:

So what’s next?

As a result discussions and research are conducted on how modern Supply Chains need to be set-up  to continue operating in times of global crisis. Current research focuses on several key topics, as for example outlined in a McKinsey study on the topic or in university papers:

• https://www.mckinsey.com/business-functions/operations/our-insights/supply-chain-recovery-in-coronavirus-times-plan-for-now-and-the-future
• https://knowledge.wharton.upenn.edu/article/veeraraghavan-supply-chain/

As a summary it can be said that current focus is on a four key drivers:

1. Transparency:
   Know your suppliers, current stock values and logistics situation
2. Planning:
   Based on the above transparency conduct continuous planning, based on updated supply, demand and capacity situations
3. Risk mitigation
   by supplier diversification
4. Collaboration:
   Engagement with all partners in your supply chain as directly (or should I say digitally?) as possible to overcome the current situation together

Whilst there are discussions on other impacts on the effects of globalization that hint on minimizing disruptions by more local sourcing and the benefits of re-shoring these movements are still only taking shape and it remains to be seen how they play out.

From an SAP perspective:

At SAP we aim to support our customers with offering immediate and more importantly free of charge help in accessing our Planning and networking solutions such as IBP for planning and Ariba for digitally reaching out to alternative suppliers. Find more information on these initiatives here.

These immediate offerings enable at least some measure of digital response to an already ongoing crisis and might mitigate some of the negative effects on logistics-heavy businesses.

As the current events play out, it will show how the business world will adapt to the learnings and the apparent need for digital solutions. For this, the long-term focus of SAP in connecting planning, transportation, warehousing and business partner networks could play a vital role in how companies rethink their digital supply chain execution processes. Hence, I can see SAPs strategy to include vital capabilities like warehousing and transportation into S/4HANA pay off, as it is now very transparent that a neglected digitalization in these areas leads to minimal resilience in case things have to change rapidly in order to keep up with current events.

I can say that these are really exciting times to work in the area of supply chain execution for a software company. Stay tuned for the updates to come.