Effects of COVID-19 Pandemic on Manufacturing Processes

According to the United Nations Statistics Division, in 2018, China accounted for 28% of global manufacturing. Chinese manufacturing sector contributed approximately $4 trillion in 2018. However, in 2020, global manufacturing saw the steepest contraction since 2009 as coronavirus impacted China, severely affecting the global supply chains.

China’s novel coronavirus (COVID-19) outbreak, swept through the country’s major business and impacted the manufacturing and distribution sector. According to Dun & Bradstreet, “the hardest-hit provinces of China contribute roughly 90% of all the business functioning in the country. Researchers estimate that more than 5 million businesses have tier 1 or tier 2 supplier located in one of these affected regions.”

Let's think about the knock-on effect on the global value chains. China is the chief supplier of intermediate inputs for global manufacturing companies. About 20% of the global intermediate products finds its origin from China. China’s official measure of manufacturing activity known as “the Purchasing Manager’s Index (PMI)” – a critical production index dropped to 37.5 in February from 50 in January. This drop in the output point towards a 2% reduction in exports on an annual basis. According to the United Nations Conference on Trade and Development (UNCTAD), “Chinese manufacturing is vital to the global value chain, particularly to precision instruments, machinery, automotive, and communication equipment. The most affected economies are the European Union ($15 billion), the United States ($5.8 billion), Japan ($5.2 billion), the Republic of Korea ($3.8 billion), Taiwan Province of China ($2.6 billion), and Vietnam ($2.3 billion)”. Restrictions in China has affected companies such as Apple, Diageo, Jaguar Land Rover, and Volkswagen immensely as they rely on China’s production and consumer market.

The negatives of the just in time. The global manufacturing industry is built on outsourcing, just in time inventory, and thin margins, that makes it delicate. The Institute of Supply Management conducts monthly surveys, found that more than 70% of the manufacturing companies surveyed in late February and March were affected by the supply chain disruption because of coronavirus, and more than 40% of these companies were not equipped to deal the disruption. It holds accurate for automakers. In 2011, Ford and other companies such as GM, Toyota, and BMW were left scrambling for the color “Tuxedo black” which is derived from the pigment Xirallic. This pigment was made only by a German company named Merck KGaA, in Onahama, Japan. When Onahama was hit by the tsunami and the Fukushima Daiichi nuclear disaster it led to a severe shortage. It affected 20% of the production of Toyota. Just-in-time manufacturing is known for its efficiency, not for its resilience. It helps the manufacturers in cutting the cost but does not leave many windows to absorb the sudden shocks and supply shortage.

What can the manufacturers do? Most manufacturers are aware of their immediate and critical suppliers. But then again, they don’t always know the supplier’s supplier. This creates a gap in understanding the hidden vulnerability in the supply chain that makes it difficult to foresee the impact of shortages and stoppages on their output.

• Rethink just-in-time manufacturing

Although creating economies of scale and volume lowers the cost, once there is a letdown, companies do not have many options. This makes it very crucial for the manufacturers to invest to make their system resilient and multisource strategies. For instance, Merck KGaA in the wake of the tsunami that wiped out the Xirallic pigment created another pigment and started stockpiling it at places besides Onahama. By 2013, the pigment was made in another factory in Germany.

• Establish a digital foundation or build an anti-fragile supply chain

Even though it sounds basic in this day and age, the fact is that paper and manual processes control most supply chains. Making the process digital is the foundation element for building an anti-fragile supply chain. This will help the decision-makers to spot the problem and make informed choices to manage these disruptions. Also, this improves the ability to collaborate with suppliers and makes it easier and quicker to find an alternative supplier which is imperative at times of disruption.

• Revisiting the supply chain

It is necessary to revisit the supply chain and mitigate the risks. Suppliers should develop a process to continuously identify and monitor the risks. They should assess various tiers of suppliers to have a clear picture of the entire chain. They should add multiple suppliers not only in terms of the number of suppliers, but also, in terms of geography, and add diversity to their supply chain.

In conclusion, once COVID-19 is taken under control we must not be naïve about the fact that similar situations will not arise in the future. The manufacturers must not do not rest on their successes and glories. Manufacturers need to rethink their supply chains and think about it more broadly. Will consolidation of suppliers help during disruptions? Will adopting digitization build an alternative and make it antifragile? By building robust action plans, manufacturers can be in a much better position than what they are now to monitor pinch points, implement other measures to deal during the time of crisis.