By Dr. William Oliver Hedgepeth
Faculty Member, Transportation and Logistics Management, American Military University
U.S. businesses did not plan for the current economic shutdown. As a result, many of them are on the verge of bankruptcy. Companies often have a backup plan for severe weather, forest fires, snowstorms or other short-term crises.
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But the coronavirus pandemic is one natural disaster that caught businesses off guard. It’s possible that government offices, schools, and businesses across the U.S. will be closed or severely limited in operations for the rest of 2020, and with it a total loss for business. One of the significant problem areas is how poorly the U.S.-China supply chains are handling the thousands of products we use daily in our homes and offices.
China Supply Chain Produces Almost All US Business, Medical and Some Military Imports
China is a main supplier of almost all U.S. business, medical and some military imports, according to Made in China. These imports include manufacturing and processing machinery, automotive parts and accessories, health and medicine supplies, computer products, consumer electronics, chemicals, metallurgy, minerals, and energy-related goods.
No one saw this COVID-19 pandemic coming until it burst on the world scene in late December 2019. It has since disrupted operations and global supply chains, resulting in the new normal in the supply chain between the U.S. and China.
COVID-19 Is Encouraging US Companies in China to Think about Relocating
How long will it take for this new normal to settle into routine operations of supply and demand? No one knows for sure just yet. But we see its effects already. For example, Apple, which manufactures most of its products in China, has begun to investigate moving some of its manufacturing operations to other countries.
According to Singapore’s Strait Times, “Wistron Corp, one of Apple’s manufacturing partners, said last month ‘that half its capacity could reside outside China within a year.’” The newspaper added, “Decisions by companies such as Wistron and other Apple partners including Hon Hai Precision, Inventec and Pegatron could reshape tech supply chains.”
The Strait Times noted that “Wistron is targeting India — where it is already making some iPhones — along with Vietnam and Mexico, setting aside US$1 billion (S$1.35 billion) to fund the expansion this year and next.”
This move to rethink offshore production started last year amid the budding trade war between Washington and Beijing. In late February, Bloomberg News quoted Apple CEO Tim Cook as saying “the company wasn’t looking to make any quick moves out of China in light of virus-related supply-chain interruptions.” Cook added, “We’re talking about adjusting some knobs, not some sort of wholesale, fundamental change.”
However, companies that Apple primarily relies on to manufacture parts for its products are exploring ways to move at least part of their operations to other countries, such as Vietnam, Mexico and India by 2021.
Global Supply Chain Trends Were Somewhat Stable before COVID-19
Before the COVID-19 crisis, global supply chains were somewhat stable. There were some signs of unrest, even though the U.S, and the world economy were strong and growing stronger. Supply chain innovations seemed to be on the rise and fairly stable as a business practice.
Some of these innovations included the digitization of the supply chain, more use of information cloud technology, and the development of an omnichannel purchasing process. This process would allow customers to research products, compare prices, make purchases and receive goods via multiple channels and to move between channels seamlessly.
These innovations are engendered by the growth of a circular supply chain compared to linear and disconnected supply chains, a total internet of things (IoT) to pull all supply chains together, and the increased use of artificial intelligence (AI) and robotics to make supply chain operations 24/7/365 efficient.
In an interview with The New York Times in January, Commerce Secretary Wilbur Ross predicted that “the deadly virus originating in China would cause companies to reconsider their global supply chains and ultimately ‘help to accelerate’ the return of jobs to the United States.”
Ross said diseases like the coronavirus were “another risk factor that people need to take into account when considering where to locate operations.”
A Pullout of US Firms from China Could Take a Decade
It may take a decade for U.S. companies to completely pull out of China. One factor is how to replace the Chinese workers. For example, at just one factory, roughly 230,000 people work around the clock.
Also, labor is still cheaper in China. The cheap labor was a main reason for American companies to outsource manufacturing to China in the first place. However, with the growing number of Americans now out of work in all 50 states due to this COVID-19 pandemic, the problem of staffing U.S. companies could be moot.
In addition to labor, there are problems with supply and demand. Preparing for a spike in demand involves having multiple supply sources. A supplyside risk entails the ability to expand production for a needed commodity without an excessive cost increase or to re-tool to produce something completely different.
Ford Motor Company is a prime example. Ford shut down its vehicle production to begin making protective facial masks.
As a result of the inherent risks to production shifts and environmental issues, over the next 10 years companies may manufacture more products and store more raw materials than they need just to have product on hand in the event of supply chain delays and other natural events beyond their control.
Many risk factors will emerge as a result of this COVID-19 virus, including a demand risk. For example, there are current demands for bleach, medical-grade thermometers, and personal protection equipment (PPE) to fight this pandemic.
But due to the virus, companies have not been able to keep up with demand, leading to supply shortages locally and globally. Supplies of professional-grade N95 masks are going directly to hospitals and are not available to ordinary citizens. The dearth of medical-grade thermometers and much-needed test kits are other examples of demand exceeding supply.
US Business Communities Will Define the New Normal
People, businesses and the government are developing innovative processes to overcome the failure of our medical supply chain to fight the pandemic. Companies like Google are offering small business a hand-up, not a handout, to maintain their manufacturing and retail businesses and the various supply chains. Google recently announced a new $800+ million commitment to support small and mid-size businesses (SMBs), health organizations and governments, and health workers on the frontline of this global pandemic.
COVID-19 is making people rethink a new normal for trade with China and what a future global supply chain will look like. It appears that by 2030, today’s global supply chain will have many “new” normal in process, protections, profits and preferences.
How long will it take the U.S. to find a new normal from the global impact of COVID-19? All of the supply chains for all those thousands of products produced by China are being tested. Some will require major changes which will likely come at great expense.
Will the current top U.S. supply chains remain on top? It’s hard to say right now. It will be interesting to see how resilient some of these supply chains are.
This virus is a wakeup call to one of the risks of locating most of your manufacturing in one geographical location. Now we get to see how those companies will deal with the crisis. It will be a great learning experience for students in the supply chain field.
Personal Isolation Will Become a New Habit and Part of Our Society
The pandemic will change the mindset of consumers for the next 10 years. Personal isolation will become a new habit and part of our society. A new normal is unfolding today when people order food from restaurants but cannot dine there. Over the next 10 years, people may not even want to dine out. And restaurant owners will most likely change their business model to the drive-through and easy pick-up business model.
The definition of “value-added” may change and become part of a new supply chain management. Value-added will mean different things to different retailers. For grocery store chains, it could simply mean being able to ramp up the availability of certain goods and make frequent deliveries to ensure that high-demand items are available for consumers. Overall, a value-added benefit during this unpredictable time is anything that will make this crisis hurt a little less. We may be just at the beginning of this great change, and we have a long road ahead.
During the global recovery process from COVID-19, many research centers will make substantial analyses of failure points within the supply and demand logistics systems. If these analyses are done properly both systems will be rebuilt to prevent these failures from recurring. This could result in the military and civilian systems looking more similar in the future. But these analyses may also result in decisions that make the systems more distinct.
If the strengths of the military logistics are not achievable by the civilian system, then those areas should be examined and improved so that when the next global crisis occurs the system is ready to provide timely support. Whichever direction the analyses take, it is hoped that it is acted on to prevent such systemic failures in the future.
About the Author
Dr. Oliver Hedgepeth is a full-time professor at American Military University (AMU). He was program director of three academic programs: Reverse Logistics Management, Transportation and Logistics Management and Government Contracting. He was Chair of the Logistics Department at the University of Alaska Anchorage. Dr. Hedgepeth was the founding Director of the Army’s Artificial Intelligence Center for Logistics from 1985 to 1990, Fort Lee, Virginia.
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