Disruptions happen, but pandemic outbreaks are somewhat different – the epidemic affects access to staff, decreases productivity and changes people’s behaviour being their shopping habits and spending.
Global transport and supply chain companies continue to feel the impact of the epidemic facing labor shortages and regulatory uncertainty. While companies prepare contingency plans, logistics and supply chains have to deal with this rapidly changing situation.
Although it’s difficult to predict the exact consequences, the impact across the global supply chain is already felt and includes supply shortages, reduced labor capacities, travel restrictions, limitations in capacity for established supply networks, reduced consumers’ purchases and more.
Based on the impact ratings within each aspect, it is clear that the overall impact on supply, transportation and logistics is severe.
Leading supply chain and logistics businesses utilize an enhanced risk management processes which include continuously measuring key risk indicators, preparing scenarios for anticipated uncertainties and focusing on unforseen disruptions.
What are some of the impacts that we have seen in freight and logistics industries:
Affected industrial operations
During the epidemic, some government authorities prescribed the additional pandemic prevention measures which businesses must meet in order to continue operating.
Some of these measures include setting up a prevention protocol, provision of protective equipment (masks, gloves, disinfectants), carrying out routine temperature controls and disinfection, social distancing and many more.
The trouble with the time needed to perform these requests and the lack of clarity with the approval process already has a massive impact on manufacturers who want to resume operations.
The cuts at foreign manufacturing plants have led to slow or temporarily locked imports where port delays are greatly due to reduced workforce.
On the other hand, demand in medication, medical supplies and equipment and cleaning supplies have drastically increased so distributors are struggling to fulfill extra large orders from the related institutions thus straining the supply and logistics providers.
Some industry experts are concerned that businesses will be more cautious in their spending after the outbreak resulting in cut outs on business travels and transportation services being limo or ride-sharing services.
A bright spot for ride-share services is that once the situation begins to normalize and cities start to reopen, it is possible that the public will be reluctant to use the public transportation system – it may lead to the increased demand for alternate transportation services like taxi and ride-hailing services.
‘Force Majeure’ clause
The Coronavirus has given a new relevance to the legal term ‘force majeure’.
Besides the world’s economy temporarily being shut down due to the pandemic, companies that work with suppliers in China face legal ‘force majeure’ clauses that will be put into effect in case of non-performance protecting the suppliers from legal and financial liability.
‘Force majeure’ is a French term literally meaning ‘greater force’ – it refers to unexpected external circumstances (natural disasters or human disasters like armed conflicts etc.) preventing one party from fulfilling its obligations.
Epidemics are occasionally listed as ‘force majeure’ events though authorities are somewhat inexperienced when deciding whether a specific disease fits the description. However, the coronavirus effects on the worldwide economy can be compared to those of any other large-scale natural disasters.
There is another non-legal term ‘price majeure’ used as a joke among traders about some buyers that use such clauses as an excuse to walk away from a contract when prices move against their favour.
As per some legal experts, although these certificates carry a significant weight, they do not exclude further negotiations.
Work and supply congestion and shortage
Pandemic situation and the quarantine have led to work and supply shortages.
Various citywide restrictions like quarantines, temperature controls and vehicle inspections or disinfection have prevented the ability of workers to reach their workplaces causing a massive labour shortage.
As many companies foster work-from-home recently due to Coronavirus, the transportation industry (e.g. taxi services) could experience a rush of bankruptcies as the revenues dry up.
Due to such a situation, the work process takes a hit and results in huge delays or significantly reduced production and services.
Travel restrictions and labour shortage caused backlogs in many worldwide ports while at the same time, iron and steel mills and mines struggled to move their key resources like zinc, copper etc. from their refineries to supply raw material.
Manufacturers and supply chains are still struggling to reach the efficient work process as the congestion and shortages affect not only the time needed to perform the work but also the capacities for the same work to be done.
Traffic delays aggravate the shortage
As the pandemic has spread, cross border traffic between many countries has been severely disrupted. Export and other goods have been delayed at the borders while some trucks at the largest worldwide border crossings waited for several days.
As soon as the situation with Coronavirus became more than serious, the various authorities began to quarantine all citizens entering the country for at least 14 days to reduce the number of travelers.
Cross border truck drivers were not included in some areas and the deliveries were possible but with advance notice. Truck drivers were being asked to stay in their trucks at loading/unloading sites and to switch from paper to electronic methods for record deliveries and pickups, as per some trucking transportation companies and freight brokers.
All these developments have led to delays and a rapid increase in the price of truck journeys.
Limited freight capacity
More than 50% of airfreight capacity have been cancelled along with other freight channels (air, rail, road etc.) which could lead to a 300-400% increase in air freight rates as per The Load Star.
Regarding rail transport, the capacity problems have also affected this type of transport as well nevertheless this option is twice as fast as ocean shipping. Many train routes have been cancelled with containers left to wait for the better days.
The difficulty of transporting freight by trucks leads to the reduced visibility of arrival times to any destination.
As per National Limousine Association, companies dealing with ground transportation have experienced 90% decline in revenue.
Load demand in April decreased compared to the prior month within all major load categories – for example specialty trailers and refrigerated demand are in better position when compared to dry van and flatbed loads. However, less idle traffic also lowers fuel consumption and costs for trucking companies.
Industry experts are somewhat optimistic that freight volumes and rates may rebound as some countries try to ease lockdown restrictions and gradually reopen their economies.
Affected overseas supply chains
The pandemic outbreak also had a massive impact on industrial production and global supply chains extending beyond China’s borders.
No matter which industry you operate within, Covid-19 has led to a supply shortage caused by the outbreak – for example, the automotive sector has witnessed a supply shortage and some major car manufacturers (Hyundai, Kia Motors, Nissan etc.) had to temporarily suspend operations while seeking supplies from alternative markets. Pharmaceutical industry was also hit hard as China had to retain some supplies of materials for certain medicines thus exported less to their other markets (USA, India etc.).
Domestic goods are also pretty slow to leave ports causing the production cuts. Distributors are challenged to balance the flow of goods from suppliers with the demand of the customers.
Shipping companies have utilized empty runs of their ships. Empty runs refer to the situation where a shipowner cancels a planned stop in a particular port (or the entire route) due to a low demand. According to Sea Intelligence Maritime Consulting, the shipping companies cancelled approximately 54 departures for the trade between Asia and Europe by March 2020.
Although some measures have been loosened, it is still to expect a delay of three to four weeks for arrival of containers, as per some shippers.
How to prepare for disruption?
As per Koray Köse, Senior Director Analyst at Gartner, there are some steps for supply and logistics companies to take to prepare for the impact on their value chain.
Short term actions include developing programs for countries affected by the virus for supply chain disruption monitoring and response as well as potential supply chain exposure from tier 1 and below. Businesses should determine how customers’ spending may fluctuate and secure that all inventory is within the reach and outside the affected areas. Companies should consult legal and HR departments to understand any financial implications in case of failed supply and provide instructions for employees in the affected areas.
Midterm actions should focus on balancing supply and demand and building up the strategic stock as well as review (or development) of the company’s overall risk management strategy. Internal shareholders and strategic suppliers can help to establish a consistent risk management approach in case of any potential material or manufacturing capacity shortages.
Long term actions are all about predicting the next ‘when’ – conducting a scenario and developing action plans, developing alternative sources, working on strategic supplies where internal capacities (alternative inventory, sources, case reserves etc.) aren’t adequate to mitigate major disruption. The solution is being prepared as it can open new opportunities in case of any similar disruption.
The global focus has shifted the priorities for all businesses on a global scale – being aware of the risks will be critical for all businesses moving forward and will help with developing the corporate strategies. Companies need to adjust and pivot their own production and business strategies to remain operational.
It still remains difficult to predict the outbreak economic impact on the worldwide businesses and industries as some countries have implemented drastic measures to contain the pandemic outbreak.
Considering the ongoing situation and the massive operational and financial impact within several industries, it may take several months or more to assess the impact.
Using the correct data sets and forecasting tools will be crucial to businesses while navigating the current market and developing future strategic decisions.