Managing International Supply Chain Disruptions During COVID-19

For insights on how to approach domestic supply chain disrpution during COVID-19, click here.

While the ultimate human and economic cost of the coronavirus pandemic is still unknown, business owners are already seeing significant supply chain impacts. Many of these issues are new to even the most veteran business people. However, supply chain experts say there are steps businesses can explore to manage supply chain disruptions.

Supply Chain Impacts

Capacity constraints, such as reduced availability of supply, and steep price hikes for ocean and air shipping from China and Europe are among the earliest and most broadly significant supply chain effects of the pandemic, according to Sam Polakoff, CEO of supply chain consulting firm Nexterus of New Freedom, Pennsylvania.

For instance, Polakoff’s operations manager reported receiving a quote in mid-March of more than $11 per kilo for air cargo from Frankfurt, Germany, to the U.S. The quote had been $1.75 per kilo just a week earlier. In some cases, it’s even worse.

“You’re seeing times 10 price increases,” Polakoff said.  

This is largely due to the U.S. ban on passenger travel from Europe. Although there was no cargo ban, much air cargo from the U.S. to Europe travels in passenger aircraft cargo holds, Polakoff explained. With passenger flights on hold, not only are prices higher, but it is difficult to even get air freight booked, he says, since the only carriers operating are freight-only airlines.

Also, as China shut down much of its manufacturing capacity in early 2020, many ships unloaded China-sourced cargoes at their destinations just as global supply chains screeched to a halt.

Now, says, Polakoff, “There is a disproportionate number of empty containers sitting idly in the world far from China.”

That’s going to lead to a bottleneck.

“As China comes back to life, all these products are going to be manufactured in great quantities because they’ll run the factories around the clock,” Polakoff says. “There’s going to be more product to bring to America than there is capacity to bring it.”

The Communication Solution

While more supply chain obstacles may turn up, including curfews that could affect truckers’ ability to deliver to U.S. destinations, none of these issues arise without solutions. The best move a business owner can make right now is to communicate with supply chain partners, says David Dreyfus, assistant professor of supply chain management at Rutgers Business School in Newark, New Jersey.

“I recommend people start calling key suppliers right away and asking them if they need help and what that help looks like,” Dreyfus says. “Get an idea of whether your supply is actually going to be arriving as expected. If you have unusual point-of-sale orders or customer demands, call your key supplies and let them know about this.”

A central concern is avoiding the bullwhip effect. This is a supply chain term for what happens when extremely heavy point of sale demand results in retailers over-ordering, which causes distributors to also over-order and manufacturers to over-produce. The result can be massive over-stocks of product that arrives after buyer demand has been thoroughly satisfied.

“They get the extra product down to the store level and there’s nobody there to buy it,” Dreyfus says.

Toilet paper, for example, is experiencing a bullwhip effect. The result of excessive over-stocking will have negative effects on retailers, distributors, manufacturers and other supply chain partners.

The way to cope is to tell supply chain partners what’s going on, Dreyfus says.

“Say you’re seeing some unusual activity. Work with them on how to properly react to new customer demands so the bullwhip effect doesn’t affect them as much,” he says.

The Finance Approach to Supply Chain Disruption

Traditionally, the supply chain is thought of as a function of consumer demand, but amid potential cash flow disruption, it's wise for businesses to think about it through the lens of finance. 

Higher transportation costs, for example, will place additional financial strains on businesses. Businesses can prepare for these by assessing their available lines of credit with financial institutions as well as agreements with logistics providers. It may be necessary to draw down lines of credit or extend payment terms with transportation suppliers as tactics to free up cash flow. 

It seems certain that most businesses, to say nothing of national economies, will rebound from this crisis with more understanding of their supply chains and greater resourcefulness than before. It seems equally certain that business and supply won’t look the same.

One way to prepare for potentially higher costs and longer delivery times is to build up stock. Firms, with the financial capability and the opportunity may choose to add inventory now if possible, says Polakoff.

"If your cash flow supports it, stock up," Polakoff advises. Getting product into inventory now will allow businesses to satisfy currently peaking demand while minimizing or delaying the impact of increasing costs and lower product availability in the longer term. 

Other Supply Chain Solutions

Numerous other supply chain problems may crop up as the pandemic develops. For instance, Polakoff warns, many smaller Chinese manufacturers will not have the financial capacity to survive the interruption. American companies that sole sourced complex products from these manufacturers may find themselves with no source at all.

While there is likely no way to completely insulate a business from the effects of a global pandemic, gaining more insight and building more flexibility into the supply chain can help mitigate the impact, Polakoff says. He anticipates more businesses large and small will undertake careful and systematic analysis of their supply chains.

These analyses will help identify potentially risky sole-source situations and highlight the complicating factors created by sourcing products so far away that shipments take weeks or months to arrive.

Many firms will look for closer suppliers. Others will build much greater flexibility into their supply chains, lining up first, second and third sources. They’ll seek geographical diversity, so that if suppliers in one country are shut down or unreachable due to uncontrollable events, the businesses will have alternatives.

Future Disruption Responses

Deeper analysis of supply chain dynamics and building in more flexibility and diversity among suppliers and supply chain partners are all likely to be widespread responses to the current global health crisis. In addition to those long-term solutions, in the short run business owners can best respond by immediately having in-depth conversations with their supply chain partners.

It seems certain that most businesses, to say nothing of national economies, will rebound from this crisis with more understanding of their supply chains and greater resourcefulness than before. It seems equally certain that business and supply won’t look the same.

“Supply chain strategy will now change forever because of this pandemic,” Polakoff says. “People will think differently now.”

Read more articles on risk assessment.

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