In more technical terms, the domino effect refers to a string of events caused by a single act, which then prompts another act, and then another, and another, until finally there’s no longer a catalyst to initiate a new event. The second that last domino falls, the damage is done.
With recent news of the coronavirus outbreak in China, retailers and business partners can’t help but think of those falling dominoes, each one signifying a critical obstacle preventing further growth. The worst part is, these kinds of fluke events remain completely out of our control, making it that much more difficult to develop proper contingency plans.
To better understand the challenges posed by the coronavirus, as well as other geopolitical events that disrupt supply chain operations, let’s take a closer look at the rippling effect caused by this health crisis and see how it’s disrupting today’s global economy.
The coronavirus outbreak appeared in late January 2020 in China’s industrial and economic hub of Wuhan, located in the country’s Hubei province. Since then, it’s infected nearly 29,000 people across the globe, killing almost 600 in its wake. In China alone, over 28,000 cases have been reported, making it the most vulnerable location for possible transmission.
For retailers and business partners alike, the coronavirus is more than just a health concern; it’s an existing threat to the world’s global economic system. That’s because Wuhan stands as ground zero for high-tech manufacturing industries like automobile, technology, chemical, life science, health care, and retail. It’s also the epicenter of China’s crude oil and natural gas imports. And to emphasize just how important the region is to global trade, check these facts: Wuhan’s contributing GDP reached $213 billion in 2018, and to date, more than half of the Fortune 500 businesses have operations in the area, including Apple, Starbucks, and Costco Wholesale.
As a result of the virus, Chinese President Xi Jinping called for a transportation blockade around the Hubei province, which houses nearly 60 million citizens. Several other country-wide mandates have also confined people to their homes indefinitely. Meanwhile, governments in the United States, Europe, and Asia have imposed travel regulations of their own, which not only block visitors from China, but also enforce mandatory screenings of those returning from the country. The United States, for example, ordered a 14-day quarantine of all non-Americans arriving from China, while major air carriers, including American Airlines, Delta, and United, have temporarily suspended all China-bound flights, prompting Singapore to announce its own ban on Chinese visitors. If we go back to that domino analogy, just imagine the number of pieces that have already toppled over in the early wake of the coronavirus.
But wait, there’s more. Because of the enforced lockdown of Wuhan, corporate offices in China have ordered factories and manufacturing mills to shut down indefinitely. In addition, pharmaceutical companies, financial institutions, and technology corporations have asked workforces to evacuate the area. Some businesses have even started relocating staff out of China for up to six months, forcing families to seek new accommodations and schooling options for children. And with people stuck home for the time being, retail stores have shuttered doors in an effort to mitigate operational costs. Apple, for example, has shut down operations until February 9th, and Levi Strauss has closed thousands of outlets across the country.
With Chinese consumer spending and industrial production at a standstill, economists have already lowered expectations for first quarter growth. Similarly, economists have stated first quarter spending in the United States will falter as well, since Chinese tourists to the U.S.—the world’s biggest-spending travelers—won’t be able to contribute. According to Wall Street Journal, “the twin hits to businesses and consumers promise to, at least temporarily, reduce China’s appetite for imports, despite its trade-deal pledge to boost purchases of U.S. goods and services by $200 billion over the next two years.”
So What’s Next?
The coronavirus and its lingering uncertainties have led to an overall disruption in global supply chains and world-wide economies. But there are steps organizations can take to mitigate impact.
1. Consider geographic diversification in sourcing and manufacturing
This is the obvious first-step solution, since it automatically removes China from the supply chain equation, allowing other non-affected parties in different geographical locations to keep supply chain operations running smoothly. Incidentally, many retailers have already started diversifying their sourcing and manufacturing operations on account of the existing trade war between the U.S. and China and China’s shifting footprint in global politics. Still, despite the seemingly straightforwardness of this solution, it’s a risky move that involves a lot of time and even more investment. Plus, retailers should be aware of the varying compliance regulations and production capabilities per region.
2. Monitor risk in real time with a digitized supply chain
Retailers can adopt retail software platforms that monitor, track, and manage potential supply chain disruptions in real time. The Bamboo Rose Multi-Enterprise Product and Supply Chain Platform is one such tool that not only streamlines supply chain management with end-to-end solutions, but also connects each and every supply chain partner on a single platform, allowing instantaneous communication on supply chain disruption. This way, all stakeholders have 100 percent visibility into all operations, allowing them to track new developments around city and government lockdowns of industrial areas and potential transportation interruptions, which gives leeway to make alternative business decisions.
3. Perform a cost-benefit analysis to mitigate damage to margins
Supply chain risk is inevitable, so retail organizations should consider using cost analysis tools to better assess ROI amid disruptive events, like the coronavirus outbreak. These costing tools allow retailers to easily forecast, prepare for, and mitigate potential financial risk. With the Bamboo Rose What-If Costing solution, users can understand the financial damage of supply chain disruption and simulate the additional cost that a restorative action will incur before submitting a final purchase order.
Wuhan and its surrounding areas remain vital assets to the global supply chain community. But as long as China’s quarantine stands in place, supply chain disruption will continue until the coronavirus outbreak is finally contained. And while experts predict this could last from three to six months, the severity of economic impact is still unknown.
However, the coronavirus is just one of the many political and environmental events that have posed disruption to the global economy in recent months, which points to an emerging need for software tools that manage supply chain complexity in an increasingly unstable geopolitical climate. That said, it’s best for retailers and their supply chain partners to start implementing risk mitigation strategies as soon as possible to prevent even further financial damage.
This article is also featured in the February 13th edition of Chain Store Age Magazine.