Professor Ted Stank is the Harry J. and Vivienne R. Bruce Chair of Excellence in Business in the Department of Supply Chain Management and Faculty Director of the Global Supply Chain Institute at the University of Tennessee at Knoxville. He holds a Ph.D. in Marketing and Distribution from The University of Georgia, an M.A. in Business Administration from Webster University, and a B.S. from the United States Naval Academy.
SH: What are some of the supply chain disruptions that you have seen as a result of the US-China trade war and now the coronavirus?
TS: The biggest challenge that we’re experiencing right now that’s really unprecedented in modern times has been that that this whole pandemic started as a supply issue for US and European supply chains. As we hit January and the virus started impacting Chinese businesses and they were closing. It became a major supply issue because U.S. companies and supply chains couldn’t get in the products that they needed. … You saw a lot of scurrying around trying to find alternative sources of supply, trying to buy up the market. In January and into February, we saw huge increases in imports at U.S. ports from China specifically, as companies were trying to stock up their supply chains…. And as we gradually got through February and into March, and the virus had spread into the US and Europe, we started seeing demand shutting down and so now we’re in this period where China is coming back online, products are starting to become available, but we’ve seen dramatic shutdowns in transportation capacity, particularly air.
TS: Now we have a dramatic demand issue as well, and it’s very uneven. Certain industries, particularly medical, health care, and food, certain other consumer goods, are seeing dramatic increases in demand.[Companies are] having a very hard time keeping up with that demand and responding to it then, of course, other industries that are relatively non-essential are seeing complete drop offs in demand, so having to shut down or furlough.
SH: Right. You mentioned that there was a huge break in logistics chains and that there were big demand drop-offs. Are there other factors that have played into supply chain disruption, such as insufficient production and insufficient capacity to keep up, or rising prices?
TS: Beginning in the industries that are seeing dramatic increases in demand, we’re talking about 40 to 60% rises in demand over standard peak levels. We work with several companies who have told us, “we just can’t keep up with the projects. We’re working on everything.” [They are] cancelling any new initiatives because people are just 24/7 engaged in trying to keep up with the pace of demand. What most of those companies are doing is shedding a lot of different product differentiation, particularly in packaging. It’s like, “let’s just focus on the 30 main products that people need. Let’s not worry about packaging differentiation. People don’t care what the package looks like. They just want it.” [This impacts] paper products, toilet paper and paper towels, hand sanitizer, lots of cleaning supplies, many different food categories. They’re just so focused on cranking out product and getting it to market on time….Of course, we’re seeing dramatic increases in e-commerce and home delivery since people are not going out of their houses….[These are] trends that have already been happening, but are just dramatically accelerated because of what’s happened in both supply and demand….
SH: Looking specifically at the US-China trade war, have you seen a lot of US companies moving out of China into other countries? Do you think this is going to be a permanent trend, even after the trade war is over?
TS: I’ve heard a lot of talk about trying to find alternative sources of supply to move out of China. I think the reality is that that’s much easier said than done. Frankly, for a lot of the industries in China , particularly [those that use] sub components that go into a lot of finished goods, there’s just not a lot of alternatives. I think on a broad base, you’re not going to see a lot of moving out of China. What I do think you’re going to see is in certain key industries, [there will be] a move toward near-shoring or even reshoring, particularly in things like medical devices and prescriptions and personal health care. 90% of active ingredients in pharmaceutical products come from China today, and I doubt that that will continue. After this crisis is over, those kinds of industries will look to either build inventory levels so that there’s additional levels of safety stock or find alternative sources of supply. And that doesn’t mean that [they will] 100% go away from Chinese supply. No, just increased diversification.
SH: How costly is it for those firms to diversify or move out of China into other countries?
TS: Very. In a lot of cases, you actually would have to engage in supply base development because the basic infrastructure, talent level’s just don’t exist in a lot of other countries. If you’re going to do that diversification, you’re going to have to invest a lot of capital to develop the capability. In other cases where the capability exists in other places, it’s usually much more expensive on a per unit cost basis. But I think that the cold reality of this kind of disruption is we’re going to see consumer prices rise because of the redundancy and diversification. We’re going to have to build into our supply chains so that this does not happen again. You will see increasing inventory levels. So just-in-time will have a very different meaning in the future.
SH: How soon after the trade war and coronavirus pandemic are over do you think supply chains will recover?
TS: We will not return to normal, just next to normal. Middle to late 2021 is the best I’m hearing now. Supply chains are resilient, and I think that as consumers are able to get out of their homes and go shopping in normal ways again, [and as] workers are able to get out of their homes and go to work and we ramp up production and distribution and transportation, we’re going to see that stabilizing. But so much of it depends on what consumers are going to do….One of the big challenges in supply chains right now is that we’re seeing a dramatic increase in transportation costs because we’re not flying airplanes anymore. And air traffic air transport capacity has been cut by something on the order of 40% because of the dramatic reduction in passenger flights, and therefore lack of belly space in a lot of these airliners that were carrying people but also cargo. Now the airlines have responded by converting some passenger flights to all cargo, but it hasn’t brought back nearly the amount of capacity.
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