While companies draw up contingency plans for production activities, supply continuation, and logistics services to cope with this complex and fast-changing situation, the crisis now looks to disrupt global supply chains until April and potentially beyond. While production-related challenges may be overcome in the coming weeks, limited inbound and outbound freight capacity could become the biggest obstacle in the months of March and April for supply chains to normalize. Chinese media organizations have put forward March 1 as the date when production schedules could return to near-normal operations; however, this will largely depend on when the outbreak will peak.
To help supply chain managers keep abreast of the situation and initiate risk mitigation plans, Resilience360 has outlined the ten 10 challenges organizations will need to prepare for in the short and medium term amid the ongoing Coronavirus outbreak.
A full copy of this report can be downloaded here
In summary, it highlights the following challenges …
1. Lockdowns cause labor and supply shortages in factories
City-wide lockdowns and quarantines have triggered labor and supply shortages as Chinese authorities from different jurisdictional levels seek to contain the Coronavirus outbreak. Some of the most notable provinces and cities imposing transport restrictions on the movement of residents and vehicles include the provinces of Guangdong, Jiangxi, and Liaoning as well as the cities of Tangshan (Hebei), Nanjing (Jiangsu), Hangzhou (Zhejiang), Zhengzhou (Henan), and Ningbo (Zhejiang).
Varying degrees of city-wide restrictions like home quarantines, temperature checks, and vehicle checks have hampered the ability of workers to reach factories. Travel restrictions and subsequent labor shortages have caused backlogs to build up at many ports.
2. Regulatory uncertainty slows the restart of factory operations
Another major challenge facing manufacturers based in China is the extent to which they will need to cope with different - and, at times, conflicting - regulatory requirements that can vary at provincial, municipal, and even district level as companies seek to restart industrial operations. Production has resumed for companies in most provinces across China as of February 10 following a government-mandated delay to restart normal business operations aimed at mitigating the virus outbreak. However, some jurisdictions, predominantly at the municipal and district level, have imposed different production schedules and requirements for resuming normal operations.
3. Public health requirements impact industrial operations
In anticipation of firms returning to normal operations, some authorities have also issued additional requirements mandating that factories apply for permission to reopen operations or meet specific Coronavirus prevention standards. The ambiguity surrounding the approval processes has already had a major impact on manufacturers seeking to restart operations.
4. Suppliers invoking force majeure clauses on the rise
On top of disruption to production and delays in orders, companies dealing with suppliers in China will be confronted with legal defenses like force majeure clauses being invoked for non-performances, shielding such suppliers from legal and financial liability. Force majeure refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations, typically natural disasters. While force majeure clauses rarely mention diseases, they frequently provide relief in the event of unforeseen acts of government, for which the government-mandated shutdowns may qualify. A Chinese international trade promotion agency has reportedly started to issue force majeure certificates to more than 100 companies unable to meet contractual obligations amid the Coronavirus outbreak.
5. Provincial border checks exacerbate trucking shortage
Cross-provincial trucking remains challenging throughout China as authorities require drivers to remain 14 days in self-quarantine depending on the license plate of the truck and the registered province of the driver to curb the spread of the Coronavirus. In particular, trucks with license plates from Hubei Province where Wuhan is located have been stopped at provincial borders and asked to return to their provinces. Reports of trucks with license plates from other provinces such as Zhejiang and Jiangxi being turned away have also emerged in the past days. Overall, trucking availability has been reduced to 40 percent within the Shanghai city area, while capacity is been down to 10 percent from Shanghai to other cities as drivers reject trips to inland provinces to maximize the number of runs per day. No drivers from outside Tianjin were reportedly allowed to enter the city, while only 10 percent of the local drivers were able to offer services. These developments have led to delays and a sharp increase in trucking prices.
6. Closed borders delay movement from and to Vietnam and Hong Kong
As of February 11, cross-border traffic between Vietnam and the Chinese provinces of Yunnan and Guangxi remains severely disrupted. In particular, export goods from Vietnam are congesting border points as trucks cannot easily cross into China. The biggest border crossing at Huu Nghi/Pingx Xiang was closed until February 8, but has reopened since. Authorities, however, are only allowing 25 trucks to pass per day if drivers wear protective clothing, with priority being given to medical and perishable cargo. Waiting times for trucks with other cargo has been 4-5 days on average on the Vietnamese side. In Hong Kong, authorities have started to quarantine for 14 days all Chinese citizens coming into the territory.
Since January 31, Russia’s 16 border crossings with China along a 4,000 km border have been closed to prevent the spread of the Coronavirus, likely affecting trade volumes.
7. Labor shortage causes congestion at airports and seaports
With limited trucking capacity available, congestion has started to build at air cargo terminals and warehouses. This is due to inbound shipments that have either not been cleared by customs brokers or for which delivery and pick-up services could not be arranged. As a result, cargo operations have slowed down; shipment (including critical medical device shipments) delays and demurrage costs are also starting to materialize.
The situation has been particularly acute at airport warehouses in Shanghai, potentially forcing logistics companies to not accept cargo destined for the area any longer or only against guarantees that the cargo will be picked up immediately. Gateways such as Hong Kong have not reported congestion yet and could serve as an alternative entry point to southern and central provinces in China. Despite limited trucking capacity, shipments have reportedly been trucked from Hong Kong to large cities in Sichuan Province such as Chengdu within 72 hours in recent days.
8. Blank sailings reduce ocean freight capacity out of China
With the Lunar New Year period having been extended in most provinces until February 9, shipping lines announced extensive blank sailing programs for their vessels until the end of February. Blank sailing refers to the situation when a carrier cancels a scheduled stop at a specific port, or an entire route, for a certain vessel, usually due to low demand. About 82 trans-Pacific sailings have been cancelled into March, taking out around 198,500 TEU off the market, while carriers have blanked around 54 sailings in total for trade between Asia and Europe, according to Sea-Intelligence Maritime Consulting. According to some shippers, a delay of three to four weeks for containers to arrive at European destinations can be expected.
9. Limited air and rail cargo capacity to increase prices
Similarly, the large number of cancellations of both passenger and freighter flights, combined with factory and logistics operations restarting in the coming weeks, are expected to cause an air freight capacity shortage that could last until April. In total, more than 25,000 flights have been cancelled per week so far, reducing air freight capacity by approximately 50%. With limited air freight capacity, outbound cargo trains from China to Europe have received increased attention. While this option is generally twice as fast as ocean shipping, capacity challenges also affected this mode of transport due to multiple cancellations of scheduled trains and priority being given to containers remaining from the pre-Lunar New Year period. In addition, the difficulty of trucking cargo across provinces to large railway stations such as Chengdu, Xi’an, and Zhengzhou could lead to schedule adjustments, reducing visibility on potential arrival times in European destinations, including Hamburg, Duisburg and Tilburg.
10. Ripple effects felt across supply chains overseas
The Coronavirus outbreak has also had major implications on industrial production and global supply chains spanning beyond China’s borders. For the automotive sector, a supply shortage of key auto parts due to the outbreak has caused some major auto manufacturers to temporarily halt domestic operations. In addition, the Coronavirus has had a disruptive impact on global pharmaceutical supply chains. Wuhan itself is host to major domestic Active Pharmaceutical Ingredient (API) makers, with most drug makers having around one-to-three months of inventory for drug ingredients. Given the current public health crisis, China may be inclined to hold onto material supplies for certain antibiotics and therefore export less to alternative markets including the U.S and India, which rely on China for such critical ingredients.
Given the fluidity of the situation and the vast operational and financial implications across multiple industries, it may take several months to assess how the event will have impacted an organization’s bottom line.
Vigilant spoke to Mirko Woitzik, Manager EMEA, Risk Intelligence at DHL Resilience360, to learn more about the steps being taken in support of supply chain resilience by both Manufacturers and Logistics service Providers…
- What actions are companies taking?
- Shutting production and logistics sites preemptively or according to government directives to prevent infections and anticipate labor shortages
- Looking for alternative sources to buy component parts to restart production lines as soon as possible or keep production lines running where possible
- Using emergency air freight to fly parts out of China to other production locations to continue production (e.g. flying cell phone parts from China to Vietnam)
- Securing cargo capacity from China via rail and air as an alternative to ocean freight which has longer transit times and very limited outbound capacity into March-April
- What is the best advice to companies to minimize supply chain disruption?
In the short term:
- Identify key suppliers in areas affected by city or production shutdowns
- Secure alternative sources and increase inventory levels at key production sites
- Educate internal staff and key suppliers about the symptoms of the virus, and enforce precautionary measures such as taking sick leave if symptoms show
In the long term:
· Monitor proactively disruptive supply chain risks in near real-time
· Be mindful of using dual-sourcing strategies for key components, ideally both for vendors and geographies
· Draft and test contingency plans for a potential supplier outage
- How long do you expect the situation to continue?
- Production schedules are unlikely to normalize until early March
- Air, ocean and rail logistics capacity is unlikely to stabilize before April
- From a cargo crime perspective, what risks could be associated with this disruption?
- Due to cross-border checks between provinces within China or at borders with Vietnam or Russia, additional checks have caused congestion, slowing down cargo operations and making parked trucks an easier target for cargo crime. Many trucks will carry high-value and easy-to-sell medical goods and pharmaceutical products at the moment, which are attractive targets from a cargo crime perspective.
- Inbound congestion at big air cargo terminals due to labour shortages may create more possibilities for cargo to get lost, be damaged or stolen.
- What longer term risks is this likely to present?
- Capacity shortages for outbound air, ocean and rail cargo will likely cause price increases and higher logistics costs for companies
- Production downtime on a supplier level may lead to lost sales due to production stoppages
- Supply chain shifts from China to other countries, which started as part of the global tariff increases in 2018, may accelerate
- From a supply chain perspective, what lessons have been learned from previous global viruses, i.e. SARS?
- Compared to the SARS outbreak, there has been a greater willingness to create transparency by Chinese authorities, which has made it easier for manufacturing and logistics companies to assess the scale of the outbreak and take decisions accordingly.