Showing posts with label covid-19. Show all posts
Showing posts with label covid-19. Show all posts

Tuesday 24 March 2020

BUSINESS UNUSUAL (PART 2) - HOW WILL CORONAVIRUS AFFECT BUSINESSES?


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Doing business in a time of Coronavirus/Covid-19, Supply Chain disruption and Business interruption - Potential impact on Businesses and Organisations


NOTE:


PART 2 – What is the potential impact on commerce and industry?

The combined effects of Corona and the pretty much simultaneous Oil war is severe for global industry and commerce:
 Apple's production problems
  • The fall-out happened so fast that it simply was not on the radar of most organisations. Even the BCI (Business Continuity Institute) Risk Ranking (based on a survey done at the end of 2019) ranked non-occupational disease (including Coronavirus) at position no 21 out of the top 22 risks on their “2020 Risk and Threat Assessments” for the next 12 months.
  • The global supply chain was destabilised on a previously unanticipated scale. On the manufacturing side, being China, firstly by inability or delays in shipping stock out, and subsequent factory closures, leading to unplanned production stoppages and stock shortages.
  • In China itself, the shutdown had a hugely detrimental effect on the economy, e.g. car sales for Feb 2020 fell by 81.7%. Manufacturers struggle to reopen – Apple’s manufacturer Foxconn anticipated to regain only 50% capacity by the end of February, and an estimated 80% capacity by the end of March. 
  • Large international buyers who import from China usually buy enough stock to carry them through the Chinese New Year’s holidays, but as a result of delays in receiving stock, many factories are running out of stock due to unexpected shortages. This, combined with the Corona-impact on health-and-safety requirements force manufacturers to close temporarily (think e.g. VW, Porsche, BMW, Ford, Chrysler PSA, Airbus), causing further disruptions down the chain.
 VW production to shut down

  • International Travel is severely being curtailed, and big passenger aeroplanes are grounded. Airports typically were not built to offer long term storage as airport space is typically at a premium. As a result, airlines are desperately seeking affordable and safe long-term storage as thousands of trips are being cancelled.
 Corona grounded airplanes - now they need parking space

  • Lastly, on the consumer side, panic buying is putting further pressure on the system due to unexpected volumes.
  • This all leading to hitherto unseen levels of interruption in the global supply chain (Bullwhip effect + the Reverse Bullwhip effect) which may continue for months to come before supply and demand stabilise again.
  • Financial markets around the world were hit hard in the fall-out, e.g. Nasdaq experienced the biggest single-week drop since the 2008 financial crisis, and US equities suffered their worst fall since Black Monday in 1987
The disruption of day-to-day life and the very tragic human cost of the Corona/Covid-19 virus on families and communities is severe. The combined effect of the aforementioned factors is causing havoc on international financial markets on a global scale, and more so in emerging economies such as South Africa. This impact may continue for the foreseeable future. The World Economic Forum calls it an "economic earthquake", what some would say is a perfect storm, and what others refer to as a Black Swan event - an extremely rare event with severe consequences.
Consider the following cases:
  • The public education system in SA feeds more than 9 million disadvantaged school children daily. Extended school closures mean no food for many children – a sad but direct impact on the most vulnerable in our society.
 School feeding scheme

  • SASOL – the SA petrochemical giant caught up in the Oil war as collateral damage. Dropping international oil prices as well as overspend on their Lake Charles project resulted in an initial one day drop of 46.5% in the share price. Followed by subsequent movements over the following days, this cumulated in a +- 95 % drop since last year and loss of shareholder value down from R450 billion to ± R23 billion.
  • A South African wholesaler/distributor (who shall remain nameless), who identified early 2020 (or thereabouts) as the perfect time for migrating to a new operational IT system, as well as moving into new facilities. Both activities at more or less the same time - What could go wrong, right? Unforeseen issues with the system appear to have resulted in system driving picking glitches and order backlogs. This, in turn, caused significant business interruption, missed deadlines and furious customers, culminating in certain reputational damage. All this before Corona kicked in.

Potential Business Impacts 


These are but three real-life case-studies of what has happened is happening and may continue to happen to businesses, organisations and society in general in the foreseeable short-term. Effects (specifically on commerce and industry) could include the following (in no specific order):

 Panic buying in South African shops
  • Panic buying
  • Capacity constraints
  • Inability to service clients
  • Suppliers out of stock
  • Unplanned delays in receiving stock
  • The increased cost of operations
  • Inability to project demand accurately
  • Inability to project stock requirements
  • Increased working capital requirements
  • Delayed cashflow
  • Increases in debt repayment
  • Unavailability of spares
  • 3rd party credit risk
  • Production or service interruptions
  • Customer complaints
  • SLA breaches
  • Contract breaches
  • Missed deadlines
  • Lost customers
  • Reputational damage
  • Inventory previously considered as low-risk now being targeted by criminals (e.g. Face masks) due to increased demand
  • Security of assets and IT systems/stock shrinkage
  • Unusual spikes in demand
  • Stock-outs resulting in missed sales
  • Short or incomplete deliveries
  • Stock stuck in transit or ports
  • Production stoppages
  • Factory shutdowns
  • Store closures
  • Forced changes in suppliers
  • Forced changes in raw materials
  • Loss of productivity
  • Loss of revenue
  • Ineffective crisis management
  • Inability to make executive decisions
  • Inability to process transactions
  • Loss of key staff
  • Succession plan gaps
  • Absence/illness/quarantine of Key Decision-Makers, Topic Matter Experts, General workforce, Contractors, Service providers, Supplier reps / Key Contact Persons
  • Inaccessibility of facilities (e.g. Due to temporary area quarantine requirements)
While the business impacts vary from one company to the next and between industries, business and industry will generally feel in the impact of greater variability, increased uncertainty and more risk.

Potential Industries Affected 


Industries affected off the top of my head include (but are not necessarily limited to): Arts & Culture, Education, Entertainment, Events, Food & Beverage, Gambling and Casinos, Healthcare, Hospitality, Manufacturing, Retail, Finance, Banking, Transport, Logistics & Supply Chain, Health, Safety & Security, Sports, Tourism. And further sectors may be indirectly affected by a fall in consumer confidence or changing consumption patterns such as Building & Construction, Energy, Property, Investment, and Insurance. And possibly a couple of others too.

CONCLUSION


The fallout and contagion (both medically and financially speaking) is material and pervasive. Very few businesses or organisation will not be affected in some shape or form.

In the next post, we will consider potential steps management can take in order to limit the effect on business or organisations.


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For more information, visit our website on www.cogniplex.co.za. A copy of this article is also posted on Linkedin.com 

All original artworks remain the property of their respective owners.


  

BUSINESS UNUSUAL IN A TIME OF CORONAVIRUS (PART 1) - WHERE AND HOW DID THIS CRISIS ORIGINATE?


Doing business in a time of Coronavirus/Covid-19, Supply Chain disruption and Business interruption - Where and How did this crisis originate?


NOTE:


  • This is a developing situation. Accordingly, role players continue to react and markets continue to adjust to the emerging situation. The historical data, facts and figures contained in this article were accurate at the time of publication, but statistical figures and some facts can change over time (e.g. share prices, mortality figures, etc). References below for further reading.
  • This article will be posted into 3 parts:

PART 1 – What happened and how did we get here?

2020 is fast turning into a watershed year. In early January the global economy was chugging along nicely, with some international Indexes peaking around record highs. However, New Year euphoria was cut short as news gradually broke about a virus spreading in Wuhan, China.

Figure 1 - Wuhan Map

Wuhan is a hi-tech hub and China’s “motor city”. It is the biggest city in Hubei province, known as the “thoroughfare of China” by virtue of being a transport and industrial hub for central China and the region’s political, economic and commercial centre. More than 300 of the world’s top 500 companies have a presence here. 

By 13 January, the first case was identified in nearby Thailand. By 22 January 2020, the novel coronavirus (subsequently referred to as Covid-19) had spread to major cities and provinces in China, with 571 confirmed cases and 17 deaths reported. On 23 January 2020 (2 days before Chinese New Year), authorities informed residents of Wuhan of an imminent lockdown from 10 am. An estimated 300 000 citizens left the city immediately. The lockdown spread as quarantine was imposed in various cities and regions. On this same day that the lockdown occurred, the first case of Corona was identified in Singapore. From early February, Chinese authorities began shutting down factories in a desperate attempt to halt the spread of the virus.

This plan did not work, and virus contagion spread to the rest of the world. And economic contagion followed – the following is a summary: 
  • China is the world's manufacturer and is also the world’s largest container cargo handler and home to seven of the world's 10 busiest container ports – processing around 30% of global traffic or around 715,000 containers a day in 2019
China factory activity plunges
  • The lockdowns meant that factories could not get stock shipped out that was already manufactured and simultaneously stopped manufacturing altogether. China’s manufacturing activity plunged to an all-time low in February, with the official manufacturing purchasing managers’ index (PMI) slowing to 35.7, according to the National Bureau of Statistics (NBS). Comparatively, during 2008’s Financial Crisis the manufacturing PMI only dropped to 38.8 in November 2008. Services were similarly affected, and the services index almost halved last month to just 26.5 from 51.8 in January (and first time lower than 50 since the index was started 15 years ago in late 2005.
 Reefer surcharges rocket due to Chinese port plug scarcity

  • Incoming cargo clogged ports and shipping lines started charging surge fees for refrigerated containers importing food. Some cargo ships left China carrying as little as 10% of TEU capacity, others cancelled trips. 
  • Overall China’s exports and imports plunged. Exports fell by 17.2% in January and February combined compared to the same period a year earlier, according to the General Administration of Customs
  • A survey by Beijing-based think tank the Shanghai International Shipping Institute shows that capacity utilisation at the main Chinese ports fell by 20-50%, while more than one-third of ports said storage facilities were more than 90% full.
 Wuhan residents trickle back after lock down

International impact

This lowered throughput had a knock-on effect on the other side of the Supply Chain in receiving countries:
  • LA handled 705 000 containers in Feb 2019. The same period Feb 2020 was down to 544 000 or 22.87%. By 18 March Los Angeles ports have seen 40 + “blank sailings” - ships scheduled to arrive that didn’t, numbers previously unheard of. 
  • On the Asia-Europe trade route, at least 61 cancelled sailings have been announced, representing a 151,000 TEU capacity reduction. China typically represents about 30% of Hamburg's container throughput and about 25% of Rotterdam's. Rotterdam Port Authority estimated that a 1% drop in its annual volume, which after recording throughput of 14.8 million TEU would amount to 148,000 TEUHamburg harbour reported a 40% plunge in trade volumes.


Oil Price War

 Oil war

Then, on 8 March 2020, after a potential oil production cut agreement with Russia fell flat, Saudi Arabia initiated a price war with Russia. This triggered an immediate international fall in the price of oil, with US oil prices falling by 34%, crude oil falling by 26%, and Brent oil falling by 24%.  Oil prices dropped to 18-year lows. For more info see here and here 

CONCLUSION

The fallout and contagion (both medically and financially speaking) spread nearly globally in the space of 3 months. This caught many off-guard, as global supply chains and financial markets were disrupted. In the next post, we will consider the potential and combined impact of the virus, supply chain interruptions and business disruption on commerce and industry, and potentially on your own business or organisation where you work.

If you like this post, please Like, Share and Comment



For more information, visit our website on www.cogniplex.co.za. A copy of this article is also posted on Linkedin.com 

All original artworks remain the property of their respective owners.

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