COVID-19's Supply Chain Scenarios and Impacts
COVID-19 continues to have devastating effects on all supply chains globally. Chains that source the raw materials and intermediate products they use in their products from the Far East are feeling these effects very intensely. Meanwhile, COVID-19 is significantly changing demand for products and services in all markets. The most important difference between the disruptions caused by the pandemic and those caused by other crises is that they are happening throughout all supply chains, on both the supply and demand sides, in a large, fast, and disruptive way.
A survey by the Institute for Supply Management shows that lead times for products sourced from China have increased significantly and that capacity utilization at manufacturing facilities in China has dropped to 50 percent. It also reveals that 44 percent of supply chains have no plans regarding their sourcing from China due to COVID-19. Another reason supply chains are affected is the serious shipping delays within China and at its ports. China, which has an important place as a source of raw materials or finished goods in today's supply chains, saw factory closures between January 23, 2020 and April 8, 2020. The effects of this can continue in a multidimensional way. Since the onset of the COVID-19 outbreak, all production processes in China have been disrupted significantly, and supply chains worldwide have been unable to procure the intermediate and final products they need. Additionally, previously planned capacity expansion and quality improvement projects have also been disrupted because foreign experts have been unable to travel to China, as reported by the Financial Times. We cannot view the effects of these supply-side disruptions as merely 76 days of lost production. The likelihood that the production loss caused by COVID-19 can be replaced by overtime or similar practices is weak because the maintenance of production systems, the return to normal production, and capacity expansion projects were not carried out. Additionally, due to COVID-19, the land, sea, rail, and air transport systems—important components of product sourcing—only began operating at very low capacity in June 2020. The effects of this supply-side disruption will be felt throughout 2020 and even in the first half of 2021.
On the demand side, we are observing significant changes. Consumer needs in all world markets have changed suddenly, and while demand for some products and services has increased, demand for others has decreased significantly. Particularly as a result of rapid and disruptive changes in energy supply chains, the price of a barrel of oil dropped from $70 in December 2019 to below $30 at the end of May. Worldwide energy consumption has declined dramatically. According to World Economic Forum data, the worldwide decrease in energy consumption is six times the size of the global financial crisis we experienced in 2008.
Due to COVID-19, a large portion of employees had to work from home. People are no longer spending their time commuting to work but rather working at home and spending time with their families. This change in lifestyle and work style will certainly have lasting effects on the demand side. Demand for some products and services is decreasing significantly while demand for others is gradually increasing.
COVID-19 has caused serious changes in individual consumers' product and service procurement habits. Food and basic product procurement, which is normally done from supermarkets, has largely shifted to e-commerce. A survey conducted by RetailX in the UK shows a 32.38 percent increase in online ordering of food products. Additionally, the shift of food consumption from outside the home to inside the home due to the closure of restaurants, entertainment venues, and hotels has increased e-commerce's share of food spending. The second-largest change is the shift in clothing procurement habits from stores to online e-commerce systems. This forced change brought about by the closure of shopping malls and stores is also a sign that the change in clothing procurement habits will accelerate. With these basic needs being channeled to e-commerce systems, a 100 percent increase has been observed in demand for cargo and courier services delivering to homes. It is highly likely that e-commerce platforms will become a standard channel for delivering goods and services to consumers in the coming period, and that work will be done for the economic efficiency and sustainability of these systems.
In addition to the short-term changes we have observed, it is also necessary to evaluate the medium- and long-term changes expected in both demand and supply. As of June 1, 2020, public and private organizations began reopening workplaces, but work continues with one or two weeks at the workplace per month and the rest of the time from home. Therefore, the fact that the work-from-home environment created in the short term will continue to be used in the medium and long term may encourage employees to make their temporary home environments more permanent. In a sense, making people's living spaces more high-quality, technologically equipped, and sustainable has become a necessity. Particularly products and services that support the need for a high-quality living space, health products and services, and technology and communication products and services that provide productivity and functionality independent of environment can be expected to see significant demand increases. Smart solutions that support the productivity of employees who have to spend a significant portion of their workday at home will determine the success of supply chains. Additionally, with the changes in the way white-collar workers work, individual travel needs will decrease. We must primarily develop new business models in these areas, build supply chains, design products and services as a package, and deliver them as a value chain.
The most important warning COVID-19 has given to all global supply chains is the supply risks brought about by the concentration of production in a single region and the increasingly inefficient supply chain structure. China has been at the forefront of countries benefiting most from globalization, raising its annual per capita national income from $318 in 1990 to $9,770 in 2018. The most important factor behind China's very rapid growth is the massive production facilities established in China and designed according to economies of scale. COVID-19 shows that supply chains being dependent on a single production hub carries significant risks for the whole world due to natural disasters and pandemics. In the coming process, all supply chains should primarily seek ways to break free from this dependency. The second important point is that supply chain costs have risen more than production costs. For example, when raw materials or intermediate products are ordered from China to be brought to Türkiye, approximately two months from production to delivery and 25-30 days for sea freight are required. The biggest challenge for companies trying to produce outside China is the financing and inventory holding costs of raw materials/intermediate products required by this roughly three-month lead time. Companies had to bear very serious financing costs to sustain operations, and they began to realize that non-production costs were more influential when setting product prices. Due to these effects seen in all supply chains, I foresee globalization continuing as a form of regionalization or localization in the coming period. For example, while Germany continues its production activities for the European continent, we can expect one or two other countries alongside Germany to make significant strides toward becoming production centers. One is Poland and the other is Türkiye. Türkiye has an advantage over Poland because it is not a neighbor of Germany, Europe's production dynamo, and can easily reach Europe, the Mediterranean, the Middle East, Western Asia, and North Africa with the products and services it produces. Therefore, important opportunities exist for Türkiye in the post-pandemic period, and these opportunities need to be capitalized on. Türkiye needs to focus on the production of basic materials, the production of value-added products, supply chains, and the service sector. Türkiye is a country whose geographic location and demographic structure are too large to focus on only one sector or only one part of the supply chain. We must particularly focus on developing our own technologies by reducing our technological dependence on foreign sources at all layers, and we must support entrepreneurial initiatives in this direction.
While some of COVID-19's effects on supply chains are temporary, the social, economic, and psychological environment we are living in brings with it fundamental changes. If we can be prepared for these changes and succeed in taking strategic steps with technology, rational thinking, and responsibility, we can make our supply chains an element of social welfare and sustainability.
HBR Türkiye
