How weak of a link is the coronavirus in the supply chain?

There is no doubt that COVID-19 is creating a significant impact throughout the world, both in the short and long term, and the disruption to the supply chain is immense. We are seeing a number of major trends along the supply chain and related industrial real estate areas resulting from the COVID-19 pandemic.

First, some good news. China, which is the source of many supply chains, is starting its comeback. As of this writing, factory production in the country is anywhere from 50 to 80 percent back online with some reduced staff (based on recent ISM survey); up from a standstill leading up to the Jan 25th Chinese New Year (CNY) and weeks after.

Obviously, the prolonged gap in product flow created from CNY and the outbreak of COVID-19 created a one-two punch lasting 8 to 12 weeks. In addition to reevaluating the shutdown for CNY altogether, many companies were already shifting as much sourcing as possible away from China to other countries in Asia and India, according to a very recent supply chain leader study conducted by the Supply Chain Leaders in Action.

According to a survey performed by Institute of Supply Management, 62 percent of manufacturers are seeing delayed orders and 53 percent are having hard time getting information from China. Additionally, 48 percent of manufacturers are seeing slower logistics in China as well as delays at ports while 57 percent report longer lead times from China. Chinese factories are operating at 50 percent capacity with 56 percent of workers, according to the survey.

Moving on to ocean shipping lines, there have been more than 100 blank sailings from China, which has reduced import port volume flow in the U.S. from 10 to 30 percent in Q1 2020 and is projected to have a similar impact in the second quarter. Blank sailings are when an ocean vessel route is canceled. For sailings that have occurred, the situation with oil prices has a favorable effect on bunker fees. A bunker surcharge, also known as bunker adjustment factor, is the charge shippers incur to compensate for fluctuating fuel prices and is typically in addition to other surcharges and fees added to the freight costs. Furthermore, according to Logistics Management, seaborne shipments into the U.S. declined 7.5 percent in February from a year ago, according to Panjiva.

Domestic transportation is seeing a temporary surge in activity as demand spikes for inland trucking capacity as grocers and retailers look to restock their shelves with critical goods amid the COVID-19 outbreak. DAT’s (an industry leader in tracking transportation rates and activity) load-to-truck ratio, a measure of demand, was up 31 percent for vans and 33 percent for reefers between March 9 and March 15. Retailers like Costco, Target and Walmart—among others—have been struggling to keep some items in stock in recent days as consumers prepare for long stays at home.

With regards to domestic distribution activity, leaders, like Amazon, are adjusting their operation to focus on shipping the most critical categories related to COVID-19 relief. These six categories include baby products, health and household, beauty and personal care, grocery, industrial and pet supplies.

In addition, here’s some advice from Industrial Distribution on what distributors should do next to prepare for and survive the COVID19 crisis, including everything from stress testing your business to scenario planning for reduced volumes.

Impact estimates gathered from multiple sources over the past couple days provide more color around the impact on the economy and commercial/industrial real estate. Detroit automakers are temporarily shutting down factories in the U.S., affecting more than 150,000 factory employees. The COVD-19 financial and economic impact projections—from discussion with national economists—include Q1 2020 GDP being down 1.5 percent, Q2 2020 GDP being down 6 percent, with overall small U.S. economic growth expected for the year. 2021 projections remain intact with a GDP growth of 3+ percent.

Regarding industrial leasing activity, we expect short term leases to increase related to storage of some product that retailers can’t sell due to store closures and decrease in other sectors. Longer term leasing activity does not appear to be materially affected at this point. It is worth noting that the grocery and drug supply chain capacity is at full tilt while folks across the country stock up for likely prolonged stays at home.

Overall, the financial impact of this worldwide pandemic is still unknown, but it is clear that there will be several months of operational impact from COVID-19 throughout the domestic and global supply chains. We see certain sectors surging ahead related to grocery and healthcare. Some retailers, on the other hand, like Nieman Marcus, Nordstrom and Macy’s, are reducing hours or closing down retail and halting operations temporarily.

About the author

Todd Steffen is a Chicago-based Vice President of Supply Chain & Logistics. Todd partners with Colliers International advisors to provide supply chain consulting services ranging from strategic capability assessments and development to operational guidance on inventory management, transportation, procurement and omni-channel distribution network optimization. Todd brings more than 25 years of large-scale supply chain expertise and worked for leading companies such as EY and Walgreens.