Posted: 25 Feb. 2020 10 min. read

Covid-19 Outbreak

Key questions that CEOs and CFOs should be asking

A novel strain of coronavirus (COVID-19) was first reported in Wuhan, China in late 2019. With more than 75,000 confirmed cases and more than 2,000 reported deaths by 20 January, public authorities in China have taken decisive actions in response to this health crisis, e.g. quarantining people in affected cities, issuing import restrictions on live products and closing factories.

Although the virus has not become a health crisis in Australia, Australian Businesses with global supply chains are being economically impacted by this outbreak. To mitigate the risks of supply chain disruption, there are some key questions that CEOs and CFOs should be asking:

1. What categories/sectors are expected to be impacted?

China is Australia’s number one export market (>30% share), number one international market for Iron Ore and Coal and the largest agricultural goods market. Whilst it is too early to predict the exact impacts, the outbreak has begun to weigh on Australian businesses to varying degrees, e.g.:

  • With disruptions in export to China, Iron Ore price per tonne has dropped by more than 11% from average AUD134/t in January.
  • Airlines have begun taking precautions, suspending some of their flights, impacting both their own business and tourism.
  • The education sector is also being impacted. Students who have travelled to mainland China within the past 14 days are advised to self-isolate for a two-week period in accordance with directives from the federal government.

These are just a few examples of what has happened since the outbreak. Companies need to assess the risk of exposure to the potential disruptions over the short, medium and long term, and prepare for mitigating the disruption risks to their supply and / or demand. This is not just limited to the organisations with direct suppliers in China, the risk is also present for companies with extended supply chains in China or shipment routes through Chinese ports.

2. What are the implications for our demand projections? 

With the COVID-19 outbreak, companies are witnessing a significant decline in consumer traffic and purchasing activities in the China marketplace, caused by restricted trading hours and temporary closure of stores in impacted areas of mainland China.

For example, the decline in the export market for Australian live products has already been witnessed by players in the seafood industry. Chinese New Year festivities were shut down which had a big impact on Australian rock lobster exports given China consumes 98% of West Australian lobster exports (a market worth $500m) but demand has plummeted following the market shutdown. Limitations on import of live products to China is another emerging issue for the businesses with perishable products that cannot be stored for long periods. 

Impact on demand may not be limited to overseas market. China is the most consistent and prominent source of international students and the most valuable tourism market for Australia. Accounting for >15% of the visitors to Australia, total spend of Chinese tourists while in Australia is significantly higher than any other group, reaching $12-16bn per annum (almost 30% of the total spend by international visitors). As a precaution, the Australian Government has introduced travel restrictions for visitors who were in mainland China on or after 1 February, which may potentially lead to a reduction in demand for products in relevant sectors (including those products which are popular with Chinese tourists as gifts to take back home, e.g. honey, cosmetics and baby formula). 

Companies commercial leads need to assess their data to identify demand share by demographics and identify the impacted categories. Working with supply chain leads, supply and demand plans need to be balanced. If a reduction in demand is expected for the short term, raw materials, production and logistics plans need to be revisited while getting prepared to re-adjust the plan when restrictions are lifted.

3. What are the implications for our inbound logistics and supply plans? 

Wuhan is a major industrial and transport hub located in the inland Chinese province of Hubei. On 23 January, authorities imposed severe travel restrictions impacting flow of goods from and to the region. Similar full or partial bans have since been implemented by other impacted cities.  

There is significant terminal congestion due to increased screening procedures and worker shortages in Chinese ports, which impacts both shipments from China and vessels passing through Chinese ports en route to Australia.

Compounded by the Australian government's decision to impose a 14-day quarantine on vessels that leave mainland China after 1 February, Australian ports are expected to face scheduling issues for inbound vessels. The uncertainty created by the possible extension of quarantines further complicates the planning process and increases the need for high visibility on status of in-transit goods.

Accounting for the expected and unexpected delays, companies need to ensure they have visibility of the status of goods in transit to be able to update expected receipt and delivery date and revise their supply plans accordingly. 

4. What are the impacts on manufacturing operations and what recovery plans can we devise?

Companies and factories in several major cities and provinces (e.g., Beijing, Zhejiang, Jiangsu, Guangdong, Shanghai) have been ordered to halt their operations. The official date advised by the authorities to return to work has been 10 February, however many local authorities and enterprises have extended the shutdown period as COVID-19 continues to spread and are targeting later dates to resume the operations. Even for the factories that resumed their work, workforce shortage and reduced operational capacities are present as people who have travelled to the affected areas are quarantined for 14 days. 

High Tech and Consumer Products industries are the most exposed. China accounts for 27% of global exports in High Tech, 33% of consumer goods and 23% of textiles and apparels. For Australia, imports from China are led by telecommunication equipment, IT products, furniture and homewares, including both finished goods and spare parts.

Given the high-tech industry relies on just-in-time delivery, inventory levels in the supply chain are expected to be low and an extended delay is likely to have significant impact on OEM’s ability to meet market demand for current products or delay the launch of new products.

During both the supply shortage and recovery period, Australian companies will be competing against global competitors for the supply. Impact of this issue needs to be assessed for Australian retailers, with lower bargaining power to secure their share of supply in comparison to the retailers working in bigger markets.

Supply chain leads need to quickly assess their exposure to suppliers in China and develop strategies to source the products from alternate suppliers, if available. Also, working with the commercial leads, promotion and sales plans should be revisited based on the projection of supply from original and alternative sources.

5. What are the expected impacts on our inventory levels?

For companies with direct suppliers or next tier suppliers located in the impacted areas, the supply line might be disrupted. With the logistics disruptions and manufacturing halts, inventory levels of imported raw and semi-finished goods as well as finished products will be influenced. However, the magnitude of the impact is dependent on how lean their inventory management approach has been and if demand projections are reduced alongside the supply restrictions.

A significant amount of materials and spares for utilities are sourced from or routed through China. Following the recent bushfires and floods in Australia, restoration of services in impacted areas and the maintenance activities have resulted in usage of up to 2 years of standard materials demand. Replenishing the safety stock for critical spares are among the top priorities for this sector. 

With the current uncertainties, it is suggested to refrain from inventory optimisation programs for the time being. However, if the inventory levels, especially for slow moving items are high, the shortage in the market may open up the opportunity to collaborate with other businesses in the same sector to share / re-sell slow moving stocks.

Facing potential shortage and in attempt to take measured steps in the recovery process, there are three risks to be aware of:

  • Overordering to “grab” available supply and not coordinating well with sales to move stock
  • Underordering and not being able to take advantage of the recovery period
  • Missing the opportunity to act on slow-moving stock in response to market demand

6. How can we seize the moment and secure our supply chain against future disruptions?

The most similar event to the COVID-19 outbreak is the SARS Pandemic in 2003. Supply chains have come a long way since then and lessons learned from 17 years ago should inform but not dictate business decisions today. Over the past two decades, global connectivity and supply chain optimisation have led to less buffers in supply chains which may amplify the impacts of the outbreak. It is not clear how long the crisis will continue; hence companies need to develop immediate, medium and long term plans. Those with robust contingency plans for closures and supply chain disruptions will have a head start for coordinating their next steps for business continuity. 

The notion of supply chain resilience is not new but as supply chain optimisation has become mainstream, achieving greater resilience through built-in flexibility, improved visibility and proactive reporting has taken on increased significance. With supply chains being exposed to potential disruptions in their weakest links, there is a clear and present need for companies to reevaluate their resiliency and business continuity capabilities.

To discuss this topic in more detail, please contact:

John O’Connor
APAC Sourcing & Procurement 
Leader, Partner, Sydney

Terry Innerst
Supply Chain & Procurement 
Partner, Sydney

Chris Coldrick
Supply Chain & Procurement 
Partner, Melbourne

Tina Northcott
Supply Chain & Procurement Director, Sydney

Chris Riley
Supply Chain & Procurement Director, Perth

More about the authors

John O’Connor

John O’Connor

APAC Sourcing and Procurement Lead

John has over 25 years of experience leading and delivering complex, multi-stream programs of work across a diverse portfolio of organisations in Australia, Europe, North Asia and Africa. He has deep operational expertise in supply chain and procurement improvement particularly in the resources, healthcare and manufacturing sectors.