COVID-19 Impacts on Supply Chain Management

 

COVID-19 Impacts on Supply Chain

The Covid-19 pandemic has had a profound impact on the supply chain and sustainability for the garments sector. Top exporters like Bangladesh have started feeling the heat due to raw material sourcing challenges and cancelled orders. The performance of the RMG sector is more critical for an economy like Bangladesh, since apparel contributes 84% of the country’s export, employing close to 3.5 million people. While gauging the possible impact of the pandemic on the apparel sector, it is imperative to look into the demand side scenario by analyzing the European, US and the emerging markets for apparel export. It crisis has put sustainability into the spotlight. It has exposed vulnerabilities across government and industry, and put the value of sustainability into sharper focus than ever before.  Here are some of the specific impacts we’re seeing, and how things will need to change in the future as we face what we call “the next normal.”

Global brands impacts in Supply Chain

Major global fashion brands have taken prompt responses to help in flattening the Corona virus curve and this has left significant impacts on worker employment, revenues and overall operations.

Nike has released a statement which outlines their halt in operations and closure of stores in the United States, Canada, Western Europe, Australia and, New Zealand to limit the spread of the Corona virus. However, Nike-owned stores in South Korea, Japan, most of China and in many other countries remain open as per the current stage of the outbreak. [2]

UNIQLO had initially shut-down nearly 350 stores in China in late February. In the current stage of the pandemic, about 30 still remain closed, while most of its shops outside Hubei province, the epicenter of the corona virus outbreak, have reopened. Globally, Uniqlo outlet closures have exceeded 100, with 27 in Europe. All 50 outlets in the United States have closed, following in the footsteps of other major fashion brands. [3]

FIGURE: UBS’s index of which European retailers are most at risk from Covid-19 / Source : UBS

 

The above figure, generated by UBS, is based on the company’s share of sales from China, the total value of products it manufactures in the country, and how quickly inventory turns over. [4]

The highest risk is observed for H&M which sources about 50% of its materials from China. Inditex, and its largest brand Zara, is also at high risk due to its highest rate of inventory turnover despite sourcing only 10% of materials from China. Gymshark which sources about 90% of its materials from China and Taiwan.

Due to large scale closure of stores owing to the lock-down enforced by different governments, apparel sales for Bangladesh have plummeted, leading to brands postponing or cancelling orders. Bangladesh Garments Manufacturers and Exporters’ Association (BGMEA) have claimed that USD 1.5 billion worth of orders have already been cancelled or put on hold by the buyers.

 

Global Cotton and Yarn Supply Chain Dynamics

Global production of Cotton is largely dominated by India, China, the US, Pakistan, and Brazil.

FIGURE: World Cotton Production / Source: FAO/OECD

 

The fall in cotton demand from China has led to demand-supply mismatch. Along with this, decrease in yarn exports for India to China will mean an even greater excess supply of yarn and lower prices in the international market. Raw (unginned) cotton in the Gondal (Gujarat) market shed almost 10 per cent to trade at Rs 4,280 a quintal in the first week of March from a level of Rs 4,755 a month ago. Cotton yarn lost 2-3 per cent over the last one month, while synthetic yarn declined by 4-5 percent during the past one month, following a fall in crude prices. [8]

FIGURE: Partner Country’s Share of Cotton Import by Quantity / Source: Bangladesh Bank

 

Although Bangladesh had been a victim of yarn-dumping from India, with import prices quoted to be up to 30% lower than local production costs by India, before the Corona virus outbreak, domestic prices have since rebounded. Bangladesh Garment Buying House Association (BGHA) has complained that spinners are now charging 15% higher compared to last month due to yarn import disruption from India. Supply chain disruption due to the Chinese lockdown has had negative repercussions across Bangladesh’s textile and Garments value chain, as Chinese imports accounts for a significant portion of the sector’s total import (46% of USD 34 billion as of FY 2018-19).

 

The Possible Responses for Supply Chain

While short term sourcing destinations have not undergone dramatic changes as of yet, employment layoffs as a result of government mandated shutdowns and quarantines are inevitable.

While countries that have incorporated some form of automation in their apparel industries are slightly cushioned from this impact, countries such as Bangladesh will suffer greatly given the large number of people employed in its apparel and textiles sector.

With China’s situation being on the road to recovery, it will require at least the first half of 2020 to bring itself back to pre-outbreak capacity levels.

The question then remains of how long global buyers are willing to wait before looking to other sourcing markets or opting to near-shore supply.

 

COVID-19 Impacts the Supply Chain

There has been a broad-based effort to make supply chains more resilient in recent years, but most organizations did not figure a pandemic into their strategies, so their supply chains are not nearly as resilient as they thought they were. Many organizations have experienced some form of supply chain disruption – either through suppliers going offline, a sudden spike in demand or, as has been seen with medical personal protective equipment (PPE), both. 

The most important one is the need for more transparency throughout the global supply chain. To achieve true resilience, enterprises will need to gain visibility into their entire supply chains, beyond the tier 1 suppliers. Most supply chains extend to tiers 2, 3, 4 and often beyond – it is critical for enterprises to understand who these suppliers are, where they are located, where they source from, their risk exposure, and so on.

What lessons can be learned from this crisis? Make or buy or source but where we source, inbound or outbound. For example, a company in Bangladesh might decide it is too heavily dependent on China suppliers, so it diversifies by adding suppliers in India. But if those Indian suppliers source components from tier 3 and 4 suppliers located in the same China industrial cluster as the current suppliers, then the diversification will not deliver the anticipated resilience. If the company had supply chain transparency, it would be able to identify this vulnerability and require that any tier 1 and 2 suppliers in Indian either avoid sourcing components from the same cluster, or have a strategy to carry enough inventory to weather multi-month disruptions.

 

Supply Chains Re-Examined

In the next normal, organizations will need to reassess their supply chain risks and may need to redefine their supplier relationships. In the past, cost has been the primary criterion for choosing suppliers. In the next normal, there will need to be a more sophisticated cost/risk analysis that factors in transparency. This will be a requirement for achieving true supply chain resilience, which may include paying more for local suppliers.

Cost differentials between some geographies have been narrowing over the last decade, so the potential increased short-term costs of taking a risk-based approach is significantly less than it has been in the past. And, as we have learned, taking this type of risk-based approach will deliver enormous benefits during future disruptive events. So, organizations need to determine the supply chain design that will deliver the most resiliency in the event of another large-scale disruption.

 

                               COVID-19 HOME TEST

COVID-19 Shines a Light on Operational Sustainability

The significant impacts on worker employment, revenues and overall operational sustainability. While many organizations may need an overhaul and a re-start for the next normal, it will be interesting to see where investment flows following the pandemic. Will companies and industries that were identified as not sustainable before this crisis receive the same investor interest? Or will investors choose to back companies and industries which are more aligned with a sustainable future, and that generally showed greater resilience during the pandemic? COVID-19 has a way of accelerating trends because it exposes and inflames existing vulnerabilities. This could cause shifts in investment that accelerate the declines of industries and companies that were already waning before the corona virus.

The post-COVID world presents an opportunity to re-invest in a new way. Rather than investing solely to restart the “old normal,” it likely makes more sense to invest in the next normal. Crises always bring with them a degree of opportunity, and as the global economy starts to come back to life, there is a major opportunity for investment in more sustainable companies and industries that will be far more resilient against future global disruptions.

Some investors are looking closely at this situation. One obvious example is the fossil fuel industry.  We are now seeing plummeting demand and prices as a result of the pandemic, which place dozens of businesses in serious difficulty. Just before or during the crisis, some industry leaders, such as BP, Shell or Total, have made commitments to be net-zero carbon by 2050. Investors have to ask themselves: Is this really going to happen? And if so, do these companies merit greater investor interest than others, because they are committed to a more sustainable future? Or, will investors turn their attention to other pure-play companies working on alternate forms of energy, which will accelerate the transition from fossil fuels to more sustainable energy sources?

 

Will COVID-19 Impact Climate Change Initiatives?

The response to COVID-19 has also exposed vulnerabilities in how the world functions in the context of a global threat. We have seen that there is little political alignment between different countries and regions, and there is little alignment between government and corporate sectors, so there has not been a coordinated worldwide effort across containment, testing, prevention and treatment.

This “every country for themselves” approach has been insufficient in the face of COVID-19. And it shows how ill prepared the world is to face another global challenge that is even more profound than the pandemic: climate change. There needs to be a coordinated response to this challenge from world leaders, which is not happening. Instead, we see countries - and organizations and industries within countries - pursuing their own interests, rather than those of the world.

Will the pandemic inspire greater levels of global cooperation against global problems? Will COVID-19 provide a lesson in how it is in each country’s best interest to operate in a way that promotes the world’s best interests?

It often requires a great deal of pain to cause fundamental societal change. COVID-19 is providing that pain right now, and it will cause a fundamental shift in investment and activity toward sustainability. The question is: how far will these changes go? It is almost a certainty that there will be a massive reassessment and realignment of supply chains. It is also likely that investors will factor sustainability much more strongly in their evaluation of opportunities. The ultimate litmus test will be climate change – if COVID-19 can break the “every country for itself” mentality, then it could become the most meaningful step forward toward addressing this global issue. These are all important trends to watch in the next normal.

Conclusion

Bangladesh’s over dependence on apparel export might prove to be its Achilles heel. Large scale order cancellation and deferment is causing a liquidity crisis across the sector, prompting the BGMEA President to appeal for support, both from international buyers and the government. The government has responded by announcing a stimulus plan of BDT 5,000 crore, explicitly geared towards the export led sectors. The primary goal of the stimulus package is to protect jobs, facilitate regular salary payment and ensure survival of the financially weak apparel factories. Details of the plan are still being worked out and timely deployment of the fund would be imperative to stabilize the sector.

The current lock-down would come to an end on 4th April and the government’s next directive on further extension of the closure will be dependent on the extent of contagion of Covid-19. By looking at the trajectory of the infected numbers in comparable countries, it’s likely that the number of infected patients in Bangladesh might increase sharply over the coming weeks. This would likely disrupt the production process further in apparel factories. Alongside, continued spread of Covid-19 in EU and US, the new epicenters of the disease, would further dampen demand for apparel and lead to another round of order cancellations.