How Europe is Coping with Supply Chain Disruption
Adapting to the present and future challenges of COVID-19
Can the complex global supply network survive the COVID-19 pandemic? And, assuming it can, how will it adapt to the new realities?
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Just-in-time delivery of finished goods and components has been put under tremendous strain. In the retail sector, supermarkets in many countries have seen their highest weekly sales ever, as consumers stock up on goods that they fear may be in short supply. Yet with the autobahns, motorways and highways largely free of traffic apart from freight, goods are generally getting through and we are yet to see long-term shortages of food and other essential items. Many countries have closed shops for non-essential and discretionary purchases, and even where they are open, consumers may be cautious about venturing to the high street, preferring to shop online. This in turn could put logistics under pressure at companies like Amazon. On top of this, a growing number of truck and van drivers are off work, often with symptoms of the virus, while many warehouse workers are unhappy about the risks posed.
— JAGGAER (@JaggaerPro) April 9, 2020
That said, the flexibility of the logistics industry has been one of the positives during the COVID-19 crisis. Elizabeth de Jong of the UK Freight Trade Association told the BBC that the demand has been 50 to 100 per cent above usual, and road hauliers have adapted to keep up. She predicted that shoppers would see more restricted ranges on supermarket shelves “to allow more throughput from suppliers and manufacturers of food”. There may be everything consumers need, but not everything they want: perhaps four types of tomato or ready meal rather than the usual 14.
They are also calling in support from sectors that are negatively impacted by lockdowns and desperately need the work, such as the events industry and hospitality, according to de Jong.
Harvests under threat
Harvest time is approaching fast in many countries in the northern hemisphere. How will they cope with lockdowns, restrictions on the movement of migrant labour, and many workers suffering symptoms and/or in isolation?
April marks the start of the asparagus harvest in southern Germany, an event that has a quasi-religious significance in some towns and villages. In late May strawberries ripen and there is already a problem for hops, vital to the country’s brewing sector – not for the harvest, but for the job of erecting the trellis-wire to support the bones.
And of course, the problem is acute right across Europe. In Italy, for example, approximately 150,000 agricultural labourers are from abroad, according to the Italian statistical office, Istat. Emilia-Romagna, one of the provinces hardest hit by COVID-19, is especially dependent on migrant labour and accounts for about a third of Italian agricultural and industrial output. It is estimated that overall, European agricultural enterprises will have a labour shortfall of 300,000.
To address the labour shortage, the German Federal Ministry of Food and Agriculture launched the job portal Das Land hilft (“The country helps”), by means of which the unemployed and farmers can get in touch with each other quickly and without bureaucracy. Despite these initiatives, it may be too late to save much of the spring and early summer crop.
Much of the available domestic labour, for example hotel and bar staff on furlough, simply are not used to field work. The Federal Government is therefore relaxing rules to allow asylum seekers and migrants from non-EU countries such as Albania, Bosnia and Herzegovina, Serbia or Montenegro without a work permit to start working in agriculture for short periods.
Despite the flexibility and government initiatives, it is likely that European consumers will experience less variety on their plates this year.
Border controls, travel bans, and reduced air travel mean delays and higher costs
Borissov wrote on Facebook that he will propose at #EUCO telco that the load of EU countries trucks be uploaded to Bulgarian trucks at Uzundjovo, to be able to proceed to Turkey. Bulgaria is not on the list of 67 countries mentioned below. https://t.co/I95oz3lNQP
— Georgi Gotev (@GeorgiGotev) March 26, 2020
At the end of March, long queues of European Union trucks built up on the Turkish border as Turkey imposed a 14-day quarantine to reduce the risk of the spread of Covid-19. Bulgaria was excluded from the restriction and started building the “world’s largest parking lot for trucks” to manage freight transfers to and from Turkey, also a major supplier to the EU not just of agricultural but also manufactured goods.
This is perhaps an extreme example, but it highlights how COVID-19 is causing severe disruptions to supply chains. The broader issue is that border controls and travel bans limit the ability of supply managers to identify and qualify new suppliers.
Countries such as the UK and Ireland, which are highly reliant on air freight, are especially exposed to this kind of supply chain risk. The reduction in air travel means companies must find alternatives, for example increasing warehouse capacity for non-perishable goods and chartering special flights for perishable goods. Airlines such as Virgin and Lufthansa are now starting to run freight-only flights, as freight airlines cannot make up the shortfall.
As China returns to normal export activity, a further challenge on the short to medium-term horizon may be warehousing capacity. Goods will be arriving in ships but many of them will have nowhere to go so long as many retail outlets are shut, . We will see how well the logistics industry copes in a few weeks’ time, but companies such as Maersk remain confident.
The longer-term impacts
“Coronavirus will lead to permanent changes in global supply chains,” Beata Javorcik, Chief Economist at the European Bank for Reconstruction and Development (EBRD
The pandemic first spread through China, and the first major economic hit was taken by companies dependent on Chinese suppliers of components and materials. It may seem like an eternity ago now, but the disruption to component supply from China had a severe impact on many automotive and hi-tech manufacturers. Volkswagen currently plans to resume production on April 19, though that is by no means certain.
For many years large enterprises have taken it for granted that trade barriers are low and the name of the game was to achieve competitive advantage, for example by offshoring production, building not buying, saving on inventory with just-in-time production, and sourcing from low-cost countries. To further reduce costs, many buyers rely on just one supplier for certain categories of spend. Great when you can count on the supply, not so great if the supplier shuts down production for any length of time or there are travel bans.
“Coronavirus will lead to permanent changes in global supply chains.”
The pandemic is likely to change the equation; the emphasis will shift away from cost-cutting to risk mitigation. The world is waking up to the fact that another major disruption could arise at any moment. It makes more sense to source from several suppliers with some spare capacity rather than just the one or two who are most cost-efficient. “Coronavirus will lead to permanent changes in global supply chains,” Beata Javorcik, Chief Economist at the European Bank for Reconstruction and Development (EBRD) told the BBC.
“Companies will have to think not only about efficiency and cost but also about the resilience of their supply chains.” She pointed out that coronavirus is a second shock to global supply chains in recent years, coming on top of the trade disputes between China and the USA. And of course in Europe we still do not know what will be the full impact of Brexit. Such shocks will have a cumulative effect, which demands a rethinking of our approach to value chains. One of the likely outcomes is that companies will choose to have more suppliers in more locations.
Sectors such as apparel, which have shifted production to countries such as Vietnam and Bangladesh, may see reshoring in the long run. Greater automation may mitigate the higher wage costs if production is “reshored” from low-cost countries to Europe, said Javorcik. Others are not so sure: automation will have a limited impact in many sectors; moreover, while China is returning to normal levels of production, much of Europe and the United States will be in lockdown for some time. Reshoring does not bring certainty of supply. The key to pandemic-proofing supply chains is therefore redundancy, not reshoring.
Either way, things will change. According to Koray Köse, Senior Director Analyst, Gartner, “The consequences of a pandemic are hard to predict. However, the risks always exist and are augmented with further globalization and integration of supply chains. It is not a matter of if it will happen but to change the focus to be prepared when it happens. That is a shift of mindset in risk management and business continuity.”
The agility of the economy is a positive
One of the few positives of this crisis has been in seeing how well many of the sectors have been able to adapt. As RiskMethods advised in its report on the impact of coronavirus, smart organizations are already considering how they can build more resilient supply chains before the next crisis hits. Here at JAGGAER we too are supporting our customers with solutions such as JAGGAER Sourcing Optimizer to get on top of the challenges today and in the future.
Here’s another positive. There is not the slightest doubt that in an uncertain world, AI-based solutions that enable organizations to predict and act on fluctuating supply patterns will play an increasingly important role in business, and this in turn will increase the demand for technology-literate professionals in supply management and procurement.