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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.

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