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Zero-Covid’ Prompts Supply Chain Scrutiny

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China’s lockdown of Shanghai was supposed to be short-lived. As the country remains steadfast in its Covid-19 zero-tolerance policy, disruption to the global supply chain continues to build.

As of April 25, the prospect of lockdowns in Beijing increased as the nation tracked a Covid-19 outbreak that may have been spreading in the capital for a week. The Chaoyang district was set to launch three rounds of mass testing of those who work and live in the district, some 3.5 million residents.

BSI’s Tony Pelli

“I have been surprised by how committed China remains to zero-Covid,” said Tony Pelli, practice director of security and resilience at business consultancy BSI. At some point the stress on business and commerce may force a shift toward vaccination rather than shutdowns, he said.

In the meantime, experts say, businesses should assess their supplier ecosystem and identify areas of greatest risk. The Shanghai lockdown has impacted all elements of the supply chain: shipping, cargo, manufacturing and supply.

“Even if the airports and seaports remain open, it’s tough to get truck drivers in and out of those hubs,” Pelli explained. “They have to leave their homes, take a test and be quarantined if necessary. As long as that remains in effect, airlines and shipping lines won’t have capacity.”

In fact, export volumes out of Shanghai have fallen significantly, according to cargo marketplace Freightos. Although that has decreased ocean freight prices to the U.S., pent-up demand may drive them up again once the city reopens.  The lockdown has limited inbound flights to Shanghai’s Pudong Airport (PVG), reducing the capacity for cargo on flights. Customs clearance has slowed as well, further delaying the movement of imports and exports.

Lockdowns in Beijing may not have quite as big an impact as lockdowns in the south of the country or in Shanghai, largely because the city does not play as big a role in producing products for export, Pelli explained. “Indeed, it’s one of the few Chinese regions that imports more than it exports. However, a lockdown in Beijing will test the country’s zero-Covid policy as locking down the capital would have substantial symbolic importance.”

The city is served by the port of Tianjin, which is about 150 kilometers to the southeast and unlikely to be locked down at the same time as Beijing itself. If the port does shut down, the chemical, textile, and auto industries will be affected.

A long stretch of problems

Shanghai is only the latest event in a two-year series of global logistics disruptions. “It started with the beginning of Covid, then we had container shortages and now there’s a scarcity of truckers in the U.S.,” Pelli noted. There was also the grounding of cargo ship Ever Given in the Suez Canal. “We are encouraging business to take a holistic approach toward their supply chain rather than react to a single event.”

Covid, supply chain

Shanghai

Supply chain agility has become a focus for many businesses. Better partnerships, more end-to-end visibility and in-depth data sharing are among the measures that increase resilience.

Building long term – and two-way – relationships with suppliers enables businesses to better respond to end-customers, Pelli said. “We also encourage them to build in redundancy where they can, so they can be flexible with transportation or buffer stock. Those aren’t particularly cheap options, but we also encourage companies to add up what disruptions have cost them and run that against [building redundancy.]”

Inventory redundancy is a tough sell in the electronics industry, Pelli acknowledges. Electronics manufacturers have adopted just-in-time (JIT); build-to-order (BTO) and lean inventory practices. Currently, redundancy in semiconductor products is highly unlikely as a global chip shortage is expected to last until 2023.

“If you can work more closely with suppliers and identify their weak points you’ll gain an understanding of what it takes for you to get the first shipment [out of the factory],” Pelli explained. There are indications that the automotive industry has taken this to heart. Automakers, which generally rely on their tier-one suppliers for consumption forecasts, are now forming alliances directly with chip makers. Ford has aligned with GlobalFoundries; GM is working with Qualcomm, STM, STSMC, Renaissance, Onsemi, NXP and Infineon.

But relationships have also been damaged, according to a recent study. A full  90 percent of respondents dropped one or more suppliers between 2020 and 2021 because of poor performance.

“If you can’t restructure your supply chain or hold inventory, and building better relationships with semiconductor manufacturers is tough [right now], mapping out your supply chain dependencies will help you understand your risk,” Pelli said. “You can reach out to your choke points and see if you can build relationships there.”

Managing risk

For the electronics industry there is also long-term geographic risk — a significant amount of chip production comes from Taiwan. And, in addition to the China lockdown, Russia’s invasion of Ukraine is impacting global logistics.

Electronic distributors can ease some of the pressure in the tech industry, Pelli said. The channel resells products from hundreds of suppliers and distributors have visibility into product offerings, prices and availability. They hold inventory for upside and downside orders, although component shortages have limited their upside capability.

“Distributors can help build risk management into the procurement and ordering process,” Pelli  said. “If you have [supplier] information and understand the risk those suppliers might pose, you can make that a factor in your sourcing decisions.”

The supply chain’s negative impact on revenue has gained the attention of upper management. Typically, C-suite executives don’t have visibility into the complexity of their supply chain. But supplier stability has become a big problem. Executives have to understand the specifics of suppliers and become less dependent on ineffectual suppliers, Pelli said.

“The most important thing is to think broadly about risk,” he concluded. “The one you are most likely to face — not one from the past two years. An event such as the Shanghai lockdown provides a view on how suppliers are able to handle risk and the most likely risk that will come up.”

 

 

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