Coronavirus adds uncertainty and cost to tech company supply chains

Just-in-time manufacturing and low inventory levels mean even a short disruption can cause business interruptions.

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Jet City Device Repair in Chicago and Seattle fixes more than 22,000 laptops, iPads, iPhones, and other devices every year. Founder and general manager Matt McCormick said his company knows how to work around China's annual new year celebration when factories shut down. 

"It means about two weeks where we can't order any parts from China," he said.

COVID-19 has made those coping strategies even more important.

"However, the timing of this year's coronavirus meant that two-week shutdown has turned into five weeks and there is still a lot of uncertainty."

Jet City Device Repair has started ordering from domestic suppliers but these parts are often more expensive and lower quality than replacement screens and other parts from China, according to McCormick. He said the overall result is lower margins on the repairs and higher labor cost per repair combined with fewer completed orders overall.

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COVID-19 is causing disruptions for business owners like McCormick as well as manufacturers and business customers. Here is what economists and supply chain analysts had to say about how the outbreak will affect tech manufacturers and customers as well as advice on how to adjust to the disruption.

Interruptions at many points in the supply chain due to COVID-19

Eytan Buchman, the chief marketing officer at Freightos in Miami, said that COVID-19's impact on supply chains has been brutal and expects ripple effects to continue for months. He said China-US ocean freight rates are currently 13% behind last year, indicating low demand at a time when demand is typically high.

"This will likely slowly improve, as we put both China manufacturing and local trucking in China, which was previously a major blocker, at about 80% effectiveness," he said.

Buchman said tech supply chains are particularly vulnerable to air cargo changes and because many airlines have canceled flights around the world, this will create a down-chain gap that will become more apparent as manufacturing speeds up. About half of all cargo travels in the belly of passenger flights.

Rodney Manzo, CEO and founder of Anvyl in New York, said that even traveling from province to province within China can cause a person to be quarantined. 

"Things are slowing down like never before, things are being held at ports and shipments have slowed way down," he said.

The supply chain management company Anvyl has employees in China and said that his entire team has been quarantined twice.

"I expect the worst and plan for the worst, that's how I operate," he said.

The impact of a long supply chain

Patrick Gourley, Ph.D. an assistant professor of economics at the University of New Haven, said that factories in China produce finished goods as well as parts that go to other plants for final assembly. 

"Exactly who is involved in a production process from start to finish might involve four countries and a dozen firms," he said. 

Richard Lebovitz, founder and CEO of LeanDNA, a software company that specializes in factory inventory management said that the recent trend of mass customization has added extra complexity to supply chains.

"What it's done is put a lot of pressure on factories because they have more customized products order by order but less control over manufacturing process overall," he said.

This need for more customized parts means manufacturers are much more tightly integrated to suppliers. "If they don't get that part, the end assembly can't ship," he said.

Lawrence B. Brennan, a professor at Fordham Law School, suggested that companies cancel or modify contracts with suppliers in areas of high rate of infections and write contracts for future deliveries based on anticipated delays and interruptions.

"The just-in-time supply chain does not have the flexibility to assure deliveries with the foreseeable interruptions and delays," he said. 

Cheryl Druehl, an associate professor of operations management at George Mason University, said that consumer technology products have a relatively short life-cycle but are expensive, which means that companies don't keep a lot of inventory on hand. 

"Electronic supply chains are also very long, it can be a couple of years from making the chip to assembling the final product," she said.  

Druehl also said that the supply chain is considered a cost center, so companies often don't make investments to improve efficiency or transparency.

How to work with suppliers during a disruption

Danny Thompson, SVP of market and product strategy at the supplier management firm APEX Analytix, offered this advice about how to maintain relationships with suppliers in countries affected by the coronavirus:

  • Look for ways that your company can help suppliers by making early payments on open invoices, suggesting alternate supply routes or donating to local relief efforts
  • Discuss short-term options with suppliers, including pausing current production
  • Ask for transparency if a supplier says they can continue operating to gauge how realistic this option is

Matt Delaney, a patent lawyer at Frost Brown Todd, said that companies should do extra quality checks as suppliers start to resume production. 
"There may be incentive to cut corners to get parts out the door as quickly as possible to meet pent-up demand," he said.

Planning for future disruptions

Supply chain managers have to adjust to disruptions all the time, whether it's a public health problem, an earthquake, or even a fire in a factory. 

Dave Brunswick, vice president of solutions at Cleo, said that companies need a comprehensive view of the supply chain to react quickly when problems occur.

"If a company's integration technology can identify an upset in the flow of information or goods, then the business knows exactly where the cause of the issue is located and can develop a plan to alleviate the issue in real time," he said. "In the case of coronavirus, if a company's supplier is suddenly ordered to shut down operations, their buyers can identify new suppliers and integrate them into their supply chains quickly and efficiently." 

Thompson, from APEX Analytix, also suggested working with suppliers to create a game plan to overcome the next disruption. 

"Conducting risk assessments and continuous monitoring for risks associated with your
suppliers are key first steps," he said. "Then determine which alternative vendors
can fill in as a replacement."

Shannon Graf, research and strategy practice lead at Dialexa, said working in the technology industry during times of global crisis always sheds light on opportunities for improvement. 

"If and when this occurs again, organizations who learn from the chaos today brings will likely be set up for better success," she said.

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