21 February 2020

Chinese and multinational companies are beginning to see their supply chains threatened due to the continued expansion of the coronavirus in China. 

This threat is due to the Chinese government's decision to quarantine millions of people to control the spread of the virus, thereby restricting the movement of people and thus industrial activity, affecting the supply chain of companies that import merchandise. In addition, governments around the world have also begun to take measures that limit the movement of goods and people between their borders and Chinese borders.

As China is the factory of the world, it seems inevitable to imagine a scenario where the supply chain is not affected or even disrupted. In fact, Nissan has already announced that it will stop production at a plant in Japan because of the coronavirus and multinationals such as Apple, Samsung, Huawei or Nintendo have already expressed concern about the possible disturbances that may occur in their supply chains because of the productive stopovers that the Chinese government imposed as a precautionary measure to mitigate risks during the health crisis.

It is too early to assess the future consequences, but it is not far-fetched to think that the current disruption in supply chains could overtake the consequences of the 2011 tsunami in Japan in economic terms, where companies such as Apple, GM, Honda, Sony or Toyota suffered million-dollar losses in sales due to shortages and internal capacity losses following the natural disaster.

The outlook for some Spanish industrial companies is not very different from other multinational companies. It should be noted that about 9% of the imports made by Spain arrive from China (26,908 million in 2018), according to data from ICEX. And while it is premature to size the possible impact on these companies, what does seem obvious is that they will not only be affected, but will have to vary, even temporarily, the footprint of their supply chain.

Among the sectors that could be most affected in the Spanish industry are the automotive sector, the textile sector, the petrochemical sector and even the toy sector. In this context, some examples of possible Spanish companies on which we are confident that supply chain managers will be working tirelessly to reduce the risks of oversupply in their supply chains Supply have been identified.

  • Automotive sector: Gestamp (11 production centers and 2 R&D), Antolin Group (18 production centers) and CIE Automotive (11 production centers).
  • Textile sector: Inditex (1,866 factories producing for them) and Mango (327 factories producing for them).
  • Petrochemical sector: Repsol (two chemical plants) and Cepsa (a chemical plant).
  • Toy sector: Falomir Juegos and Famosa have outsourced their production.

But, once the industry is aware of the risk of disruption in supply chains, what steps should be taken to mitigate the potential consequences of such disruption?

It is critical to understand the behavior of disruptive models applied to the supply chain and to establish the time point at which such disruption is located.

In the current status, companies must focus, certainly with contingency measures, on giving a first response and anticipating possible failures in their supply chains. For example, by examining the capacity of other existing suppliers located in other geographical areas, changing the production mix, re-planning deliveries to customers...

At the same time, companies should begin to estimate the initial impact of disruption to the supply chain, in order to model future actions, control the situation and avoid major damage. Once the initial impact has been assessed and the impact of the disruptive situation understood, the supply chain manager must prepare the organization for recovery. This may involve finding and approving new suppliers, finding alternative modes of transport, determining which references are available, and selling products built from those references.

Once the previous stages have passed, the organization should design a recovery period to return to normal operating levels and compensate for the shortage produced during the disruption, as far as possible. Many companies compensate for production loss using overtime and resources from suppliers and customers.

In any case, it should be borne in mind that supply chains often have the ability to return to their original state after a disruption.