Institute of Supply Management chief executive Tom Derry discusses the challenges facing the supply chain before, during and after the coronavirus pandemic
China will continue to be central to the world and container shipping once the engine of international business is again running on full power, says Institute for Supply Management chief executive Tom Derry.
He tells Container Shipping and Trade most industrial companies have long planned for and taken precautions against emergencies such as fire and flood. "Those are the hidden costs of the supply chain, but they are localised and specific. A countrywide systemic emergency such as the coronavirus is completely new territory for everyone. This is what shippers and carriers are having to deal with and consider now."
With world attention zeroed in on the effects of the pandemic and lockdown, Mr Derry reminds policymakers that shippers were already grappling with other shocks. "The 25% tariffs on goods from China have been a continuing battle for industry and came as a supply shock. This led to businesses buying ahead, before the tariffs came in, and a surge in orders."
Container lines were stretched and rates behaved accordingly. Mixed in with this were the Chinese New Year and the factory closures, which Mr Derry says were known factors. "The supply chain proved how strong it was and there were no weaknesses, with no shortages of goods.
"The virus is a complete unknown and has caused a demand shock - that is what industries will have to deal with. The next two months are going to be the worst for manufacturers," warns Mr Derry.
"The rescue/stimulus package from Congress will help lessen the problem but it will not solve it."
In the institute’s March survey, supply chain disruptions had affected almost 75% of companies, 62% of companies were finding delays in ordering goods from China and disruptions were hitting 80% of companies. Later indications are that 15% are forecasting a profit drop of 5-15% this year.
On average, suppliers have been operating at 50% capacity; 48% of companies encountered delays in moving goods within China and more than half reported worse lead times since 2019.
Surprisingly, almost 45% of companies that responded to the survey have not drawn up a plan to tackle supply chain disruption from China.
"Companies that shift production to other countries, or find alternative suppliers outside China, are better positioned to withstand the impact of a supply disruption," says the institute. "Supply chain disruption is becoming the norm."
Mr Derry says the trend for some manufacturing to shift from China will continue. "The US has become more competitive because of the higher tariffs and freight surcharges levied on goods coming from China. Products are being sent to the US for final assembly.
"Shippers have really had to work hard and push to get their goods on vessels from China. We have noticed some US buyers have been asking carriers to substantiate their charges and wanting details. Sometimes they say ’No, I don’t think I am going to pay that.’
And some Chinese businesses are moving to countries such as Vietnam, with Chinese managers in charge."
Taken by surprise
What has also taken the United States by surprise is the scale of the onslaught the virus has wrought in China. "A fluid labour force of 400-500M takes off in the New Year there. That is more than the entire population of this country. And then the lockdown came in and they could not get back to the factories. People here were unable to fully comprehend that," Mr Derry points out.
And the fact the virus broke out in a city like Wuhan did not come as a surprise to businesses and analysts knowledgeable about the country. To most Americans it is unknown, but, says Mr Derry, "It’s a city of 11-12M people and is particularly important in the automotive industry, with companies such as Volvo and Honda having plants there. Products are shipped by barge to Shanghai.
"I was there in November and I fully understand just how important it is in manufacturing and the supply chain. This crisis shows the importance for shippers to continually check on their networks, from point of origin through transport to the final destination."
China will continue to be central to the world, notes Mr Derry, and any shifts away from the country are marginal in the overall context. "Remember that two-thirds of multi-national manufacturing is outside the US."
Apart from economics and cost revenue worries for container lines, the biggest concern is cutting pollution and emissions. Some observers have suggested that lines might ease up in lowering pollution levels, but businesses in the supply chain are not going to waver.
"That ship has sailed, to coin a phrase," says Mr Derry. "The drive to get greener is well on the way and the industry is moving towards that."
Based in Tempe, Arizona, the Institute for Supply Management provides education, training, information and research to more than 50,000 members in 90 countries. It is the largest not-for-profit professional supply management organisation worldwide.
Snapshot CV: Tom Derry (Institute of Supply Management)
Tom Derry has more than 30 years’ experience in leadership and general management roles for public and private companies, and in the not-for profit sector. Mr Derry has represented ISM at the White House Council of Economic Advisers, the National Security Council, the Federal Reserve System Board of Governors, and the US Small Business Administration.
He was previously chief operating officer of the Association for Financial Professionals and general manager of the business intelligence unit of LexisNexis. Mr Derry is a 1986 graduate of Georgetown University’s Walsh School of Foreign Service.