= & SCRIBD Search Q The Atlantic The Modern Supply Chain Is Snapping The coronavirus exposes the fragility of an economy built on outsourcing and just-in-time inventory. BY LIZZIE O'LEARY . MAR 19, 2020 . 4 MINUTES Save for Later Source: Umit Bektas / Reuters When President Donald Trump invoked the Defense Production Act yesterday, it was telling in two respects. First, it showed that the full force of the federal government will be brought to bear in the manufacturing of vital=\" 53 SCRIBD Huh 'H. ' I Search C" .2\"! n __ For Doug Watkins, that was obvious several weeks ago, when he realised that his hospital didn't have enough surgical gowns. Watkins, who oversees the supply chain at the Medical University of South lEarolina health system, learned in February that one of the Chinese gown manufacturers that supplies his hospital had a contamination issue with its products. [Read: You're likely to get the coronavirus] The problem was unrelated to the novel coronavirus, and in any other time, it would have been a small hiccup on the way to nding replacement gowns. But then, as the virus surged, so did demand for gowns, both in and out of China, leaving Watkins and his colleagues scrambling. "This is probably as bad as I've seen it,\" he said in a phone interview. We've built a global supply chain that runs on outsourcing and thin margins, and the coronavirus has exposed just how delicate it is. \"I guess we've done a good enough job within the health-care supply chain of getting pricing down to the point that the vendors don't have a lot of extra margin or slack to play with," Watkins said. So when demand spikes, everyone feels it. In general, hospital supply chains work like this: A hospital {or nursing home or health agency} enters a group purchasing organisation, or GPD, with several other providers. They pool together to order what they need, in bulk. When the system works, everyone saves money. But GPs aren't nimble; when there are problems, they're felt across the system. And individual hospitals can't immediately get what they need. =\" sceleo {Search (1:) [:1 Q to ramp up production of personal protective equipment for health-care workers. There is a strategic reserve of health-care supplies, which the White House has discussed tapping. And now it's invoking the Defense Production Act. But across other industries, the supply chain doesn't have a similar cushion. And the strain is obvious. The Institute for Supply Management, which conducts monthly economic surveys, found that nearly T5 percent of the companies it contacted in late February and early March reported some kind of supply-chain disruption due to the coronavirus. And 44 percent of the companies didn't have a plan to deal with this kind of disruption. \"That is a little surprising in this day and age," IBM's CED, Tom Derry, said in an interview. \"However,\" he added, \"you have to realize that there's almost no industry sectorand when I say that, I mean manufacturing and nonmanufacturing that isn't reliant on China in the United States.\" [Anna Applahcum: The coronevims celled America's biu Chinese materials and manufacturing are so pervasive that the average customer has no idea how many of their everyday products contain Chinese components, or how reliant on Chinese components most companies have become. \"Ifyou don't have a rst-tier supplier who's sourcing from Ch' " Derry said, \"then your supplier's supplier is." = & SCRIBD Search China joined the World Trade Organization in 2001, and surpassed the U.S. as an industrial powerhouse in 2010. During the SARS epidemic of 2002 and 2003, China represented 4.31 percent of worldwide GDP, wrote the MIT professor David Simchi-Levi, who studies supply chains. Now that's 16 percent. Western companies find it cheaper to manufacture goods in China, and elsewhere in Asia, than to do so closer to home. Car parts, technology, fashion, medical gear, and drug components are particularly vulnerable to disruptions in Asian markets. Derry noted that in 2012, after the Japanese tsunami, "you couldn't buy a red Toyota for months, because the one factory that made red pigment for Toyota was offline." Apple, Fiat Chrysler, and Hyundai have already warned investors of potential supply constraints due to the coronavirus pandemic. In addition to offshoring, Simchi-Levi told me, companies have emphasized "just in time" delivery, keeping only 15 to 30 days of products on hand. That has made global companies more profitable but has also "significantly increase[d] supply-chain risk." He predicted that the worst of the supply-chain disruptions would begin now, in mid-March. Fewer Chinese ships are on the water, and major ports around the world, such as Rotterdam and Le Havre, are already feeling the effects. Those 15 to 30 days of inventory (even if a company stocked up prior to the Chinese Lunar New Year holiday) are likely running low now. "We are=\" 53 SCRIBD {Search (1:) [I] Q As the CDVIDhl pandemic ripples throughout the world economy, it's possible that it may begin to change the way global supply chains work. Simchi-Levi said companies will come under pressure to diversify where they make their products, which will prove easier for some than for others. While the blood thinner heparin may still he made in lilbina, it's not as difcult to move the infrastructure for, say, the kind of fashion sold at HM and Eara to other Asian countries. ".ifou can still emphasize low labor costs by moving into 1iiietoram, Malaysia, and Cambodia,\" he said. More electronic and car-part production could shift to factories in Mexico and Brazil. Due thing not to worry about is the grocery supply chain. 1Whe some consumer products, such as toothpaste or shampoo, could be limited because of components sourced from li'ihina, that's not the case for food. Derry noted that the grocery supply chain is remarkably robust. Stores that run out of ingredients one day will be full a day or two later. As for nonperishable goods, such as toilet paper and cleaning supplies, now is a time to be prudent. If you're buying up all your local store's inventory, he said, "i would argue that you're doing your fellow citizens a disservice. Do we really need to have a gallon of Lysol at home? Probably not." For everyone to do their part, he said, it requires thinking like you work in the supply-chain industry: \"it only exacerbates the problem if we allas we call itbring forward demand.\" = & SCRIBD Search Q Supply Chain China World Politics Economies Business f yin M Related Articles TIME TIME . 2 min read . World If China Wants To Lead, It Must Hold Businesses Accountable For Emissions CHINA IS THE WORLD'S most populous country and the largest emitter of carbon. If it can meet its vast potential for emission... The European Business Review . 9 min read Why the Fourth Industrial Revolution Requires More Supply Chain CEOs CEOs need to transform businesses - an imperative which is increasingly relevant in the Fourth Industrial Revolution... 5. The European Business Review . 2 min read STAY SAFE, Stay Resilient The rapid outbreak of the coronavirus presents an unprecedented crisis that the world is grappling with. It is causing tragedy to hundreds of thousands of people and family. It is also creating severe disruptions to businesses and the global economy. More from The Atlantic The Atlantic . 6 min read