Tuesday, January 28, 2020

Two years ago this morning I answered a client’s questions about supply chain implications related to a novel coronavirus that had been identified in China. Here are some excerpts.


The current epidemic in China is disrupting manufacture of products consumed in the United States.  [Client] has expressed specific concern regarding healthcare products.  There will be a substantial slowdown in Chinese manufacturing and related activity through at least February 8.  An extended period of disrupted commercial activity is possible.  While spot shortages of individual products are possible, overall US healthcare inventories should be sufficient for normal seasonal demand through late February.  If Chinese manufacturing and/or transportation sectors experience extended disruption, the United States is most likely to experience systemic shortfalls in the supply of medical consumables, followed by selected medical devices, nutritional supplements, and generic drugs.  If the novel coronavirus becomes epidemic in the United States significant disruption of demand and supply networks – including but well beyond healthcare – is likely.

According to the World Health Organization, as of January 27 there were 2798 confirmed cases worldwide.  According to DXY, a respected online physician forum in China, there have been 106 deaths associated with the disease.  Measures intended to contain the disease have suppressed manufacturing, transportation, and other commercial activities in most of China.  The target of 2019-nCoV can be characterized as all potential hosts, including all humans. The force of this coronavirus is not yet clear.  To date, impacts on demand and supply networks have been entirely the result of measures taken to control the virus, not a direct result of the virus or even the secondary effect of 2019-nCoV on the population. Official quarantine operations – combined with nervous buying and consumer hoarding – have effectively collapsed ordinary “last-mile” supply chains across much of the central Yangtze River Valley serving more than 55 million people.  There is also evidence, however, that long distance transshipment through the most impacted area is continuing by road, rail, and river.

More than sixty percent of confirmed cases continue to be located in Hubei province (especially Wuhan City) in Central China.  As of January 27, the CDC is reporting five confirmed cases and seventy-three pending cases in the United States.

It is too early to draw firm conclusions, but to date confirmed fatalities have been concentrated in individuals with significant preexisting vulnerabilities. Actual population effects will depend on the virulence of 2019-nCoV, something that is not yet fully understood.  In terms of effect on demand and supply networks, the population’s perception of virulence can be even more consequential than scientifically demonstrated effects.

US healthcare sources report that the United States is dependent on Chinese manufacture of “medical consumables” (all FDA Class I products and some Class II products). Using 2016 data, the Boston Consulting Group found that, “China dominates low-cost medtech manufacturing” with up to 78 percent of world capacity at the low-end. This includes products such as sanitary gloves, disposable syringes, surgical masks, gauze, serum collection tubes, etc. China has a strong export presence in FDA Class II medical devices, such as infusion pumps, pregnancy test kits, and catheters. The Chinese biochemical industry is a significant source of the Active Pharmaceutical Ingredients (APIs) needed to manufacture a wide range of pharmaceutical products. China is also a major source of generic drugs for the global market.

It is worth highlighting that there are structural and seasonal factors involved in the current status of US inventories for many healthcare products sourced in China.  Because Chinese products are concentrated at the lower end of value-chains they mostly utilize less expensive container shipping.  As a result, both manufacturing and transportation realities impose long lead-times on these supply chains. Further, there is a recurring annual slow-down of economic activity in China associated with the Lunar New Year.  Every year US distributors schedule procurements to reflect supply constraints associated with this holiday.  In 2020 this constraint was already anticipated for the period, roughly, from January 21 to February 1.  As noted above, this manufacturing “holiday” has essentially been extended through the first week in February.

If the novel coronavirus becomes epidemic in the United States and if mortality and morbidity rates for this virus continue to be modest, then the principal risk to demand and supply networks is likely to be unsustainable surges in demand reflecting consumer uncertainty regarding the resilience or integrity of local supply chains. This has already been observed in last weekend’s surge in demand for facemasks in New York City.  Similar behavior has been observed in central China impacting the retail food supply chain.  Nervous buying or hoarding tends to break-out in rather specific geographic – and population – clusters.  If the underlying uncertainty can be quickly and effectively countered in the initial outbreak, this can amplify wider confidence in supply chains and serve to discourage further demand surges.  But once any extended demand surge exceeds cycle-time of distribution capacity, retail shortages are inevitable, and retail shortages serve to inflame increased nervous buying and hoarding.


Two years later:

The client was asking me for more after I had sent them an (unsolicited) January 24 note that included, “Hoarding has started in China.  Hoarding will crash supply chains worse than most cyclones or seismic events.” In many ways consumer behavior (demand management) has remained my “white whale for the duration of the pandemic; including earlier this month as I wondered what a combination of omicron-related absenteeism and nervous buying could do to US food flows. This month consumers were much more restrained than in March 2020.

My rhetoric is restrained. I was not explicit regarding the potential outcomes of the potential shortages in those product categories so quickly listed. Subsequent client notes assumed a more urgent tone. Within a few weeks billions of dollars were being spent to expedite flows of medical consumables and much more.

I’m not ready — and this blog is not the place — for a detailed after-action. We are not yet post-pandemic. Covid deaths continue to surge. But in the context of the early note above, network fundamentals have been clear enough. Demand leads, supply follows. Flows reflect distance and discontinuities between demand and supply. Emergent implications for flow are usually, at least strategically, clear enough.

Except that — nothing is clear to most of those who don’t work the flows day-in and day-out. Inaccurate assumptions have persisted. Decisions have been undertaken or neglected that had profound impacts on flows — typically with little or no thought given to flows. Decisionmakers (corporate, political, and otherwise) have been surprised again and again by excess demand or reduced capacity or increased congestion, all of which were predictable outcomes of their decisions. In May 2020 a colleague clearly called out diminished US freight capacity as an emerging (accelerating) cause of concern. Very little attention was given to this systemic constraint until well into 2021. The constraint was observable. The constraint was articulated. Mitigation was possible, especially with early action. Most mitigation measures were not undertaken.

There is an epistemological problem involved. We are much better knowing how-to-describe than knowing how-to-do something about what is described. In some ways, certain kinds of knowing actually seem to suppress — or at least complicate — doing. This disconnect is becoming a new White Whale for me.