June 26, 2020

COVID-19 Supply Chain Disruptions: Where Do Manufacturers Go From Here?

By Jonathan Shoop, Office Managing Partner, Downtown Cleveland

Industrial Products

Building off a strong first half of the year, many U.S. manufacturers have not yet felt the full effect of supply chain disruptions to their businesses related to the COVID-19 pandemic. As we referenced in our June State of the National Manufacturing Industry, their attention largely has been focused on conducting business with workforce reductions, to contain the spread of the virus. Any delays in orders due to employee layoffs or furloughs have a ripple effect in the industry.

Extended layoffs are also leading to capital/liquidity challenges for manufacturers that had limited to no revenue for a number of weeks or months. Those who qualified for Paycheck Protection Program (PPP) loans kept employees on to meet loan forgiveness requirements. While PPP loans expire on June 30, 2020, the PPP Flexibility Act extends the time business owners have to use the loans, from eight to 24 weeks. This has the effect of forcing employers to maintain their workforce through December 31 if they want to retain full loan forgiveness eligibility. It remains to be seen whether another round of funding will be approved.

China’s Effect on the Supply Chain

Long delays experienced by some manufacturing sectors are causing owners to think long-term about their sourcing options. Shipping capacity issues due to COVID-19-related bottlenecks in Europe and Asia, including delays at ports of entry, require manufacturers to reconsider their supply chains. According to a March 2020 study by the Institute for Supply Management, almost three-quarters of the 628 businesses surveyed reported supply chain disruptions as a result of the pandemic. More than half reported longer lead times with China-based suppliers.

The ongoing pandemic and uncertainty about if or when a vaccine will become available requires that manufacturers take proactive steps now rather than a wait-and-see approach. First, some of their suppliers had to slow down production as the virus gained steam in April, and some permanently closed. The shutdowns require manufacturers to find other suppliers to close gaps in their supply chains, and many will look to U.S. companies to fill the void.

The pandemic has made U.S. companies take sharper notice of the inherent danger of relying on China for a range of manufactured goods, including medication, computers, and electronics. For example, Industry Week reports that 80% of active pharmaceutical ingredients come from either China or India. If China were suddenly to cut off the availability of exports, whether due to the pandemic or trade wars, the U.S. medical system would come to a standstill. After a long policy of outsourcing plants and products to China, U.S. manufacturers are taking a more serious look at reshoring, which brings production back to the country where customers and manufacturing facilities are located.

Need for Resilient Supply Chains

When China resumed full-scale operations after the country emerged from COVID-19, U.S. manufacturers breathed a collective sigh of relief and lowered predictions for long-term supply disruption. Now, parts of China (and the U.S.) have had to go back to earlier phases of reopening due to recent spikes in COVID-19 cases. U.S. manufacturers largely unaffected to date must plan for a second wave of shutdowns if there is a reemergence of COVID-19 later this year.

The pandemic drives home the need to prepare for crises. The threat of a recession didn’t do it for everyone. Nor did higher U.S. tariffs on some trading partners and the threats of tariffs on others, or other geopolitical events. The pandemic might be the thing that does it.

Having a healthy, diversified supply chain base is the No. 1 priority for manufacturers, even if it comes at a higher cost. Lowest cost and minimal inventory may no longer be the leading factors in determining suppliers. Some manufacturing leaders are looking to Canada, Mexico, and Southeast Asia as alternatives to diversify their supply chains and decrease their risk.

At a minimum, manufacturers should consider how to diversify their supply base and develop relationships with backup suppliers. Having strong business continuity and contingency plans is critical in forging a path ahead. Flexible supply chains will be one of every manufacturer’s strongest assets.

Marcum’s Manufacturing, Retail & Distribution advisors will continue to update you on the state of the nation’s manufacturing industry. Contact your Marcum professional for assistance.