Coronavirus Crushes Global Supply Chain
The supply chain has been deeply affected by the Coronavirus.
Every industry has been influenced and the Coronavirus devastation has been felt globally. The time horizon of the supply chain being impacted is relatively long. We will demonstrate the impact on the supply chain in a few cases.
Supply chain management can be divided into three fields: logistics, procurement and operations.
First, the fact that WTI crude price traded to a negative value results from the issue in the oil supply chain. The logistics and operations of the crude supply chain have been extremely affected by the Coronavirus.
In regards to operations, due to the fact that the Coronavirus which quarantines people decreases the human activity and the use of vehicles, the demand for crude oil has fallen off a cliff.
Even Russia and OPEC agreed on cutting their oil production while President Trump restocked the US Strategic Petroleum Reserve, however the supply of crude oil is still far surpassing demand.
The fact that not maximizing the capacity will drive up the production cost is very bad news for the oil industry.
The most important factor that impacts the oil supply chain is the logistics, specifically warehousing. The carrying cost and production cost of the crude oil surpassed the utility of the crude oil.
If investors would like to take a long position on crude oil futures maturing at the end May, one has to have a warehouse to store the physical upcoming crude oil. The transportation and inventory cost of the crude oil is considerable. Thus, the price of crude oil futures went negative.
Not only the crude oil industry but also the fashion industry has suffered greatly from the outbreak of Coronavirus.
We reported in an earlier piece about the deep connection between the global fashion industry and Wuhan, China in Northern Italy & Wuhan: Partners for Better or Worse.
A lot of recognizable retail brand production is experiencing an existential crisis.
Sales revenue in the fashion industry plummeted by 30% in March, because people are currently unable to travel aboard and foot traffic to brick and mortar stores has plummeted with the stay at home orders.
Most fashion companies outsourced their manufacturing globally. Transportation crossing the borders will be costly due to the fact that President Trump continues to resist calls from hundreds of companies to drop tariffs he has placed on foreign goods.
During this global pandemic, some countries have some special restrictions or export policies on the export of goods, which deteriorates the supply chain of the fashion industry.
Numerous retail stores have closed including Pier 1 Imports and Gamestop.
The whole industry will have some discounted sales as time goes by. Adidas for instance, has such a superfluous amount of inventory in its warehouse that even if the pandemic ends immediately the inventory could be used for a year. Overproduction has yielded excess inventory across the retail sector.
Tyson Foods, which is the largest meat company in the USA, warned that the coronavirus endangers the food supply chain, because around 900 workers at one of their main meat processing plants in Indiana tested positive.
In the past week, pork processors saw operations decrease by 25%, while the retail price of beef increased by 20%.
The meat inventory in the USA is around 1 billion pounds vs about 75 million daily pounds of US meat consumption.
Unlike other food industries, workers in meat processing plants have to work closely, so it is difficult for workers to maintain social distancing. Once a worker in the meat processing plant tests positive, the meat processing plant may close.
If the operations of a tier one company like Tyson Foods has some trouble, then the whole supply chain may break down.
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Written by Kailun Chen & Edited by Alexander Fleiss