Businesses in China must learn from their experiences of the devastating impact of Covid-19 to ensure their supply chains are more responsive and resilient to future shocks, says Dr Xiande Zhao, professor of operations and supply chain management at the China Europe International Business School (CEIBS). Speaking to SCF Briefing ahead of the business school’s first online Supply Chain Finance China conference next month, Zhao explains that businesses need to redesign their supply chains to ensure they can adapt to a new working environment where social distancing policies are likely to become the norm. They must also be prepared to respond effectively if a similar disaster or a second wave of the virus hits.
The outbreak of the virus in Wuhan at the start of the year, its rampant spread through China and subsequently the world, has caused immense human suffering, and – as a result of the strict government-imposed lockdown – a severe economic downturn. The Chinese economy shrank 6.8 percent in the first three months of this year, according to official statistics. Businesses and their supply chains were hit hard by lockdown restrictions and the closure of factories, as well as the refusal of international airlines to fly in and out of China. Suddenly companies could not access their required supplies from outside of their borders. This situation worsened when the rest of the world started to enter lockdown and overseas factories also ground to a halt.
Different sectors faced their own challenges, Zhao says, explaining how restaurants and other food outlets were left holding vast amounts of fresh food they had already bought in preparation for Chinese New Year celebrations at the end of January only to have their physical outlets shut down and their customer footfall drop to zero overnight following lockdown. While the negative economic impact on all businesses cannot be ignored, some have been able to adapt and develop new revenue streams quicker than others, he notes.
In the restaurant sector, some outlets were able to more easily switch their business model to an “online only” structure. Zhao gives the example of a Chinese restaurant chainwhich, after seeing a drop in customers at its physical outlets, managed to launch an internet platform through which people could order home delivery or order the semi-finished products and ingredients to make their own meals at home. “They put a lot of effort into changing their supply chain and picked up a lot of sales,” Zhao says.
The creation of new digital platforms linking producers to consumers has helped businesses weather the crisis. In the restaurant sector, alongside existing online home delivery giants such as Meituan Dianping, there are other digital companies teaming up with third-party vendors to provide online food and meal deliveries. Some of the large online delivery firms are now diversifying into other product lines, with Meituan expanding its offerings to cosmetics, books and smartphones. The digitisation trend is happening in retail and fashion, with the e-commerce giant Alibaba launching a new platform this month that aims to allow luxury fashion brands with excess unsold inventory to sell their goods via one online channel, specifically focusing on younger consumers.
Online platforms such as JD.com have also provided supplies of medical equipment to hospitals, linking producers with the doctors and nurses on the front line. The better the ability of the company to quickly respond to a crisis, the more likely it will weather the economic impact of Covid-19, Zhao says, before outlining three key recommendations he wants businesses to adopt. Being ‘responsive’ is essential, he says. “If normal demand was 1 and then suddenly it is 100, can you turn up your volume to meet that demand,” he says. “What if demand falls to zero: Can you cope?,” he asks.
Businesses must be able to adapt if there is a significant shift in the type of channel through which demand is coming from – for instance when lockdown was imposed and all demand shifted online, he explains. Responsiveness can also relate to the ability of a company to quickly change a product’s design and specifications. “Some companies have changed their production line to produce masks, and automobile producers have changed to produce ventilators. Can you change your product design quickly?”
His second recommendation is the need for greater ‘resilience’ in a supply chain, which he explains could be the ability to quickly find new sources of transportation or new suppliers if the existing ones can no longer deliver. His final piece of advice is to look at a company’s ability to ‘restore’ its supply chains. Covid-19 not only damaged supply chains, but in many cases the virus and the subsequent lockdown resulted in the entire supply chain grinding to a halt.
He poses a question to businesses on how easily they would be able to resume operations from scratch. “We also need to make sure supply chains are more responsive, resilient and be able to restore operations after a complete stop,” he said. “Building on these three capabilities will be very important for long-term success of the company.” To attain these goals, Zhao believeses more businesses need to become digitised. He cites the huge demand the e-commerce platforms such as Alibaba and JD.com have seen during the pandemic as evidence of the need for investment in digitisation.
Improving supplier relations would be beneficial to ensure suppliers are willing to help their larger buyers restart operations in extraordinary situations such as a virus outbreak. He also suggests reconsidering where you locate your factories and warehouses as well as how much stock you keep on your inventory. The most efficient location for operations in “normal” times may not be the best location during a crisis. It may be worth prioritising resilience and flexibility over optimum efficiency, he explains.
The impact of Covid-19 has also affected how supply chains are being financed, with Zhao seeing an increase in demand for supply chain financing as companies need to improve their working capital flow. He also notes a distinct shift among larger companies moving away from self-financing via their own finance arm towards seeking funding from the banking system. “Collaboration with banks works better than their own SCF. Using their own internal capital is getting harder as their working capital is coming under pressure,” he explains. With lockdown affecting overseas suppliers as well, some large Chinese corporates are approaching international banks to provide SCF to their foreign partners, Zhao observes.
Government intervention will be essential to ensure there is enough liquidity to fund pressurised supply chains, with the Chinese authorities already using monetary policy to increase cash supply, lowering interest rates and providing financial aid packages for companies. Many of these topics will be discussed at CEIB’s online event being held on 12 June, which aims to explore innovation in SCF during the Covid-19 crisis. The livestreamed conference will feature two sections – one focused on academic research featuring panel discussions with university professors including Zhao himself and Professor Song Hua from Renmin University, while the other half of the day will focus on industry with speakers from banks, logistics firms and large corporates.
There will be representatives from companies such as Haier and Ascom, while an international panel discussion – conducted in English – is also planned – including speakers from Greensill Capital UK and Santander (Asia Pacific). CEIBS works closely with the SCF Community and both Zhao and chairman of the community Michiel Steeman will share their thoughts on the crisis at the event.