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Coronavirus' effect on supply chains: Potentially worse than 2002 SARS outbreak

While this morning the coronavirus has reportedly killed more than 2,100 and sickened more than 75,700, QSRs and other businesses are waiting and wondering how the illness will affect their health. In this report, global supply chain experts weigh in on the virus's potential effects on business supply chains.

Image courtesy of iStock.

February 20, 2020 by S.A. Whitehead — Food Editor, Net World Media Group

Editor's Note: An earlier version of this article ran on QSRWeb.com, a VendingTimes.com sister website.

Several supply chain and economics experts are voicing some concerns over the effects of the coronavirus on the flow and pricing of a whole array of products, many used by commercial foodservice brands regularly. In fact, one expert said that he feels the impact of the virus on supply chains worldwide is en route to being many times worse than in the 2002 SARS virus, which also initially originally emerged in China. 

In fact, the impact of the outbreak could be felt for as much as two years and cost up to $400 billion for business supply chains, including those of commercial foodservice brands, said Panos Kouvelis, director of the Boeing Center for Supply Chain Innovation at Washington University in St. Louis' Olin Business School. 

From teas, produce and other menu staples, to the metals and plastics in restaurant equipment and wares, foodservice brands are on the receiving end of a lot of products made and grown in China, where the outbreak has had its most substantial effect thus far. In fact, Kouvelis said the world's businesses and their dependence on China for products has changed enormously since the 2002 SARS virus, with many more companies now relying heavily on China for products.

However, in the case of the virus's net effect on business, commercial foodservice brands in the U.S. might have gotten some advance preparations from an seemingly unlikely source. Kouvelis said the turmoil over trade tariffs involving China has allowed businesses stateside to do a little preparatory groundwork since he said since it forced many brands to rethink their sourcing from China. 

"I look at the shocks where they happen. Then I look at how they're going to propagate over time. As you go back in the supply chain, you're going to see an increased effect as a result of the original shock. … The shocks delay how long it takes before returning to a normal state."

-Panos Kouvelis

In a news release about Kouvelis' predictions, he said that due to trade tariff uncertainty, many "companies bought inventory ahead of time, so supply chains right now might have more inventory than they usually have, which is very good."

But long-term the picture may be different as the ultimate effects of the virus's devastation in China and potentially elsewhere. 

"I look at the shocks where they happen," Kouvelis said in the release. "Then I look at how they're going to propagate over time. As you go back in the supply chain, you're going to see an increased effect as a result of the original shock. … 

"Sometimes people don't think about it, but those are the effects that persist longer and you've got to account for them. Then you've got to account for them during the recovery phase: If the supply chain is not ready and you try to recover, it's not happening. Thin inventories and downsized capacities during the reduced demand phase will be slowly adjusted to the recovery phase. The shocks delay how long it takes before returning to a normal state."

For an idea of the amount of products used in U.S. supply chains, both within and outside the restaurant industry, some data released by the Minnesota Department of Agriculture is relevant. It shows that the U.S. imported more than $4.6 billion of agricultural products from China in 2017. At that time, the department reported that the largest part of those imports were fruits and vegetables, which are naturally used across food service and other sectors. 

"Restaurants and similar facilities are clearly uncontrolled public spaces, so the business response to shut down or control access to protect both patrons and employees is understandable. Clearly, there are no screening mechanisms used for people entering McDonalds, Starbucks, or even Disneyland – all corporations that have chosen such measures. This means that both production and service businesses will suffer economic consequences."  

-Barbara Hoopes

In fact, those products — combined with snack food, tea and spices — make up about half of the imports U.S. businesses get from Chinese agriculturally. Businesses, like foodservice brands which rely on so-called "just-in-time" inventory systems, may face a more than 10% drop in Chinese imports this month alone, according to Washington University in St. Louis economics experts.

However, Washington University Professor of Operations Management Bintong Chen believes the supply chain impact may be shorter-term, adding that companies in major Chinese cities that are critical to the global supply chain have already resumed operations. 

Meanwhile, at Virginia Tech, another supply chain expert said the issues caused by the China-centered virus on businesses like fast food systems are so multifaceted that it may be nearly impossible to accurately gauge total effects for months or even years from now.  

"While short-term consequences of the coronavirus outbreak are unavoidable, long-term consequences are still hard to predict," said Barbara Hoopes, Virginia Tech MBA Programs academic director and associate professor of business information technology in a summary from that school. "It is clear that the impact of interrupted shipments, reduced worker availability due to quarantined cities and the removal of international workers from the region will undoubtedly be felt worldwide. Obviously, the longer the situation continues, the deeper the impact will be felt.

"Restaurants and similar facilities are clearly uncontrolled public spaces, so the business response to shut down or control access to protect both patrons and employees is understandable. Clearly, there are no screening mechanisms used for people entering McDonalds, Starbucks, or even Disneyland — all corporations that have chosen such measures. This means that both production and service businesses will suffer economic consequences."  

Hoopes added that since the world's food and other product manufacturers typically use lean inventory practices, work stoppages in China will "have a relatively immediate impact on partner supply chain facilities in other parts of the world. In fact, she pointed out that even holdups in seemingly minor parts can cause assembly lines to shut down if shipments are delayed or cancelled.

Finally, Hoopes pointed out that since many internationally traded supplies to foodservice and other businesses worldwide are shipped by sea and by air, flight cancellations in outbreak-ridden areas "may have companies rethinking their single-sourcing strategies in the long run.

About S.A. Whitehead

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Pizza Marketplace and QSRweb editor Shelly Whitehead is a former newspaper and TV reporter with an affinity for telling stories about the people and innovative thinking behind great brands.