Why restarting the global economy will not be easy

The United States receives approximately $ 1 trillion in products annually from Asian countries, most of which are shipped by sea, which requires a delay of four to six weeks. Here, containers are stacked at the Georgia Ports Authority facility in Savannah. (GPA photo: Stephen Morton)

As the world contemplates ending a massive shutdown that was implemented in response to COVID-19, Vinod Singhal studies what will happen when we press the power button and the engines that drive industry and commerce back to life.

Singhal, who studies operations strategy and supply chain management at the Georgia Institute of Technology, has some ideas on how to facilitate the transition to the new reality. But this epidemic makes it difficult to predict what this reality will be.

“We know that epidemics can disrupt supply chains, because we have gone through the SARS experience, but this is something completely different,” said Singhal, professor of Charles W. Brady Chair of Operations Management at Schiller College of Business. The pandemic of 2002 to 2003. But this event almost had no lethal extent around the world from COVID-19.

He said, “There is nothing like this epidemic.” “Predicting or appreciating stock prices is simply impossible, unlike the supply chain turmoil caused by a company’s fault, or a natural disaster, such as the earthquake in Japan.”

For more coverage of Georgia Tech’s coronavirus response, please visit the COVID-19 Response page.

The earthquake that rocked northeastern Japan in March 2011 unleashed a devastating and deadly tsunami that caused the collapse of a nuclear power plant, as well as the global economy. It was called the biggest disruption of all time in global supply chains. Senegal co-authored a study on the after-effects, “The Stock Market’s Response to the Supply Chain Turmoil of the 2011 Great East Japan Earthquake,” published online in August 2019 in the Journal of Manufacturing and Service Operations Management.

But COVID-19 represents a new kind of mystery when it comes to something as complex and critical to the global economy as the global supply chain, for a number of reasons Singal highlighted:

The global spread of the virus and the duration of the epidemic. “We have no idea when it will be under control and whether it will emerge again,” Singal said. “In the event of a natural disaster, you can kind of expect that if we make some effort, then within a few months we can return to normal. But here there is a lot of uncertainty.” Both the supply and demand side of the global supply chain are disrupted. We are seeing many factories close only, which affects the supply side, but there are restrictions on demand as well, because you cannot go out and shop as you used to, at least for the time being, “he said.” And all of this is happening in an environment where supply chains are complex to Somewhat – complex, interconnected, interdependent and global. “Senegal said:” We get nearly a trillion dollars in Snow Products. ” From Asian countries, and about $ 500 billion from China. ”Most of them are shipped by sea, which requires a lead time of four to six weeks. The fact that logistics and distribution are disrupted and need to increase again will increase the lead time. So, it will take time to fill a line Piping, and that will be a problem. ”Supply chains have little recession, and little buffer stock. While manufacturing giants such as Apple, Boeing, and General Motors have more financial stagnation to carry them by tightening the massive economic belt, their suppliers, spread across all Around the world, they come in different sizes and different levels Roll, “These small companies are not doing that,” Senegal said, “There is a lot of financial recession,” referring to a report by China’s SMEs, which has less than three months of cash. It has already been closed for two months, and cash tends to fade quickly.

He added, “Many of these companies may go bankrupt.” So we need to know how to reduce the number of bankruptcies. The government will play an important role in this, and the stimulus package approved by the United States will be useful. “

Trying to deal with how stock markets respond to everything that happened is like trying to target the moving target during high winds. Volatility has increased significantly since February 13, when the Dow reached its highest level ever at 29,500.

“This is because we did not expect the epidemic to spread and the turmoil was initially low due to pipeline inventory,” Singal said, noting that since then the index has fallen sharply to 18,500 on March 23 (almost 38 percent decrease) it rose and returned to 22,000 by March 30 . The same applies to other stock markets. The Chinese stock market fell 13 percent, but it appears to be controlling the epidemic. “

While COVID-19 makes it difficult to predict what the market will look like, Singhal has some ideas for which industries will be most affected.

He said: “Travel, tourism, entertainment and restaurants – companies that depend on outside people will take a long time to recover, in terms of profitability and stock price, even after the epidemic is contained.” After all, people will be reluctant to travel. Tourism will be affected. “

Basics like grocery shopping increase as people store up as a reaction to the shutdown, but that’s not a long-term trend. Senegal does not expect this trend to continue as shopping habits and store shelves are eventually normalized.

“But industries like cars and electronics, which have global supply chains and have difficulty replacing specialized high-tech components, will be affected,” said Senegal, who will also influence companies selling the basics with a strong online presence. It has suggestions on the most important issues to be addressed and how to help speed up the recovery and restore supply chains back to normal (or anything that looks normal thereafter):

The ability to provide the ability to the Internet, especially for small and medium businesses. “Facilities and equipment may need some time to restart,” he said. “Employment is a big issue. How quickly are people getting back to work? Also, can you get the raw materials and build the inventory to support production? This can be difficult when pent-up demand is released and everyone is competing for a limited supply. Note that the lead times are really long, The sudden increase in demand for logistics and distribution services as everyone increases again can extend lead times. Government programs (such as the American stimulus package) must be created to keep SMEs in business. This concern extends to second and third-tier suppliers, and to Companies For big ones like Apple, Boeing, or GM, do the same for their most important suppliers. Singhal said: “Keep cash, get new credit lines or withdraw credit lines, maybe cut profits or re-buy stocks.” And build inventories for critical components. . “

Singhal also stresses the need for transparency, up and down the supply chain: “What this means is that companies need a good understanding of what is happening to their customers and suppliers, but not only to their customers and suppliers from the first class, but also to their customers and suppliers, and so forth.

It will be very important to move forward in the next several months to monitor the health of the supply chain from a customer and supplier perspective, because this is a new world, says Singhal, who adds an upbeat footnote, “It’s the crisis of the situation now, but I think we can regroup it.”

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