Intro
I have been following the situation with the COVID-19 pandemic since the start and I have developed some insights I think the Supply Chain community might find useful.
A little bit of background how I started accumulating all this information.
From the last part of 2019 until mid-January, I had a project that involved a long commute and to pass the time I started listening news podcasts. I enjoyed listening updates of the NFL, but I also noticed the economics news were increasingly filled with topics of Supply Chain, mostly for the high dependence of the entire world of the supply from China, which had been dealing with a new infection and declared an epidemic outbreak in January 31st that led to establishing a quarantine and an almost total shut down by the arrival of the Chinese new year on January 25th. While as a Supply Chain Professional I was fascinated that the entire world was paying attention to Supply Chains, I slowly realized the impact of this epidemic was going to be extensive.
I was working at the time with a very dedicated team to organize a Symposium about Supply Chain Risk Management[i][ii]. I had the honor to MC the event, which took place on February 15th. We had the luxury of having a very well-informed speaker, Greg Hutchins[iii], who had been in talks with companies in China to advise them of the impacts of the Tariffs war for a good part of 2019 and early 2020. Earlier that week, on February 10, the delegation of WHO had arrived in China to analyze the information gathered about the outbreak, but they had not presented their conclusions yet.
Greg warned us that among the many uncertainties the most important was the contagion rate. Greg stated “if the factor is less than 1 then it can be controlled locally, but if the factor is greater than one, it will become a pandemic. No way around it”. When we were talking after the symposium, Greg told us “we were lucky that back in October we scheduled the Symposium in February. If we had postponed even one month, we would have had to cancel it”. He was right on the money. On March 10th, the World Health Organization (WHO) issued the Pandemic declaration and the first orders limiting gatherings to 10 people or less and social distancing rules started being issued at different government levels.
During this time, I had been gathering information first because of my interest in Supply Chain Management and specially on the topic of Risk, later because I realized this was coming our way fast, so I was not surprised and I was even a little relieved when the local School district (March 16th), the County of Ventura (March 12)[i] and then the state of California (March 19th)[ii][iii] started putting activities on-hold. The School district suspended activities for the rest of the school year, which seems consistent with some of the analysis about the impact of the outbreak in California made by independent organizations, such as the Institute for Health Metrics and Evaluation, an independent research center at the University of Washington, which was projecting at the time that the emergency in California could extend until June in the most probable and worse case scenarios. Luckily, the projections as of today are looking into some point in the second half of May[iv].
Now that China has lifted the quarantine and with the early indicators that the curve of total cases starting to flatten in the US, many people are wondering when we will return to routine activities, I have some outlook that might be useful or at least interesting and I am sharing it here. When you are reading this, please take into account this is my own analysis, it involves a lot of prediction and opinion, so take it with a grain of salt.
I do not think the data is showing the actual situation. Some governments might be hiding the real numbers out of political motivation, some governments are limited by their ability to test everyone. Some governments in good faith might have established policies that hurt their ability to produce real numbers.
Some experiments performed during this pandemic in the city of Vò in Italy[i] in the midst of the outbreak and more recently a study with similar results in by the government of Iceland[ii] in combination with deCODE Genetics[iii], a subsidiary of AMGEN[iv], have proven the importance of wide testing and revealed among other important data, that at least 50% of the infection cases are asymptomatic.
Looking at public policy, in Mexico for instance although the guidelines for testing were relaxed on April 1st, the initial federal guidelines were telling people beyond high risk individuals to stay at home, if they developed mild symptoms, they should isolate themselves and only if they developed concerning symptoms they should go get tested. I will assume with the limitation on number of available testing kits, they were saving kits to identify those cases in need of hospital treatment for a better allocation of scarce resources. But these type of efforts in managing resources also make the number of detections unreliable.
In the US, the first official case was confirmed on January 20th, but wide testing was delayed until early March and by the day of this article (April 25), there are still controversies on the existence of enough tests in all States for re-opening to be advisable.
Despite all this, I am analyzing based on official numbers reported because on my belief that the numbers are understated everywhere even if some places more than others, it is probably better for comparing apples-to-apples. Also, the numbers tend to maintain about the same partial reliability through time, making trends more reliable than the total number of cases themselves.
Projections about Social distancing
I want to start by addressing one of my pet peeves, the term “New normal”. I first started hearing that expression from Wall Street analysts and government authorities during the 2007 downturn, referring to employees and small companies having to adapt to the situation. It sounded to me like saying “instead of finding how to fix this or prevent it in the future, just learn to suck it up!”. The term quickly became standard at all levels. I never liked it.
So, I am not going to use that term at all, instead I am going to refer to a Transition Period and a Return to Regular Activity.
On the transition period for the US, when the activities start resuming most probably on a state-by-state case, I believe it will start reopening gradually. But even as business and schools return to activities, some social distancing requirements will remain in place.
Doctor Fauci said that there is no reason we should ever shake hands again although later he qualified his statement in an interview on Today[i]. We cannot expect never again shaking hands with a friend, never hugging our darling or kissing our kids.
The reality is that 4 elements are necessary to lift completely the rules of social distancing and heightened hygiene. Until then, size of gatherings, extra hygiene protective equipment and other rules are completely lifted.
- Widely available testing. As the studies previously referred in the Italian town of Vò and in Iceland, the way to completely stop the disease, is by identifying everyone to properly isolate carriers and quarantine and those who came in close contact. Opening with insufficient testing would be playing Russian Roulette, which judging by the eager of some politicians to reopen, some places will go that route. Probably less than half of them would run with good luck and the rest will look a noticeable return of cases
- Reliable, available and affordable medical treatment. With the costs of health services in the US, I am concerned with the affordability piece of this equation, I foresee that depending on how fast the employment is recovered and how soon people get health insurance from work, the social pressure will make legislation or public assistance cover for treatment.
At the time of writing this article, from the multiple reports I have seen, blood transfusion from people recovered from the infection is a proven method, but it is not widely available. From a lot of research I have seen, the most promising development is the one form Dr. Jacob Glanville’s team in San Diego[ii], who started developing a treatment from an already existing treatment for SARS (another type of Coronavirus) and has shown early success, but funding, clinical trials and scaling are still an issue and assuming everything goes well FDA approved treatment would still be several months away.
- Widely available and affordable vaccination. Just like with the H1N1 flu, I expect vaccination to be rolled out for free in phases, first with the most vulnerable groups and then for everybody at a low or no cost. The COVID-19 is not going away. It will be just added to the existing variety of Coronavirus.
Vaccines development, even when successful at the first attempt require 12 to 18 months to be developed. Clinical trials are needed to ensure not just that they are effective, but also that the potential harm in using them does not extend beyond minor discomfort or symptoms. After clinical trials are successful, verified and replicated, then mass production can start, which has its own challenges.
- Collective immunity. It has not been one year since the first case of COVID-19 was detected in Wuhan, China. Therefore, there are a lot of unknowns about immunity. So far, we do not know if once patients have recovered, they will be immune for the rest of their lives, for three months, for a year or for three years[iii]. If patients develop extended immunity, once the infection has passed in a community it will be safer but if there is no extended immunity, the COVID-19 vaccination might need to be a seasonal vaccine, similar to seasonal flu vaccination.
based on IHME projections[i], my expectation is that the transition period in the US can safely and gradually start around mid-May to early-June with return to activities maintain social distancing and the use of protective equipment. Some people might not like keeping these rules for such an extended period, but this is a matter of WE, not ME. Risk infection of one will not be a matter of individual choice, but a matter that would affect the entire community. I estimate It might take between 18 and 24 months from now before gradually returning to Regular Activity removing all social distancing rules.
Projections for Supply Chains
The uncertainty at this moment has made many companies adopt a “wait and see” stance, but some analysts and experts are starting to plan for the transition period and for returning to regular activity, like the APICS Webinars[ii], or the webinar I attended last week, presented by Jane Tiernei[iii] from Purple Link. In her weekly Moving Forward webinars, she recommended activities that companies can start to prepare for the transition period.
There are two aspects that will shape the Supply Chains of the future. The first one is a factual one, the second one is partially subjective. I will mention below the three leading opinions.
First, the spread of the virus is not even. It is reaching different countries at different times. While the infections in China appeared in December and countries with a lot of business and travel from and to China like the US and Japan started detecting cases in January, places like Mexico reported their first cases on February 28th [iv], The Gambia in Africa reported first cases on March 17th[v] and so on. Also factual is that prevention and response measures have been uneven, so it will take different times in different countries to contain the spread of infections.
The second one depends on what company executives understand as lessons learned. I have been reading a diversity of opinions that can be grouped in three generic strategic proposals. First, some voices are saying no change is necessary, China is still a reliable supplier and the probability of a new pandemic is too slim to make drastic decisions. There are also those who pointing out the dependence on another country has been proven dangerous and risky (95% of active ingredients of the medicine worldwide are sourced from China and were threatened by lockdown) and will go for a majority of domestic sourcing. I lean more with those with a third opinion that points out that a diversification of the Supply Chain with a component of domestic production is the best course for the future. A company and certainly a country should not depend on the next epidemic, earthquake, war, or any type of disaster stopping their critical supplier. And there is no telling on where the next one will hit, even at home.
I attended the 2019 ASCM international conference[vi], formerly APICS International Conference[vii], where in a panel discussion titled Sourcing Trends to watch in 2020, David Hatoff[viii], Managing director at Blue Sphere Consulting and former Google executive shared his approach to processes (I would assume non-value added processes): “Eliminate, Outsource, Automate”. But he also shared his opinion that most companies do outsourcing wrong. Mr. Hatoff explained that when a process is outsourced, the management of that process should be kept internal. It is unavoidable loosing certain control, but most companies yield control completely, becoming 100% dependent of their external source in times of crisis and incapable of moving it to a new source. The vision I share is certain outsourcing mixed with some local/in-house sourcing would present the most flexible combination for rapid reaction in regular operation an even more so, in times of crisis or disaster. But that requires outsourcing wisely, not widely.
My expectations for the Supply Chain are that when the transition phase starts, a lot of maneuvering will be required. Some suppliers will not survive, some others will start recovery in a bad financial shape limiting the amount of business they can take and with the intricacies of internationally connected Supply Chains and different countries being able to operate at different times, new sources will have to be developed. Some companies coming out of their respective national hurdles will find they have to compete against new sources developed by former customers that could not wait for their recovery, facing new competition triggering an extended period of re-sourcing and re-balancing.
Between companies that decide sourcing locally and those who decide for a more balanced sourcing, China is in most probability the country that will lose more business. After all, it is the country that has more to lose, being practically the manufacturing center of the planet. China still will hold a lot of business they have built manufacturing structure and infrastructure that won’t be easy, cheap of fast to replicate anywhere else.
Companies that start adopting one of the three strategies described above will start seeing the benefits of their new operation. At some point though, Wall Street Analysts will start leaning toward one of the three and grading their stock prices based on their preferred strategy. At some point a critical mass of analysts leaning toward one of the three will indirectly decide which one is the “correct” strategy.
In my point of view, each company should select the strategy that fits them better, but I have observed that because Wall Street analysts tend to assume when a strategy works, that strategy is correct for most.
In hindsight I do not think so many companies outsourcing manufacturing to China was a good idea. Almost the first page of every Manufacturing Management book, there is a statement “manufacturing creates wealth”, as well as in APICS CPIM. Henry Ford understood this well when he raised the salary of his employees to allow them to buy their own products, but since the 1990’s this wealth has been taken elsewhere. The local market, sometimes addressed by stock markets analysts almost as an abstract, is the sum of the buying power of all the employees of local companies. I tend to question the trade-off of providing best prices for the local market by laying off employees as a sustainable strategy.
Regardless my opinions on stock market analysis, my observation is that sooner or later company executives start taking an approach based what benefits the ratings of their stock price. CEOs have a fiduciary responsibility with their stockholders, and they prioritize actions that rewards their companies’ stock price. I hope the winning strategy is the balanced approach, although in a recent conversation a friend of mine reminded me that trends tend to be like pendulum swings. They go to one extreme (like outsource everything) and after a crisis they typically over correct. It tends to take a few crises to reach a medium point. Bottom line, I cannot predict which strategy will be the winner, but I predict that in the long term most companies will adopt the same strategy.
Preparedness
My last observation/prediction is that companies will not feel comfortable waiting for the next one to catch them by surprise, so I predict that the importance of Risk Management in their Supply Chain is going to be on the rise.
Initially, the part of recovery is going to take precedence but as time passes companies are going to learn to go beyond the typical low importance of preparedness.
Current companies’ internal Measurement Systems tend to be rigid, data collection and Key Performance Indicators (KPIs) have minimal flexibility and adjusting data to changing conditions is slow. I believe to be successful in times of crisis, companies need to automate data collection as much as possible, learn to store data that at the time seems unimportant but later it could be slow to collect, reduction of dependence on spreadsheets in the back end is a must. While tools for modeling data have greatly improved lately in spreadsheets in the front end, back end data needs to be readily available; databases and data warehouses should store the back end data and internal data analytics and modeling skills need to be acquired through a combination of hiring and internal training.
Before the 2019 trade war with China and the COVID-19 outbreak, I saw preparedness in two types of context. Plan B for known situations, typical short lived like fires or hurricanes, most disruption was expected from competitors and/or emerging technologies, so recommendations were “become the disruptor, not the disruptee”. The recent experiences will shape a new importance of being flexible not just to face difficulties, but to gain opportunities. Threats and opportunities can appear suddenly, more damaging and lost lasting than what is covered by a basic approach. Before these crises, the ISO 900x standards were already making emphasis on Risk Based Thinking, a more advanced way of dealing with risk.
I can see Risk Management coming out of the obscurity inside Operations Managers responsibilities and becoming integrated with other skills and responsibilities of higher-level executives, I would expect Risk Management and more specifically Supply Chain Risk Management education become essential internally and for new hires.
[i] IHME Projections for United States: covid19.healthdata.org/united-states-of-america
[ii] APICS Webinars page: www.apics.org/credentials-education/events/webinars
[iii] Jane Tiernei LinkedIn profile: www.linkedin.com/in/jane-tierney-2a762/
[iv] News report of the first official case of COVID-19 in Mexico: losangeles.cbslocal.com/2020/02/28/mexico-confirms-its-first-2-coronavirus-cases/
[v] First report of official COVID-19 CASE in The Gambia: www.mrc.gm/confirmed-case-of-covid-19-in-the-gambia/
[vii] APICS Website: apics.org
[viii] LinkedIn profile of David Hatoff: www.linkedin.com/in/davidnatoff/
[i] Dr. Fauci interview in TODAY: www.youtube.com/watch?v=VY1tP40jeW4
[ii] Interview with Doctor Glanville on CBS 8 San Diego : www.youtube.com/watch?v=AV-nWT2VLuI
[iii] World Health Organization (WHO) statement on no proof of immunity from recovered patients: www.who.int/news-room/commentaries/detail/immunity-passports-in-the-context-of-covid-19
[i] Newsweek article on mass testing experiment in Vò, Italy : www.newsweek.com/coronavirus-mass-testing-experiment-italian-town-covid-19-outbreak-1493183
[ii] Iceland COVID-19 Study: www.zmescience.com/medicine/iceland-testing-covid-19-0523/
[iii] deCODE Genetics website: www.decode.com
[iv] AMGEN Website: www.amgen.com/
[i] Ventura County Emergency Declaration: apics-vc.org/wp-content/uploads/2020/03/Ventura-County-Public-Health-Declares-Local-Health-Emergency-3.12.20.pdf
[ii] CNN report of first Stay-at-home order in California: www.cnn.com/2020/03/19/us/california-coronavirus-stay-home-order/index.html
[iii] State of California Stay-at-home order update: covid19.ca.gov/stay-home-except-for-essential-needs/
[iv] IHME COVID-10 projections for California: covid19.healthdata.org/united-states-of-america/california
[i] APICS Ventura Chapter SCRM Symposium Page: apics-vc.org/scrm-symposium/
[ii] APICS San Fernando Valley Chapter Symposium Page: apics-sfv.org/scrm_at_reagan_library
[iii] Greg Hutchins LinkedIn Profile: www.linkedin.com/in/greghutchins/
