Global SCM: Impact of a Pandemic

Global SCM: Impact of a Pandemic

#SCM #pandemic #globaleconomy #ethics

What’s the impact of human values in global crisis?

A brief History

Before 1900, most of the agricultural products were regionally transported, mainly due to lack of efficient systems (no long-haul trucks & expressways, no shipping containers, no refrigeration systems). The World Wars (I & II) created a strong need to provide adequate supplies & support to troops in the front lines. Later developments in this field led to creation of: pallets, warehouses, rack-based optimised layouts, fork-lifts, and standardised shipping containers (including refrigerated ones) [1]. 

After IBM developed the first computerised inventory management and forecast system in 1967, and the use of barcodes (1975), efficiency in logistics improved many folds. Inventory at warehouses could now be accurately monitored, and orders could be easily tracked. In the 1980s, as enterprise resource planning (ERP) systems and radio-frequency identification (RFID) tags became popular, intercontinental trade increased rapidly. In the early 2000s, with the growth of high-speed internet networks and use of artificial intelligence (AI), accurate real-time tracking of goods (on ships, trucks or warehouses) was achieved. Therefore, global trade boomed, many products & services, which offer low gross-margins in advanced countries, shifted to Asia, particularly to China (manufacturing) & India (services). This has led to a highly interconnected and interdependent world [2, 3].

What’s the Consequence of a Global Economic Shock?

To understand such shocks, let’s look at three different global events, which altered the Global Economy permanently:

  1. The Great Depression (1929-1933)—Global trade was low
  2. The Great Recession (2007-2008)—Global trade was high & scores of companies in many countries went bankrupt 
  3. The COVID-19 Recession (2020)—Pandemic induced recession, not a cash/credit crunch induced recession

Firstly, The Great Depression (1929-1933) was caused by highly speculative markets, starting from the early 1920s, after the end of World War I. A shortage of food and supplies in World War I, led to overproduction of agricultural & industrial goods, and an excessive use of credit to finance businesses and farms (agricultural machinery). This in turn led to a surge in stock prices at Wall Street. Such huge volumes of goods (agricultural & industrial) led to a crash in prices at their respective markets. This made investors nervous and they started selling shares, which led to a panic situation at Wall Street. This fear trickled down to investors at banks & financial institutions, which led to many bankruptcies within manufacturing, agricultural, and financial sectors. This led to large scale unemployment and reduced consumption. Therefore, demand reduced which led to a downward spiral in the U.S. economy, and their allied markets—the U.K, France and Germany [4, 5, 6].

Secondly, the Great Recession (2007-2008) was caused by a similar situation. This time the speculation was caused by the real estate market, starting from the early 2000s, after the end of Dot-com Bubble. The criteria to issue home loans was relaxed by many banks, in order to sell more loans. Therefore, many risky creditors were offered loans, without proper scrutiny. This led to an over-building of homes, surge in home prices, and a huge demand in all construction related sectors—manufacturing, timber, chemicals, etc. This led to a boom at Wall Street, as stock prices rose rapidly. At a point, the financial irregularities went so high, that people were unable to service the interest part of their home loans. This led to a panic sale of mortgage-backed debt, which was sold at peak rates, until then. This fear slowly trickled down through the U.S. and many other economies worldwide. As global trade suddenly came to a sudden halt due to a lack of consumption (demand), this led to a rise in (global) unemployment [7, 8, 9].

Thirdly, the COVID-19 Recession (2020) does not have all the characteristics of the previous recessions. For instance, though many firms within the U.S. and other developed markets are highly levered (very-high debt/equity ratio), an overproduction within a single or group of sectors is not evident. Therefore, except for the hospitality industry (hotels, airlines, cruises, etc.), the remaining sectors in the economy show signs of healthy growth. This growth is stalled by the pandemic. The overall consumption in the economy is not affected by any fears or panic. A key issue due to this unforeseen pandemic is—many employees have been laid off (worldwide), without a certainty of their future [10].

What are the Steps forward to revive the economy?

A key characteristic of great reforms after any major recession is ‘public spending’. When each economy opens up, following the WHO guidelines on this pandemic, governmental intervention is required to help reduce large scale unemployment. This can include—large construction projects (backed by the local/national governments) and stimulus packages to individual firms to start/revive/grow their businesses. Such policies have helped major economies of the past to rise out from the Great Depression & the Great Recession. The key characteristic in COVID-19 Recession is the sudden-halt of global trade [11]. 

The world is dependent on many Chinese & East-Asian firms for manufactured goods. As the recession ends, we can expect a rush in the procurement of: manufactured goods, raw materials, components, etc. from China & East-Asia. Most large firms are not cash/credit crunched (compared to other recessions), they can influence global trade to a large extent [12, 13, 14, 15]. For instance:

  1. Leaders of large firms can easily take bold steps to increase their market share (no recent history of negative decisions) 
  2. This would lead to a fierce competition, and many small players may get bankrupt (multiple sectors) 
  3. This overproduction leads to high-volume, low-quality & counterfeit products/components/raw-materials (greed wins over ethics)
  4. Such low-quality products, create losses for suppliers & clients, negatively-effects global trade, and growth of many countries (precious time loss: lost-business-opportunities, litigations, monetary losses, extended unemployment)

To conclude, in a rush to increase sales, ethics should never be compromised. As the quality control & quality assurance teams fail in many (Chinese & East-Asian) firms, low-quality & counterfeit products are being supplied to many countries. These misdeeds delay ‘worldwide eradication of COVID-19’, and the growth of the World Economy. 

© Sudhanshu Vuppuluri, 17-04-2020


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