COVID-19: The Impact on Middle Eastern Procurement and Supply Chain
‘Go Corona Go’ a trending keyword on the internet at the moment. This trending keyword has not only set the online community ablaze but has also sent the shivers down some of the top economies and power corridors around the world. COVID-19, or more popularly known as Coronavirus, has been the reason behind this trending keyword. The virus has been declared a pandemic by the World Health Organization (WHO) and has prompted nations to close their international borders for immigration completely.
The COVID-19 pandemic has caused havoc around the global supply chain because of its country of origin. Originated out of China, also known as the factory of the world, the virus outbreak has caused significant disturbances in the global supply chain because of the massive reliance on world industrial production on Chinese suppliers.
Middle Eastern countries are witnessing two-fold impacts due to the virus outbreak. It is not only depended on Chinese suppliers just like the rest of the world for their industrial production, but it is also dependent on China on demand-side for its massive oil reserves.
According to recent data by Dun & Bradstreet, 51000 companies globally have tier 1 suppliers from the impacted region in China, and an additional five million has tier 2 suppliers from the impacted area. Nine hundred thirty-eight of the Fortune 1000 firms are directly or indirectly dependent on the suppliers from the impacted area of China for their supplier needs.
According to global consultancy firm Publicis Sapient, due to the impact of the outbreak, the organizations that have supplier exposure in the affected area of China should expect delays of 30, 60, or 90 days delay in the demand signal and delivery. The biggest impact that the Middle Eastern countries are facing is the economic instability due to the falling price of crude oil in the global market. The situation has further worsened due to decreased demand of crude oil from major importing nations, especially China due to the coronavirus outbreak.
Middle Eastern countries are the worst affected by the coronavirus outbreak in terms of supply chain disruption and negative economic impact. The region’s economy is highly dependent on the global crude oil prices, and any significant fluctuations in the crude oil prices have high ramifications on region’s economy.
China, the biggest importer of the Gulf oil in the world, has seen the oil consumption plummet by 3 million barrels per day, which is close to 20% of its consumption. The Middle Eastern economy is trying to diversify its portfolio in the past several years to reduce its economy’s massive reliance on oil money. After oil and gas, the region’s economy is highly dependent on tourism and capitals market for its sustenance.
UAE, in particular, attracts 17 million tourists every year and hoping to take this number to 25 million with the upcoming Dubai expo 2020. Saudi Arabia attracted 20 million tourists, mostly for religious purposes. However, due to the restricted travels and border entry due to the virus outbreak, the number of tourists will significantly decrease this year until the situation normalizes, and this will have a significant impact on the region’s economy.
According to a report by the International Monetary Fund in Feb 2020, without a stronger diversification plan, Gulf economies could see approximately $2.5 trillion in accumulated wealth crumble away in 15 years as global oil demand drops.
How to build a robust supplier network to tackle COVID-19 like situations in future
Most of the organizations that are facing massive supply chain disruption due to coronavirus outbreak do not have visibility to their Tier-2 suppliers or are highly dependent on single geography or a single supplier for key products. These are the organizations that don’t have visibility into their extended supplier network to assess their risk. They don’t have access to modern digital technologies to understand their supplier performance and manage risk in case of a global pandemic like COVID-19.
A robust supplier performance management tool with an inbuilt risk assessment module will help organizations to gain more visibility into their extended supplier network and asses their risk. The organizations that have minimized their risk in the case of a global pandemic have diversified their suppliers across the geographies to multi-source key commodities or strategic components to reduce their reliance on a single supplier.
They have also invested in increasing their digital supply chain capabilities to have a better understanding of their inventories, project stock out of the direct material, and optimize production.
For organizations that are sourcing most of their direct material from single geography (China in the present case) the primary measures that have been suggested to prevent the sustained disruption of their supply chain in the future are:
Identify and focus on Tier-1 Supplier Risk — Working with the key direct suppliers of the company to figure out their ability to fulfil supplies during a pandemic situation like coronavirus outbreak. Effort should be made to have visibility into supplier’s inventory, production, and purchase order fulfilment status. The company should also try and identify whether the supplier has the ability and willingness to shift production to an alternate location in case of a pandemic like coronavirus.
Get the Visibility into the Extended Supplier Network — It is also important that the organizations make an effort to gain maximum visibility into the Tier-2 suppliers and how their activity is going to impact the supplies from the Tier-1 supplier. To get this extended visibility into the extended supply network, the adoption of new-age digital tools becomes imperative.
Access to Alternative Supply Sources — It is very imperative for organizations to have alternative sources of supply in place that is spread across the geographies and organizations should move quickly to activate these secondary relationships as soon as there is any possibility of supply chain disruption.
Although the coronavirus outbreak has seen a massive impact on the global supply chain, some companies with direct exposure to COVID-19 have taken less time than others to respond to the situation. These companies and their strategies can play a guiding light to others who are still struggling to respond to the pandemic in a positive way. Here are some important supply chain measures that organizations can implement to see any short term impact -
- Buying in advance to procure inventory and direct material which are in short supply from the impacted area
- Securing capacity and delivery status for Tier-2 and Tier-3 suppliers
- Activating pre-approved parts and raw material substitution for places where the primary supplier is affected but the secondary supplier is not
- Securing future air transportation as supply and capacity becomes available shortening ocean freight based lead time
- Updating customers about delays and adjusting customer allocations to optimize profits on near-term revenue or to meet contractual terms
Sources:
1) https://www.pwc.com/us/en/library/covid-19/supply-chain.html
2) https://www.oilandgasmiddleeast.com/drilling-production/36337-china-loses-its-appetite
3) https://www.cnbc.com/2020/03/12/three-ways-the-coronavirus-could-impact-middle-east-economies.html
