The Covid-19 crisis and its impact on supply chain management in Germany and Europe.
The international division of labour has been massively disrupted by the Covid-19 pandemic, border closures, the collapse of supply chains and production standstills. The crisis is a challenge but also presents opportunities.
In Europe, we will not forget March 2020 in a hurry. On March 9, Italy declared the entire country a no-go zone after being hit hard by the corona pandemic; by March 16, there was not a single control-free border crossing anywhere in Europe. From March 17, the major car manufacturers shut down their assembly lines at very short notice.
According to Eurostat, the volume of trade between the European Union and other countries fell by more than ten percent in March, while trade within the EU suffered to a significantly lesser degree. German logistics experts like Prof. Christian Kille forecast a decline in real terms of five percent in the German market for logistics services in 2020, followed by a three percent decrease in 2021, albeit from a lower starting point. The original forecast – without corona in other words – was for real growth of 0.4 percent in 2020, which means that Covid-19 came at a time when the market was already stagnating.
It would naturally have been desirable for the member states of the European Union to closely coordinate their measures to contain the pandemic. Trust-based cooperation is one of the most important success factors for companies in value added chains – and the same applies to cooperation between countries. This is a lengthy process, as trust has to be earned. Close cross-border cooperation would also have made it easier to defuse some of the problems during corona – although solutions were ultimately found within a relatively short space of time. It is not possible to rehearse these kinds of situations, and there is no blueprint on how to address them.
Production operations come to a standstill if relevant parts are not available. These parts may come from Asia, but there has even been a supply bottleneck for parts from Italy or other neighbouring countries. Who would ever have thought that Schengen borders would be closed? What this tells us is that it is not the geographic dimension of a network that is the decisive factor. What is paramount is that political decision-makers and industry work together to emphasise again and again the benefits of cross-border cooperation with a message appealing to both intellect and emotions.
The global supply chains have not grown to any great degree in the last ten years but are more or less still at the same level as in 2010. This is due to the uncertainty following the 2008/09 financial and economic crisis but also to technological progress, which has reduced production costs in the industrialised countries. Two thirds of the cross-border trade of the EU countries takes place within the EU.
It is to be hoped and it is desirable that the global division of labour continues, as this system of cooperation enables us to draw on the strengths of different regions to the benefit of all. It ensures that products are up-to-date and competitive; and it secures jobs in different parts of the world while laying the foundation for prosperity. Protectionist trends and national isolationism do more harm than good. This is evident from the trade conflict between the US and China.
Times of crisis are times of consolidation. In a study published in April, the WTO estimates the volume of global trade in 2020 will be roughly one third lower than would have been the case without corona. This also means less business for the logistics service providers. As a result, some companies will disappear from the market. There are no winners in the economic crisis caused by the corona shutdown: a crisis is not a competitive race under defined conditions in which the best, fastest and most innovative players come out on top. We are facing the effects of a “system failure” over several months.
There has even been demand growth in recent months in specific sectors like food retail or medication supply, but we have also seen dramatic slumps in the food service industry and industrial production. Negative impacts have been overwhelming, with freight volumes in motion falling by between 30 and 50 percent or more within a short space of time. We are now facing new questions. How will structures and processes change when business activities pick up again? And how will production, trade and logistics be organised after lockdown?
As production ramps up, many supply chains will come together again. The resulting “supply puzzles” need to be reconfigured to re-create effective supply chains. We already know that we will not see a synchronised reboot of all systems, as both the pandemic and the resulting protective measures have been time-staggered around the world. This will all take time, but we are hearing from sectors like the automotive industry that the global supply of parts is gathering pace. Efficiency and risk criteria now need to be re-balanced to make supply chains more robust. This means reducing risk through dual or multiple sourcing, geographic relocation of intermediate products to ensure direct access, and a return to high stocking levels.
Manufacturing companies will seek to identify potential weak points in their supply chains, asking where the global division of labour entails high risks and where it brings stability. As in any crisis, the successful companies will be the ones who react to new conditions in a flexible and agile way, who can rely on an engaged and committed workforce, and who make intelligent use of digital tools.
What certainly help are optimism and a positive attitude. We are all busy doing what logistics does best, namely remaining matter-of-fact, solving problems and keeping the economy moving. This helps us to make and implement well-reasoned decisions – and thereby to return economy and society to a state of equilibrium as soon as possible.
The work of BVL is based on face-to-face contacts in settings that enable us to learn from each other. We are currently bridging the gap with digital offerings, webinars, web conferences and virtual chapter meetings. We are determined to stage the International Supply Chain Conference in the autumn of this year. But it will be a different kind of event, comprising live content on site as well as live on the Internet, complete with value added services before, during and after the event. Safeguarding the health of attendees, exhibitors, organisers and service personnel will naturally be at the forefront of our strategy. Here as well, BVL is sending a signal of optimism, and we wish our friends in the neighbouring countries of Eastern Europe every success as well as that little bit of luck that even the most competent among us sometimes need.
Prof. Thomas Wimmer, Chairman of the Board, Bundesvereinigung Logistik (BVL – The Supply Chain Network), Germany
© 2019 Eurologport