Impacts of Pandemics on Supply Chains

Impacts of Pandemics on Supply Chains

Source: Adapted from Notteboom, T., A. Pallis and J-P Rodrigue (2021) “Disruptions and Resilience in Global Container Shipping and Ports: The COVID-19 Pandemic vs the 2008-2009 Financial Crisis”, Maritime Economics and Logistics, https://doi.org/10.1057/s41278-020-00180-5.

Supply chains can be very complex and composed of a series of stages, from the provision of commodities to the consumption of final goods in consumer markets. A pandemic can impact the components of supply chains through three fundamental aspects:

  • Supply shocks. They represent an unexpected sudden change in the availability of raw materials, parts, and manufacturing capabilities. It is not just that prices may surge. Still, the availability of essential components can vanish because of a lack of raw materials, parts or the lack of labor necessary for their procurement. Depending on the existing buffer, such as stockpiles of energy, grain, or raw materials, the supply shock can take some time to be felt across a supply chain.
  • Demand shocks. Similar to supply shocks, demand shocks imply a sudden change in demand due to unforeseen circumstances. For several items such as food, hoarding may trigger a temporary surge in demand, with several items becoming unavailable. However, the fundamental impact of pandemics on market demand is deflationary. The consumption of discretionary items such as cars, clothing, furniture, or appliances is deferred, and the demand for energy declines with less commuting. The only notable exception concerns medical equipment and pharmaceuticals that see a surge during a pandemic. Consumers undertake a substitution of their consumption patterns towards essential goods and shift their consumption depending on the scarcity and price of items. Restaurants and caterers may be incited to substitute their services to new forms such as takeouts and home deliveries only.
  • Distribution constraints. During a pandemic, the distribution capabilities can be impaired by restrictions on trade, the lack of a workforce, or the closing of key distribution facilities such as airports, ports, or distribution centers. This implies that existing inventory could be mainly unavailable because of the lack of distribution capabilities. So, even if production capabilities could be present, the lack of distribution capabilities can create shortages irrespective of the demand. As last-mile distribution relies much more on labor than prior stages, there is a much higher risk of disruptions through labor absenteeism due to illness. Due to substantial changes in the demand, major distributors, such as e-commerce retailers, will modify their procurement strategies to focus on high demand items while discontinuing the procurement of discretionary items.

Shocks can propagate or backpropagate within supply chains, depending on where they occur. A single propagation is usually common such as when a weather event or a strike takes place. Such events are well documented since they involve a readily identifiable component or segment of a supply chain. However, during a pandemic, propagation and backpropagation mechanisms are simultaneously taking place, creating several concurrent shocks. For instance, the hoarding of food and cleaning supplies transfer the inventory from distribution centers to the final market (e.g. consumer homes) in such a short amount of time, that the manufacturing and distribution capabilities cannot cope.