The Butterfly Effect of COVID-19 on the Supply Chain

The Butterfly Effect Metaphor

How often do you hear nowadays people talk about the butterfly effect and how it can impact a system? The butterfly metaphor is used in chaos theory to describe how a small event like a butterfly flapping its wings, can have huge consequences in a system, for example, a typhoon.

During the last fourteen months our world witnessed a situation like never. None of us would have predicted that a single action that occurred in a small city like Wuhan in China, would have triggered the COVID-19 outbreak. We may never know if it was poor food safety standards that caused all this, but what we do know that the whole world has turned upside down.

Global supply chains could be similarly interlinked to the butterfly effect due to the complexity and interdependency of their structure. Supply chain is the industry that brings the world together as it links countries to international markets facilitating global trade. Yet, it has always been vulnerable to shocking situations that occur in the major exporting countries. So, could it be that the butterfly effect of COVID-19 has exposed the Achilles’ heel of the system?

The supply-chain disruption

The pandemic which emerged in China in December 2019, triggered a global health and economic crisis with widespread implications on the supply chain system and consequently the maritime transport and trade. China is considered to be the ‘world’s factory’. As estimated by the World Economic Forum (WEF) in the last one and a half decade, China has emerged as the world’s largest exporter with about US$2.3 trillion worth of goods exported annually. It holds 16% of total global exports and accounts for nearly 20% of global intermediate products. It is one of the major manufacturing and distribution hubs thus its role and importance to the global trade is fundamental. Any major disruption, like this pandemic, puts the global supply chains at risk and causes severe implications for foreign manufacturers that depend on the country for inputs and to countries that mainly depend on China for trade.

With the implementation of lockdowns first in China, and gradually in the rest of the world, global activities got disrupted. The transportation sector, upon which global supply-chain activities depend, remained partially closed. The disruptions affected the ports and shipping and undermined the smooth movement of trade flows and supply chain operations. Various industries faced challenges in their supply chain such as shortages of raw materials, lead time issues, blank sailings on global shipping routes, port closures, reduced working hours at ports, labour shortages as well as truck/transport capacity constraints.

Consequently, this resulted in volume declines, transit delays, delays from port to customers and lack of capacity¹. Global business and industrial activities as well as the financial economies have been extremely challenged by the inconsistent volume demand, and the increased costs from late or non-payments from clients and cancelled credit lines from physical carriers¹.

Any disruption to global maritime transportation networks can have far-reaching implications for a highly globalized world economy. According to the Institute of Shipping Economics and Logistics (ISL), container throughput index (the number of people and goods that pass-through shipping ports daily) declined from 113.3 in January 2020 to 107.7 in May 2020 – a drop of 9.5%².

According to a survey¹ conducted by the Shipping and Freight Resource, around 59% of global shipping and freight professionals have been affected by the pandemic. Shipping and freight experienced volume declines while more than 50% were hit with transit delays. Around 50% were hit by delays from port to customers and 40% had to address issues related to the lack of capacity. The ability of the maritime supply chain to quickly adapt to the new normal and unprecedented conditions was fundamental.

The disruptions in transport and logistics and the significant shifts in demand have also impacted the movement of food products along the supply chains. They imposed unexpected stresses on food systems, and created many challenges for the whole process, from field to consumer.

Food products and agriculture are transported via bulk carriers, containers road transport and air freight. Though bulk shipments have not seen any major disruptions, air freight has been severely disrupted as global air cargo capacity dropped due to airports restrictions. The International Air Travel Association (IATA) stated a decline in the air cargo tonne-kilometres (CTKs) by 13.5% during the first six months of 2020³.

All links of the food supply chain was severely shaken: from farm production to logistics and even the overall demand. Even though not all food products have been equally affected yet, all have experienced disruptions at different stages of the supply chain. Farm production, as it heavily depends on manual labour, has suffered the most due to the limits on the mobility of workers resulted from the global and local measures imposed to contain the spread of the virus⁴. The necessary social distancing measures may also reduce the efficiency in operations especially in small and busy spaces where employees work close to each other, like food packaging.

According to the World Food Programme (WFP), the pandemic could almost double the acute global hunger and make an additional 130 million people be at high risk by the end of 2020; from the current 135 million this number is estimated to go up to 165 million.

Undoubtedly, this pandemic has revealed many of the long-standing vulnerabilities and risks of the supply chains system. It should serve as a catalyst for organisations to examine their processes and business models and assess their readiness to manage their interdependency on the global supply chains when adverse impacts, like a pandemic, occur.

Lessons Learned

This has been a learning curve for all as it revealed that most countries were not effectively prepared to handle the impact of a pandemic on their entire supply chain. We should move on and, in a post-Covid-19 world, be wiser and use what we learned from recent events to prepare for the future.

Investing in technology is fundamental. During the pandemic we saw that operations with stronger digital infrastructure fared better than those without. They enforced their business continuity plans and continued to effectively communicate and manage within a remote working environment.
The post-pandemic world can open new opportunities for innovation, growth, and other advantages. It is crucial to carefully assess all options regarding changes in the supply chain design to ensure the best economic, social and environmental outcomes⁶.