Here’s my rough sketch of what might happen to large manufacturing companies due to shutdowns within the supply chain.
Costs of other people’s shutdowns
Different countries / companies are likely to have different shutdown periods.
Supply chains are highly international so shutdowns in one country have huge knock-on effects. Most companies will aim to be dual sourced on critical components which require long qualification periods but this isn’t always simple. Even if dual sourced, bringing up the second source to cover the loss from the other won’t happen overnight, if at all.
For instance, say you buy a critical component from Italy. It’s dual sourced but on an 80:20 ratio so if Italy shuts down then your the potential output drops by 80%.
In reality stock levels will often sit at 30 days so for a shorter shutdown there is some slack. However, 30 days is an average. With enough different components you’re likely to be low-ish on stock for at least a couple of components and may be forced to drop output.
The other side of this is customers. Some customers will shut their production lines, others stay open. If your product in fairly homogenous this might be fine and match your incoming component levels. With a wider product range you may find that your supply line fails in the place where you most need the components.
The above will apply to a lesser extent where companies have to slow production.
Cost of your shutdown
Whilst you’re shut down you aren’t producing anything. This obviously has the direct impact of reducing turnover to 0 for however long you’re closed. This is almost certainly the biggest impact. If the government steps in to cover this (at least partly, e.g. the UK government will pay 80% of wages) then large manufacturers shouldn’t have an issue. Even if they have a temporary cash flow problem, the banks are likely to step in to help out.
Costs like renting the space that you’re in might still need to be paid. However if you’re struggling then whoever you’re renting off doesn’t really have the option to rent out to someone else in the short term so there may be some renegotiating being done (I’m less confident about this point—I’m not sure how the contracts would work out).
When you shutdown you probably already have lots of goods on their way to you by sea. My guess is that if possible people will try to get these accepted into the factory although I know some deliveries are being turned away if they have come through a high risk country.
When you reopen, everything will be a mess and the first week will be chaos (although with people working from home maybe this can be minimised with good planning). For a month or so things will be a bit muddled so efficiency won’t be optimal.
You’ll have some customers chasing you to get product immediately. I guess there’ll be a huge demand for airfreight—maybe this is how the airlines can recuperate some of their losses?
There may need to be some working with customers and suppliers on contractual terms of payment etc. In normal circumstances these are very tightly controlled but I would anticipate that most companies will be able to take the practical approach and overcome the bureaucracy which is inherent in such negotiations, due to the exceptional circumstances. Companies which are unable/unwilling to do this are likely to suffer additional damage.
Smaller companies
The above mostly applies to smaller manufacturers but to a lesser degree.
They are likely to be lower on the list of priorities for banks to sort out emergency loans which could cause a number to go out of business. This may be the target of additional government intervention.
Supply chains are likely less complex and so have fewer critical point to go wrong. They are also probably able to switch suppliers more easily if required.
They will manage to get things sorted out more easily before and afterwards.
Smaller companies have less leverage in negotiating new contracts. In purchasing this is offset by probably being able to be more flexible. In sales this is harder if they are selling to larger companies.
Overall economy
So multiply the above throughout the economy and you get a large variation across companies depending on how the individual supply chains which they are a part of are hit. Everyone will kind of muddle through as best they can but things will be far from efficient for as long as there are significant parts of the world in lockdown, even for companies which aren’t in lockdown.
The obvious cost of lockdown (lack of productivity) is likely to be the most important and other considerations are likely to be large but considerably smaller.
***
I wrote the above and then realised that this was based on the assumption that overall demand for your product will be the same a year after lockdown as it was a year before. For many industries this is probably true but others (e.g. some luxury goods?) might not bounce back fully or might bounce back into a different shape than before. This is a completely different question that I’m not sure how to answer.
Here’s my rough sketch of what might happen to large manufacturing companies due to shutdowns within the supply chain.
Costs of other people’s shutdowns
Different countries / companies are likely to have different shutdown periods.
Supply chains are highly international so shutdowns in one country have huge knock-on effects. Most companies will aim to be dual sourced on critical components which require long qualification periods but this isn’t always simple. Even if dual sourced, bringing up the second source to cover the loss from the other won’t happen overnight, if at all.
For instance, say you buy a critical component from Italy. It’s dual sourced but on an 80:20 ratio so if Italy shuts down then your the potential output drops by 80%.
In reality stock levels will often sit at 30 days so for a shorter shutdown there is some slack. However, 30 days is an average. With enough different components you’re likely to be low-ish on stock for at least a couple of components and may be forced to drop output.
The other side of this is customers. Some customers will shut their production lines, others stay open. If your product in fairly homogenous this might be fine and match your incoming component levels. With a wider product range you may find that your supply line fails in the place where you most need the components.
The above will apply to a lesser extent where companies have to slow production.
Cost of your shutdown
Whilst you’re shut down you aren’t producing anything. This obviously has the direct impact of reducing turnover to 0 for however long you’re closed. This is almost certainly the biggest impact. If the government steps in to cover this (at least partly, e.g. the UK government will pay 80% of wages) then large manufacturers shouldn’t have an issue. Even if they have a temporary cash flow problem, the banks are likely to step in to help out.
Costs like renting the space that you’re in might still need to be paid. However if you’re struggling then whoever you’re renting off doesn’t really have the option to rent out to someone else in the short term so there may be some renegotiating being done (I’m less confident about this point—I’m not sure how the contracts would work out).
When you shutdown you probably already have lots of goods on their way to you by sea. My guess is that if possible people will try to get these accepted into the factory although I know some deliveries are being turned away if they have come through a high risk country.
When you reopen, everything will be a mess and the first week will be chaos (although with people working from home maybe this can be minimised with good planning). For a month or so things will be a bit muddled so efficiency won’t be optimal.
You’ll have some customers chasing you to get product immediately. I guess there’ll be a huge demand for airfreight—maybe this is how the airlines can recuperate some of their losses?
There may need to be some working with customers and suppliers on contractual terms of payment etc. In normal circumstances these are very tightly controlled but I would anticipate that most companies will be able to take the practical approach and overcome the bureaucracy which is inherent in such negotiations, due to the exceptional circumstances. Companies which are unable/unwilling to do this are likely to suffer additional damage.
Smaller companies
The above mostly applies to smaller manufacturers but to a lesser degree.
They are likely to be lower on the list of priorities for banks to sort out emergency loans which could cause a number to go out of business. This may be the target of additional government intervention.
Supply chains are likely less complex and so have fewer critical point to go wrong. They are also probably able to switch suppliers more easily if required.
They will manage to get things sorted out more easily before and afterwards.
Smaller companies have less leverage in negotiating new contracts. In purchasing this is offset by probably being able to be more flexible. In sales this is harder if they are selling to larger companies.
Overall economy
So multiply the above throughout the economy and you get a large variation across companies depending on how the individual supply chains which they are a part of are hit. Everyone will kind of muddle through as best they can but things will be far from efficient for as long as there are significant parts of the world in lockdown, even for companies which aren’t in lockdown.
The obvious cost of lockdown (lack of productivity) is likely to be the most important and other considerations are likely to be large but considerably smaller.
***
I wrote the above and then realised that this was based on the assumption that overall demand for your product will be the same a year after lockdown as it was a year before. For many industries this is probably true but others (e.g. some luxury goods?) might not bounce back fully or might bounce back into a different shape than before. This is a completely different question that I’m not sure how to answer.