COVID-19: Impact on Essential Goods’ Supply Chains
- By Professor Micheline Naude
The COVID-19 pandemic has had, and will continue to have a substantial impact on global supply chains. Initially, its impact was felt on the supply chains of goods originating from China, particularly Wuhan province. As the disease spread to more and more countries, so too has the impact on global supply chains. This has taken the form of disruption of the manufacture and supply of a broad range of goods, largely as a consequence of stay-at-home orders and lockdowns in many countries.
South Africa began a nationwide 21-day lockdown on 27 March 2020, later extended to 30 April, which is one of the “strictest” in the world. The country faces continued restrictions for months to come in terms of the government’s ongoing COVID-19 risk strategy. While South Africa’s borders are closed to the movement of people, the movement of cargo is still taking place, albeit with ongoing port and transportation delays. This adds risk, costs and pressure to the supply chain.
Most of the South African economy has been shut down, with the exception of essential services, mines and quarries, the banking, insurance and financial sector, the production and sales of chemicals, medical products, cleaning and hygiene products, food production and sales through grocery stores, food stores and spaza shops.
As a consequence of the shutdown of a significant portion of the economy, a large number of workers have been removed from their employers’ payroll entirely, or are being paid a proportion of their former income. Such workers include among others, domestic workers, construction workers, contract workers, taxi operators, hairdressers, beauticians, gym trainers, pre-school staff, estate agents, car sales and travel agency representatives. These consumers have reduced or no income and are therefore cautiously using any disposable income they may have, to buy only what they consider necessary. So, whilst the shelves of essential goods in retail stores are fully stocked, many consumers just do not have money to buy these goods and retailers are experiencing decreased sales revenue.
Retail grocery and essential goods traders operate on low margins and are adept at running their operations by negotiating and utilising extended trading terms. Simply put, they use credit from their suppliers to maintain their cash flow. They trade in a range of products from food, hygiene, and cleaning materials, to a broad range of consumer goods, which are not considered essential products under South Africa’s lockdown regulations. Many of these “non-essential” consumer products are sold at higher prices and better margins and the broad basket of ALL products allows for margin subsidisation.
While sales revenue is down from lower consumer purchases, traders need to pay their fixed costs – the most significant of which are rentals and employee costs. Consequently, they are formally or informally renegotiating payment terms, aimed at squeezing extra credit from their suppliers. This places fast-moving consumer goods manufacturers (FMCGs) and suppliers of these products in a difficult situation as they supply essential goods at lower volumes and with extended credit. The impact on the supply chain of FMCGs is significant – lower sales volumes and reduced profitability.
Preliminary discussions with leading FMCGs in South Africa reveal that while many of their operations have experienced reduced revenue and profitability, a significant impact of the South African lockdown has been on cash flows. This places immense pressure on these suppliers. The supply chain of the FMCG industry has further been impacted by the COVID-19 pandemic through additional containment and unplanned management costs, which include:
Pandemic planning expenses. FMCGs manufacturers are doing their utmost to keep their workspaces hygienic and COVID-19 free through additional processes such as deep cleaning and sanitising warehouses and factories, disinfecting incoming and outgoing trucks and testing staff.
Expenditure to move staff to and from work.Food manufacturers rely heavily on labour and most of the workforce relies on public transport to get to work, which makes them more susceptible to infection. Social distancing is not practical when travelling in close proximity to others in taxis or busses. Some FMCGs have thus arranged for transport for their staff.
Production delays due to supply chain interruptions. FMCGs have no control over what happens outside the workplace with their workforce and should their staff become infected, this could result in further losses as they are forced to temporarily close. For example, Tiger Brands temporarily closed its Durban Albany bakery as a precautionary measure after some staff members tested positive for COVID-19. Unilever South Africa confirmed that 30 of its employees had tested positive for COVID-19 at its Boksburg plant and operations were suspended to undertake deep cleaning.
Screening of staff and the supply of PPE. Workers have been provided with personal protective equipment (PPE), and health screening and testing has increased for all staff and contractors at each factory and warehouse.
In conclusion, the ripple effects of this challenging economic situation will be reduced profitability and lower cash flow, even after the outbreak is contained. Economic adjustments globally post COVID-19 will be challenging. Social distancing measures will continue until a safe and effective vaccine is discovered and universally distributed.
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Professor Micheline Naude is the Academic Leader for Marketing and Supply Chain Management in the School of Management, Information Technology and Governance, UKZN.