Economy , Culture & the Family

Ray Carter | April 3, 2020

Supply chains threatened by forced business closures

Ray Carter

To reduce the spread of the COVID-19 virus, state and local governments in Oklahoma and across the country have ordered the closure of most businesses, aside from those deemed “essential” by government officials.

But the reality of the marketplace is that many “nonessential” businesses are crucial to the continued operation of “essential” businesses, so experts say government-ordered business closures could have ripple effects that result in unintentional scarcity of goods or services and associated higher consumer prices.

Christine McDaniel, senior research fellow at the Mercatus Center at George Mason University, said “the government shutdown orders may inadvertently disrupt the supply chain and perhaps raise costs or contribute to artificial shortages.”

“That may be an inevitable even if unintended consequence,” said McDaniel, who previously served as a deputy assistant secretary at the federal Treasury Department and senior trade economist in the White House Council of Economic Advisers.

While many government officials have focused on immediate “essential” businesses, such as grocery stores, they may fail to comprehend the necessity of other businesses that serve “essential” outlets. Businesses are also having to consider this problem in their planning.

“Visibility to only Tier 1 suppliers will likely be insufficient for most organizations looking to manage supply disruption risks,” said Jim Kilpatrick, the global supply chain and network operations leader for Deloitte Consulting. “Orchestration of the rebound requires the transparent flow of product, cash, and information across each tier of the supply chain. Many supply-side disruptions are not caused by direct (Tier 1) suppliers but by a supplier’s suppliers (Tier 2 and beyond). Companies will need to embrace new digital approaches to illuminate the supplier network to gain visibility to critical material and component supply as quickly as possible.”

Daniel Stanton, author of “Supply Chain Management For Dummies,” defines a supply chain as “a complex system made up of people, processes, and technologies that is engineered and managed to deliver something of value to a customer.”

“All of the products and services that we enjoy on a daily basis have their own supply chains. We all depend on them! In any complex system, small changes can have far-reaching consequences,” Stanton said. “Right now, there are a lot of big changes which are being triggered by the spread of COVID-19 and the response of governments around the world.”

Ken Petersen, a professor at the University of Oklahoma’s Michael F. Price College of Business and director of the division of Marketing & Supply Chain Management, also notes that the current supply chain has been fine-tuned in such a way that minor changes can have major impact, and the government response to COVID-19 is far more disruptive than the changes that normally create supply headaches.

Petersen noted supply chains are designed “to meet a customer’s requirements in a stable marketplace, but with an eye towards maximizing profit.” This means supply chains “leave themselves exposed to the risk of even relatively small changes in demand or supply.”

That makes government designation of an “essential” business challenging, at best, and Petersen said there is “a trade-off that likely tries to strike a balance between the health of people and the short term role that a company plays in that space.”

“If healthcare is an essential business, the question is how many nonessential businesses support that business and how long can an essential business perform its mission without support from nonessential businesses?” Petersen said. “For instance, how long can a hospital go without support from a nonessential business?”  

Even seemingly unrelated businesses can have significant ties.

Petersen noted a family member, who lives in Mississippi, had to have surgery this week. Because hotels near the hospital have been closed, the family “had to get up and drive for an hour to get to the hospital by an early time, and then load back up after the surgery and drive an hour back to their home.”

“In this case, the lack of an essential service to support patients may well compromise the delivery of the needs of an acute patient,” Petersen said.

The longer business shutdowns continue, the more the remaining open businesses will “find ways to adapt,” McDaniel said. While she predicts “business practices will change,” McDaniel also noted some businesses “will not make it.”

Stanton said businesses now have three main priorities with the first two being reducing the spread of COVID-19 and ensuring local capacity to treat those who have it. But businesses’ third priority will have to be “making smart changes to processes so that supply chains can continue to function and support us.”

“Focusing only on costs right now is short sighted—we need to invest money in new ways of doing things that support all three of the priorities above,” Stanton said. “In the short term, this will probably increase the cost of doing business, for some. But companies that figure out how to do it well will be better positioned to survive the shutdown period and ramp up as we come out the other side. Governments need to balance efforts at limiting the spread of the disease by ordering businesses to close with strategies for supporting supply chains so that they can continue to function.”

McDaniel noted that reducing the spread of COVID-19 can have positive economic benefit, but that the logistics of reducing the spread without creating outsized hardship through supply-chain disruption may be far more complicated than what people realize.

“At least in the immediate term, the information from the health expert community is indicating that minimizing the damage to the economy is a function of minimizing the spread of the virus,” McDaniel said. “This means reducing physical contact in order to reduce the spread. There is no way around it.

“Shutting down nonessential businesses is a way to try to do that,” she continued, “but the economy is complex, and if you look at the input-output table by the Bureau of Economic Analysis, you see that nearly every sector is linked to nearly every other sector in one way or another.”

Ray Carter Director, Center for Independent Journalism

Ray Carter

Director, Center for Independent Journalism

Ray Carter is the director of OCPA’s Center for Independent Journalism. He has two decades of experience in journalism and communications. He previously served as senior Capitol reporter for The Journal Record, media director for the Oklahoma House of Representatives, and chief editorial writer at The Oklahoman. As a reporter for The Journal Record, Carter received 12 Carl Rogan Awards in four years—including awards for investigative reporting, general news reporting, feature writing, spot news reporting, business reporting, and sports reporting. While at The Oklahoman, he was the recipient of several awards, including first place in the editorial writing category of the Associated Press/Oklahoma News Executives Carl Rogan Memorial News Excellence Competition for an editorial on the history of racism in the Oklahoma legislature.

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