Covid-19 supply chain disruptions pose multi-trillion economic threat

17 August 2020 3 min. read

Global markets could forfeit as much as $5 trillion in economic losses, if they do not adapt their supply chains in the wake of the Covid-19 virus. According to a new study, with natural and man-made crises disrupting supply chains more regularly, businesses need to evaluate whether it is sustainable to rely on a sole location for a resource, or assumptions that demand will go unhindered as a rule of thumb.

The year 2020 has been a year of massive challenges for global businesses and especially for supply chains. Looming trade wars between the US and China, preparations for the post-Brexit economy in the Euro zone and an increasing focus on sustainability and environmental consciousness all pushed global supply chains to review and re-engineer their operating models – though none had as much of an impact as the worldwide Covid-19 pandemic.

According to a new report from McKinsey & Company, the Covid-19 crisis could top $5 trillion in economic losses worldwide, if supply chains spanning the globe fail to adapt to reduce exposure to threats to business survival, such as a further wave of the pandemic. Analysing 325 companies in 13 industries, the firm concluded that man-made and natural disasters are getting more severe, frequent and costly, and that supply chains spanning the globe need to adapt to reduce exposure to threats to business survival.

Net present value (NPV) of expected losses over 10 years

Susan Lund, a Partner at the McKinsey Global Institute, commented, “The average company can expect to have a month to two months’ disruption of production every 3.7 years, which is incredibly frequent… So although you don’t know what the next shock is going to be, the fact is, in most industries these have become quite significant.”

McKinsey predicts that the average expected losses from supply chain disruptions across all industries equal 42% of one year’s EBITDA, over the course of a decade. This will be most keenly felt in the commercial aerospace sector, where it will be around 66%, and automotive at 56% – while both mining and petroleum products manufacturing look set to be impacted worse than average too.

Business leaders cite multiple sources of supply chain vulnerability

This may be because a number of these sectors are either prone to demand variability or to unpredictability surrounding the sourcing of raw materials they centre upon. Commercial aerospace, for example, was rocked by the sudden absence of demand brought about by lockdown. Meanwhile mining and petroleum refining are both dependent on being able to readily ship the materials they produce around the world – but if a local lockdown suddenly prevents them from doing so, their entire supply chain can grind to a halt.

These are also the concerns which top the agenda across a host of other industries. When McKinsey asked pharmaceutical companies which conditions currently make their company most vulnerable to value chain disruptions due to crises such as Covid-19, 49% said sole sourcing and non-sustainable inputs were a key issue. Meanwhile, in the automotive sector, 42% of companies said that demand variability was a major concern – with the demand for new cars and parts having plummeted in lockdown, as the need for transportation fell away.