Coronavirus – Companies now should rethink on the basic Procurement Principles

Coronavirus has been raging its impact across the world from more than 2 months now and its specific impact is being noticed on Shipping and Pharma industry.

Since last two-three weeks, most of the giant shipping companies such as Maersk, MSC, Hapag-Lloyd and CMA-CGM have reduced the number of vessels on routes connecting China and Hong Kong with India, Canada, the United States and West Africa which is now termed as ‘BLANK SAILINGS’.

Most of the vessels are not arriving or arriving late by one or two weeks.  Even shipping companies have stopped releasing containers/bookings too. They have anchored the vessels instead of moving as a major chunk of the business is moving out to/from China which is not moving in/out.

Several container ships emerging from China are operating on their 1/10th capacity.

Sea-Intelligence in a report said, more than 3,50,000 containers have been removed from global trade since the outbreak of the virus led China to impose large travel restrictions at the end of the country’s Lunar New Year holiday break.

As a precautionary major, Government of India has suspended all the landing permits, shore passes to Chinese crew national members or foreign residents in China.  As per another circular DPPQS has instructed all to take care of sampling & testing from respective labs for all the commodities.

Normally after CNY, Chinese exports & imports would have restarted by 7th February but in the current situation, there is no assurance when the situation will return to normalcy.

Shipping lines and entire logistics industry were supposed to start operations from 10th February but according to recent updates, the date has been revised from 10th February to March 1st week.

It shows that even if China opens up, the required capacity to ship necessary goods would not be available and the demand gap would not be met as per expectations.

Every year importers from around the world pile up inventory for these two weeks and expect subsequent delays in shipment due to heavy load on ports. However, now it seems to be a matter of a few days that this inventory would run out. This would have serious consequences on the world market – both importing from China and exporting to China.

Wuhan, capital of Hubei province in China is a major transportation hub with excellent connections of railways, roads, and expressways with other major cities. The closure of Wuhan has impacted the entire domestic network of China because of its key role in transportation.

Wuhan, the epicentre of the crisis is a traditional manufacturing hub for decades.

Some of the key industries in Wuhan are Automobile Production/Assembly, Biotechnology/Pharmaceuticals, Chemicals Production, Intermediates and Processing, Food/Beverage Processing, Heavy Industry, Telecommunications Equipment, and Optical-electronics. Additionally, Wuhan Bio-lake is an industrial base established to accommodate research activities in biosciences.

Apart from these, a whole lot of sectors such as toys, furniture, computers, cars and white goods are dependent on China. A supply crunch in smartphones, TVs and electronics will impact e-commerce sales dearly. Millions of smartphones sold annually are sold online in India only.

In fact, not so long ago, local companies such as Micromax, Lava and Karbonn were among the leaders in the handset market, but now four of the top five players are Chinese companies and Indian companies don’t even figure in the top 10. Chinese brands have cornered the entire market. This may lead to severe financial repercussions across the globe.

However, there would be a huge impact on the Pharma & Agrochemical industry because of the huge dependency on raw materials such as Active Pharmaceuticals Ingredients (API) & many intermediates as well as techniques for many drugs & pesticides, which are mainly transported from China.

Historically, India has been self-sufficient for these drugs until the 90s for Pharma but huge cost advantages and economies of scale have led to a significant increase in imports from China.

Over the last 15 years, making seemingly impossible to head back to a situation where global demand may be completed from India or other locations.

Since a significant percentage of the imports into India are from Wuhan, it may not be practical for Indian manufactures to start scaling up within India or identify alternate locations in such a short time span.

Unlike the automotive or mobile industry, Pharma manufacturers usually keep sufficient stock to last up to two months. Hence, there is still some time left to take action on this situation. However, in global settings, switching suppliers and ensuring the right quality and cost in such a short time span will be very challenging. This may even lead to a global increase in medicine prices.

It is time to rethink the basic principles of procurement that there should be no dependency on one location or one supplier in order to maintain business continuity.

In today’s scenario with pricing being the key, it is time to review the procurement strategy again or go for MAKE IN INDIA initiative which required much more efforts, strategy & government support in every manner. 

This Article is Authored by Mr Bhupendra Kumar, Head – Logistics, IOL Chemicals & Pharmaceuticals Limited

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