COVID-19 ISO Insights

Coronavirus: Various Supply Chain Concerns Come Into Focus

February 18, 2020

By: David Geller, CPCU

With the World Health Organization (WHO) declaring in January that coronavirus had emerged into a global emergency, the supply chain is one of several areas of focus to consider.

For example, Wired has reported that China produces many of the same masks that are being purchased by U.S. consumers to reduce their chances of exposure (although there are questions related to the effectiveness of this strategy). With factories reportedly closing for an extended period of time in China, could this outsourcing of mask production increase the chances of the spreading of the disease in the U.S.? The New York Times mentions that this surge in demand also may increase the likelihood that there isn’t enough availability for doctors and nurses that treat patients.

In addition to medical equipment potentially being at risk, the Wired article also notes that China is the world’s largest producer of active pharmaceutical ingredients. This could potentially pose issues in the United States, as a separate Wired article estimates that nearly four-fifths of active ingredients in American pharmaceuticals comes primarily from China and India. Additionally, despite the fact, per the New York Times, that generic drugs comprise 90% of American drug supply, only 10% are manufactured domestically.

The exposures resulting from this dependence on outsourcing may be heightened given a reportedly high level of uncertainty pertaining to what percentage of critical medicines actually originate in China. Wired explains the issue as follows:

The biggest problem is that there is no publicly available information on what portion of which critical medicines originate in China, and specifically where those factories are located, she says. Pharmaceutical companies consider such information to be proprietary. “One of the big unknowns is how many products are sole-sourced—in which literally only one place in the world makes that raw material,” [Erin Fox, expert on drug shortages] says. “We don’t have good information on that at all.”

Erin Fox also explained to Wired that impacts to the supply from shortages may not be felt for months, as pharmaceutical plants around the world reportedly maintain and inventory of supplies.

Coronavirus Supply Chain Impact: Extends Beyond Medicine

While it appears that coronavirus may create stress for the health industry that hopes to mitigate—and ultimately resolve—the issue, other economic impacts may emanate from its spread.

The New York Times has reported on the greater potential of coronavirus to cause economic losses then the SARS pandemic in 2003, which Reuters reports led to billions of dollars of economic losses in several countries, including Canada, Hong Kong, and Singapore.

Since 2003, the Times notes that China’s annual economic output has multiplied more than eightfold to roughly $14 trillion. Its share of global trade has also reportedly doubled to 12.8%.

While China’s relevance to manufacturing, global trade, and more appears to be clear, an increasingly complex supply chain, per the Times, has created ambiguity in determining how these effects will unfold. The article notes that even companies do not know which suppliers are producing components three or four rungs down the supply chain. This may inhibit these enterprises’ ability to anticipate the extent to which their production may be affected.

Though the circumstances were different, the Times cites the earthquake and tsunami that devastated Japan in 2011 as an example of supply chain difficulties that can ensue from a disruptive event. Numerous companies that had reportedly assumed they were buying parts from a wide range of suppliers had abruptly found out, through the fallout of this event, that critical components were being produced from a single plant that was decimated.