In general, hospital supply chains work like this: A hospital (or nursing home or health agency) enters a group purchasing organization, or GPO, with several other providers. They pool together to order what they need, in bulk. When the system works, everyone saves money. But GPOs aren’t nimble; when there are problems, they’re felt across the system. And individual hospitals can’t immediately get what they need.
That means someone like Watkins ends up appealing to state and federal authorities for help. The World Health Organization is asking manufacturers to ramp up production of personal protective equipment for health-care workers. There is a strategic reserve of health-care supplies, which the White House has discussed tapping. And now it’s invoking the Defense Production Act.
But across other industries, the supply chain doesn’t have a similar cushion. And the strain is obvious. The Institute for Supply Management, which conducts monthly economic surveys, found that nearly 75 percent of the companies it contacted in late February and early March reported some kind of supply-chain disruption due to the coronavirus. And 44 percent of the companies didn’t have a plan to deal with this kind of disruption. “That is a little surprising in this day and age,” ISM’s CEO, Tom Derry, said in an interview.
“However,” he added, “you have to realize that there’s almost no industry sector—and when I say that, I mean manufacturing and nonmanufacturing—that isn’t reliant on China in the United States.”
Anne Applebaum: The coronavirus called America’s bluff
Chinese materials and manufacturing are so pervasive that the average customer has no idea how many of their everyday products contain Chinese components, or how reliant on Chinese components most companies have become. “If you don’t have a first-tier supplier who’s sourcing from China,” Derry said, “then your supplier’s supplier is.”
To understand why the modern supply chain is uniquely vulnerable to a threat like the coronavirus, you have to realize how quickly it has changed. China joined the World Trade Organization in 2001, and surpassed the U.S. as an industrial powerhouse in 2010. During the SARS epidemic of 2002 and 2003, China represented 4.31 percent of worldwide GDP, wrote the MIT professor David Simchi-Levi, who studies supply chains. Now that’s 16 percent.
Western companies find it cheaper to manufacture goods in China, and elsewhere in Asia, than to do so closer to home. Car parts, technology, fashion, medical gear, and drug components are particularly vulnerable to disruptions in Asian markets. Derry noted that in 2012, after the Japanese tsunami, “you couldn’t buy a red Toyota for months, because the one factory that made red pigment for Toyota was offline.” Apple, Fiat Chrysler, and Hyundai have already warned investors of potential supply constraints due to the coronavirus pandemic.