Commercial businesses play a tremendous role in influencing worldwide prosperity, but their future is shaky because of the coronavirus (COVID-19) pandemic outbreak. Many countries’ assets, business, and commerce worldwide that prospered just months ago are now severely strained. The pandemic has changed all aspects of life in business and personal lives.
In Kuwait, the oil and gas sector has largely set the standard for the national Gross Domestic Product (GDP). Kuwait is surely a wealthy country that owns countless natural resources such as oil and gas, however, relying only on these sources of income alone will lead Kuwait to a large economic risk. But since it’s outbreak, the COVID-19 pandemic in Kuwait has caused the oil prices to gradually decline 60% per oil barrel; prices decreased over 50%, from $55 to $22 USD per barrel on April 6, 2020.
This drop shocked our financial vision for 2020.1 Our economy will be experiencing its highest budget deficit ever in case this situation lasts or gets worse, estimated at 18 billion Kuwaiti dinar (KWD) – half of which is because of COVID-19. As this pandemic runs its course, we anticipate the amount of oil production will drop significantly more.
- On March 13, 2020, Kuwait International Airport stopped all commercial operations and quarantined all residents.
- Nine days later on March 22, the government imposed a curfew and stopped public holidays temporarily until further notice.
- On March 26 Standard and Poor’s (S&P) lowered the Kuwait credit rating from AA to AA-.2
- Kuwaiti’s employees started working remotely from their homes, and of course, this further slowed work efficiency.
According to KOTC management, supplying its operations with everything needed to run the business is essential. But because COVID-19 outbreak has affected the international supply chain, the number of KOTC supply chain purchase orders dropped between March and April as Figure 1 shows. This affected our noncapital expenses as well.
Figure 1. COVID-19 significantly impacts KOTC’s supply chain
We are seeing many similar declines in our production due to many other developments like manpower shortages, governmental disruptions and cash shortages.
How did the supply chain for DAF trucks affect KOTC?
Aside from transporting oil internationally, KOTC manages two Liquefied Petroleum Gas (LPG) filling plants in Kuwait. Each owns a huge fleet of DAF3 trucks that transport gas to different locations.
Dun & Bradstreet (Feb, 2020) listed 51,000 companies around the world who directly contracted to Wuhan, China factories. (Wuhan, China is where the COVID-19 outbreak first occurred.) These companies have recently experienced poor business performance due to the imposed lockdown. Because of this, the issue over the supply chain of DAF trucks’ spare parts must be more clearly defined because of potential damage to workers through COVID-19 epidemics.
As shown in Figure 2, an awarded bidder supplies the buyer (KOTC) with the desired items as long as they are available. But if not, an agent will order them from the DAF headquarters at Paccar, the parenting company of DAF Trucks in Eindhoven, Netherlands, and it will be shipped to KOTC within an agreed timeframe.
Figure 2. Supply chain flow diagram
Laurence Drake, the Managing Director of DAF Trucks Ltd, announced on March 4, 2020,3/4 that due to parts shortage and manpower insecurity, the headquarters of DAF Trucks and its subsidiaries would shut down their factories starting from the following dates until further notice:
- Netherland -- March 2
- Belgium -- March 19
- England -- March 23
The main reason is the ChinaMach industry,5 one of DAF’s core suppliers located in Shandong province, China, which is only around 800 km (about 4.5 miles) away from Wuhan, China. Management knew this virus could spread quickly. No doubt Shandong had been affected too as Figure 3 shows.
Figure 3 Focus of COVID-19 in both Wuhan and Shandong as of March 4
Three events created a cumulative challenge to KOTC:
- The deficiency of supplies caused by the ChinaMach Industry in China;
- The DAF Trucks in the Netherlands; and
- The Agent X of Kuwait (agent permitted by Kuwait to do business in or with Kuwait).
Regardless of how well we prepare our safeguards and alternative solutions, we must recognize how the world trade market behaves when one market fails. It’s like dominos. A collapse of one can collapse others -- causing widespread business disruptions and stoppages.
The procurement strategy we use today will matter tomorrow.
Swift forward-thinking decisions can curtail any catastrophic situation. Procurement at KOTC is creating a frontline tool to overcome this pandemic, since basic commodities have diminished worldwide resulting in severe shortages of medical supplies and services.
Healthcare authorities in Kuwait created a firm sourcing strategy against the consequences of the COVID-19 pandemic. To avoid any possible long delivery periods, the national Kuwaiti airlines is shipping personal protective equipment (PPE) cargos within less than 48 hours directly from the affected manufacturers.
We cannot forget the importance of automation and its value at a time like this. No one should hesitate to invest in information and communication technology (ICT), digital platforms and a 24-hour IT helpdesk. Software technology has made a huge difference in the speed and efficiency of purchase order processing. Thus, electronic sourcing and purchasing systems are considered a must today.
Revising your contracting terms and conditions can enhance a customer/supplier relationship. Being flexible in negotiation with live contracts and purchases benefits all sides fairly. Therefore, putting a “force majeure” clause in the contract under applicable wordings with detailed and direct definitions is needed for any future crises.
Large sized organizations need to specify an emergency cost code categorized for PPE and medical devices. Lowering the rate of possible infection is mandatory.
Evaluating a contracting decision after the pandemic
So many business owners (suppliers) are facing shaky situations like reimbursing wages, paying rents and operating costs, laying off employees, dealing with confiscated warehouses, and solving transportation challenges. Those suppliers need time to adjust to an inexact normalization phase. It will never happen overnight. Suppliers will need to handle their losses, look for new workers and restructure flexible business models to fill missing gaps.
Steven R Covey’s principle applies: approach should control the circle of influence rather than try to survive procurement barriers. In other words, the business needs to influence and improve its way forward rather than monitor and wait for external conditions to change. Searching for new suppliers and rebuilding trustful relationships should be first priority.
It is best to contract directly with manufacturers to lower the possibility of risk and increase sustainability if an unpredictable crisis occurs. This will allow you to shorten the lead time and collaborate with proactive companies who ensure environmental values. For example, the companies Apple and Tesla competed well in designing medical equipment as an initiative for public healthcare. Apple came up with making one million face shields per week, while Tesla invented ventilators made by vehicle spare parts.
In conclusion, COVID-19 issues will continue expanding. We need to make sure we are always ready for such emergencies. At the end of the day, we believe the shift toward digital commerce is key to the technological and industrial infrastructure that allows us to stay connected more during a crises like COVID-19.
- Oil prices could plunge below $20 a barrel this quarter as demand craters: CNBC survey
- S&P lowers credit rating to (AA-) but stable economic outlook article
- Briers, S. B. S., & Briers, S. (April 3, 2020). Coronavirus: Daf extends production shutdown until April 20.
- Kulikowska, A. (March 24, 2020). Vehicle manufacturers apply the brake and stop production.
- Kuwait Export Crude Oil Price Today, OPEC - OPEC Daily Price Historical Charts USD/BBL
- Ivanov, D. (2020, March 24). Predicting the impacts of epidemic outbreaks on global supply chains: A simulation-based analysis on the coronavirus outbreak (COVID-19/SARS-CoV-2) case.
ABOUT THE AUTHORS
Haya and Barak are both IACCM certified practitioners and APS (American Purchasing Society) certified purchasing professional. They have an industrial and systems engineering bachelor degree and working at the Commercial Group of KOTC currently. They are dealing with technical purchase-requisitions which let them be responsible on sourcing, negotiating, procuring, maintaining stock level, planning future agreements and managing supplier’s relationship. Analyzing a daily supply chain of a Filling Gas Plants is mainly a career pathway. Also, conducting Total Cost of Ownership analysis on mass component as a cost reduction and overall business solution at the company.