Manufacturing Restart: How manufacturers in China are preparing for a production rebound

In our previous blog of the series, we looked at china’s use of Artificial Intelligence in healthcare during and after the COVID-19 lock down. In this blog we take a look at how Chinese manufacturers are ramping up post lock down operations while extracting key learning’s for the global manufacturing industry.

Measures to prevent or reduce COVID-19 infection have affected supply chains and disrupted manufacturing operations across the world. How will the global manufacturing industry re-boot operations after the pandemic? According to China’s Activity Index, many of the country’s industrial manufacturers are now in post-crisis mode. So, what key learnings can they share with their global counterparts?

As of April 13^th, some three weeks after restrictions started being lifted in the province of Hubei where the outbreak began, 97% of large companies in China had restarted their activities. Although many were operating with reduced capacities – figures indicate that on average they were at 81.8% of normal activity levels – the process of normalization given was clearly under way given that the index was sitting at just 46%on March 2^nd and 69.5% on March 16^th.

Illustration 1: The activity index looks at the current state of China’s industrial and manufacturing enterprises overall economic capacity utilization as compared with “normal” levels prior to the virus outbreak. (Source, Trivium China)

Hyper agile task force

Speed is of the essence as manufacturers in China restart operations. One solution is to empower a hyper agile team capable of rapid decision making, responding to unprecedented situations in real time, and dealing with an ecosystem of suppliers and clients has offered a solution. This ‘recovery task force’ approach is mandated at CEO level as business leaders recognize the huge challenges ahead. As well as shortages and illness amongst their own employees, manufacturers are dealing with regions at varied levels of lockdown and stakeholders in diverse industries, all affected to a greater or lesser degree.

With its CEO mandate, a typical task force might comprise the country leadership team along with head of sales, as well as supply chain, finance, legal, HR and safety personnel. Working across business units and departments (along the value chain), its initial task will be to identify business impacts and define and implement mitigation measures. This hyper agile task must be given global scope!

At a leading manufacturer with which Capgemini is working, the recovery task force is one of three main streams under the umbrella of crisis management, alongside HSE and legal communications. The task force has its own workstreams: procurement, production, logistics, sales, projects, finance. Their overall objective is to ensure production plans can be fulfilled, projects are delivered and installed, people are safe, and financial impacts and mitigation are harmonized.

While the immediate objective of this would be to ensure that the business can rebound quickly in the short term, it is also an opportunity for the task force to support the development of a longer-term transformation strategy.

First and foremost, however, every company restarting operations after lockdown must focus on their people, clients, supply network, demand and sales planning.

Taking care of people first

Industries in China rely heavily on migrant workers, many of whom had gone back to their hometowns for Chinese New Year just before the lockdown. In mid-March, around 80%² of those who left tier-1 (Beijing, Shanghai, Guangzhou, and Shenzhen) and tier-2 cities (e.g. Tianjin, Chongqing, Wuhan, etc.) returned. How could this returning workforce be monitored for the wellbeing of all employees? How should facilities running at reduced capacity during an extended period be managed? For one leading manufacturer, the solution lay in contactless technology. Almost immediately, the manufacturer set up a digital program designed to help the task force better understand when employees would be able to return to work by capturing daily information on their health and any recent trips to affected areas. This also enabled managers and HR to offer guidance to employees confirmed to be in Wuhan or reporting fever, and it gave clarity on how to reorganize their teams.

Manufacturers during this initial recovery period in China also put in place protective measures to reassure employees coming back to work and support them through the time of crisis.

In the factories, these measures included the provision of personal protective equipment (PPE) like masks, gloves and sanitization gels, regular disinfection of facilities throughout the day, and the obligation to keep a safe distance in public spaces, with assigned seats in company buses and canteens.

Securing supply and inventory

All manufacturing OEMs located in China or abroad faced shortage of parts during the crisis. Globalization and just-in-time delivery became a major area of risk. Suppliers and sub-suppliers were all facing the same situation. In such instances, a major issue arises when procurement teams have no close contact with their suppliers and are therefore unable to monitor production capacity on a daily or weekly basis, or to evaluate new logistics routes and prices.

One manufacturer’s task force in China built its restart strategy to work around potential delays and freight issues for critical parts. A leader in the renewable energy industry, providing offshore and onshore wind turbines and services, the company’s objective was to detail the full impact of the disruption on its production and warehouse availability and find mitigating solutions. These solutions primarily involved the use of air-freight deliveries, negotiation of acceleration plans with suppliers, and the use of new suppliers. The task force also looked at internal solutions, including, where possible, an increase in the number of shifts once the supply chain was re-established, and the reallocation of employees to the plants that were up and running.

In the context of supply and inventory, a major challenge during any crisis such as Covid-19 is the increased risk of contractual defaults and potential legal action for failing to fulfil orders. In this instance, a task force might also focus its efforts on the critical matter of triggering a force majeure clause for inclusion in most trade deals. In a force majeure situation, a company is the victim of events beyond its control, such as a natural disaster, war … and pandemic. One task force in China achieved this to:

Reduce the expected losses as a result of supplier disruption;
Improve the clarity on the current situation for clients;
Enable a legal force majeure case to be constituted.

Indeed, the government provided a record number of force majeure certificates to exonerate companies from penalties. When force majeure provisions are put in place, it is important to manage communication as early as possible with customers in order to maintain trusted relationships going forward.

Evaluating demand and sales impact

It is not enough to simply think about restarting production. The task force must also rapidly understand and adapt to a completely new economic order. Every actor in the business ecosystem is trying to simultaneously recalibrate their strategy and operations at an unprecedented speed. This demand evolution and impact on sales can lead either to a dual (production and demand) crisis or missed opportunities. Manufacturers need to be proactive both in ensuring that the restart does not lead to an inventory surplus and also at the same time they must be able to fulfill their customer’s need.

Why it’s time to rethink strategies beyond the restart

While the task force activities described above address the immediate restart challenge, manufacturers now need to begin thinking about the resilience of their industry going forwards. There’s no doubt that the COVID-19 crisis has turned the spotlight on accelerating digital transformation strategies, notably with:

Digitalization to collect data and provide better supply visualization with control tower solutions
Robots and automation to enhance plant flexibility and the capacity to run critical processes alone or remotely.

During and immediately post the COVID-19 shutdown in China, use of these tools was largely limited to quick wins. However, large scale projects will be expected in the coming years to ensure manufacturers’ survival. Notably, crisis highlights a manufacturer’s existing weaknesses, such as lack of stock transparency or over-reliance on a country for key supplies, and this demands transformation.

New issues have since arisen with new epicenters of the virus and a global shutdown. Many manufacturing companies are now struggling to deliver overseas with lower demand. As Chinese manufacturers cope with slowdowns in other economies, the task force model is likely to remain in place to respond to an ever-evolving situation.

This unique crisis and the threat it poses to the global supply chain could also be a turning point in the make-up of international supply chains. For example, will manufacturers use this moment in global history to rethink local sourcing so that they can continue production during prolonged lockdowns?

What’s clear is that any response to the crisis needs to focus not only on restarting manufacturing, but also on a close alignment with sales recovery for setting the right priorities. The longer-term transformation towards more resilient supply chains is then the next step.