Effects of Coronavirus on a Sustainable Supply Chain

Effects of Coronavirus on a Sustainable Supply Chain

Volkswagen is a renowned automotive manufacturer on a global scale. The company is not only well known for its innovative vehicles but also for its unique approach to sustainability regarding the supply chain. The Prevent, Detect, React mantra was created to ensure that the company’s relationships with suppliers are progressive in promoting sustainability. Suppliers are expected to observe the contract terms that entail sustainability requirements. Through self-assessment, suppliers can constantly assess their performance against the set metrics, which identifies the areas that need improvement. The metrics emphasize decarbonization, responsible procurement, human rights, and the need to eliminate corruption. The Volkswagen Group seeks to proactively fulfill its role in different business relationships and exceed legal expectations (Volkswagen AG, 2021). Transparency is a critical aspect of its relationships with suppliers, which works alongside compliance. Do you need help with your assignment ? Get in touch with us at eminencepapers.com.

The involvement of suppliers in sustainability-related training enables the company to raise their awareness. This action facilitates prevention through adherence to the requirements that are contained in the Code of Conduct for Business Partners. To detect, the risks within the supply chain are analyzed and evaluated. Prioritization is done with the help of suppliers who do a self-assessment. React occurs when the company identifies different action plans to correct various supplier breaches. The actions should avoid a negative effect on the suppliers’ performance.

Once orders are placed at Volkswagen, they go through different systems, including production ordering, assembly, logistics, and delivery to the client. However, the seemingly simple process is complicated further by the need to reduce costs. This challenge demanded that Volkswagen modify its core processes. Thus, Volkswagen worked alongside IBM to install a new system that simplifies and automates the entire process. Employees can now use the system to access, analyze, and utilize the captured information. The system improves efficiency because it also alerts the company about expected material shortages, alternative sources, and the expected impact on production and finances (IBM Corporation, 2004).

COVID-19 effect on the supply chain

The presence of COVID-19 has adversely affected global supply chains. While this is not the first event to affect the global supply chains, its recovery is elusive. Other disruptions that result from natural disasters last for a short while, which enables companies to recover in weeks. The COVID-19 pandemic’s scope is much greater than the past disruptions, making its effects more severe. The lockdown that has been encountered since the pandemic spread across the world has affected all economic sectors negatively. The lack of certain predictions regarding the containment of the pandemic worsens this phase.

Global supply chains have experienced significant disruptions due to the lack of raw materials, human resources, and consumables. High-technology product manufacturers have paused some of the production centers due to a shortage of materials. This has led to the postponement of deliveries to clients. The automotive industry has not been spared. China-based plants have shut down, as have other regions. The output in the industry is expected to reduce by 13 percent. Companies such as General Motors have resumed production in China at low rates. Other companies, including Nisan and Hyundai, continue to hold production in different plants due to the current material shortage (Xu, Elomri, & Kerbache, 2020).

Volkswagen has also been affected variably by the pandemic. The lack of materials has led to the shutting down of production plants in China. The company cited the lack of semiconductor chips, which control the vehicles’ systems. This reason has led automotive companies, including Volkswagen, to reduce their production. It is not possible to continue with the company’s announced reduction of first-quarter production levels. The effect extends to the company’s production because it is impossible to continue with the manufacturing plans without some parts.  This reduction would affect Europe, China, and North America. As a result, the company is unable to deliver all orders on time (Volkswagen AG, 2021). However, the effect may not affect clients’ loyalty significantly because the pandemic has hit all individuals and organizations, causing a global halt/delay to various economic activities.

Volkswagen has had to pay higher prices for materials. Automotive suppliers around the globe have often enjoyed high volumes of orders. To match this demand, these suppliers invested in facilities to manufacture the materials. However, the pandemic has reduced the demand for vehicles as motor assemblies reduce their production. The fluctuating demand has affected the orders that auto manufacturers such as Volkswagen make to their suppliers. Despite the lower volumes of materials, the company has to pay more for the materials due to the fixed costs that suppliers incur. The fixed costs are present in their balance sheets regardless of the volumes that they produce. When lower, Volkswagen and other companies pay more as the supplier seeks to cover their overheads, which cannot be reduced drastically unless the suppliers shut down their plants (Green, 2020). In that case, the case would be different since the companies would lack the materials to produce any vehicles.

Volkswagen’s sales have reduced significantly due to the pandemic. During 2020’s first quarter, sales reduced to €19 billion. This reduction was 1.9 percent lower than the previous financial year. The operating profit was reduced by 47.7 percent to a €481 million record (Green, 2020). The drop in sales affected the profits that the company earned. This drop in both sales and profit is connected to reduced production, fluctuating demand for vehicles, and a lack of sufficient parts at economical prices. This implies that the company makes fewer sales in comparison to the previous years before the pandemic hit. The event can also be attributed to reduced consumer spending. Since the pandemic began, more individuals are sending less money on luxury or unnecessary items. This change in consumer spending is due to the unpredictable economies, prompting consumers to save more and spend less on non-basic items.

Volkswagen has had difficulty protecting its customers during the pandemic. The inadequate safety gear that is recommended for protection against COVID-19 makes it difficult for businesses to carry on with their activities. When having employees at work in the few production plants that are still active, the company has confessed that ensuring their safety is challenging. This is due to the rapid spread of the disease, the evolving strains that manifest differently, and the likely occurrence of accidents that could lead to the spread (Green, 2020).

Finally, Volkswagen operates on a Just-In-Time policy, which makes it dependent on the suppliers. The interruption of delivery of materials due to COVID-19 has paralyzed production at the company. Suppliers are penalized for late deliveries. This implies that the lack of raw materials would penalize more suppliers. However, this action would be unfair due to the widespread effects of COVID-19, which have negatively affected the suppliers and manufacturers (den Broek, de Beer, & van Amelsvoort, 2020). The interruption that resulted from COVID-19 reduced the demand for vehicles due to lower production.

Conclusion

A sustainable supply chain is critical for a company’s future ability to support its operations. Volkswagen’s sustainability is achieved through preventing, detecting, and reacting. The suppliers are constantly monitored to ensure that they follow all the requirements listed in the contracts. The COVID-19 pandemic is different and presents unique challenges to the automotive industry. Volkswagen is one of the players in the industry. COVID-19 has made it difficult for suppliers to provide all the required materials on time. This shortage has directly affected the manufacturing process and profits alike. Volkswagen’s inability to produce vehicles and fulfill orders caused deep profits and sales. The company has had to shut down manufacturing plants in various regions. The closure has been motivated by the lack of specific materials, such as semiconductors, high prices for the same materials, and reduced demand. Suppliers are forced to charge more money due to the constant fixed costs. The vast investments that suppliers made to support the large-scale production of materials pose a challenge to the company’s operations. It is also impossible to operate on a Just-In-Time basis due to delayed deliveries or a lack of the required materials. Thus, COVID-19 has made it impossible for Volkswagen to pursue sustainability through its supply chain due to interruption.

References

den Broek, K., de Beer, F., & van Amelsvoort, G. (2020). The Covid-19 Effects on the Volkswagen Supply Chain.

Green, W. (2020). VW faces higher prices from suppliers.

IBM Corporation. (2004). Volkswagen’s world-class procurement strategy produces breakthrough productivity gains.

Volkswagen AG. (2021). Sustainability in the Supply Chain. Retrieved from Volkswagen Aktiengesellschaft: https://www.volkswagenag.com/content/onkomm/brands/corporate/world/presence/en/sustainability/sustainability-in-the-supply-chain.html#

Xu, Z., Elomri, A., & Kerbache, L. (2020). COVID-19 impact on Global Supply Chains: Facts and Perspectives. IEEE Engineering Management Review, 48(3), 153-165.

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Effects of Coronavirus on a Sustainable Supply Chain

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Effects of Coronavirus on a Sustainable Supply Chain

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