Rapidly falling communication and coordination costs since the early 1990s have ended the need to perform all business functions within the same region. This trend is reflected in the rise in offshoring over the past three decades. Globalisation has allowed businesses to take advantage of lower labour and operating costs and become competitive internationally. However, since the onset of the coronavirus pandemic, vital supply chains have been disrupted and workers across the world have been affected. It has exposed the vulnerability that global interdependence creates, leaving manufacturers to reconsider the prioritisation of efficiency in their supply chains over domestic self-sufficiency.
According to a McKinsey survey of global supply leaders, 73% of them encountered problems with their supply base, and 75% faced problems with production and distribution. A whooping 85% of respondents struggled with inefficient digital technologies in their supply chains. Whilst just over half of the executives felt that they had been able to manage supply-chain planning following the abrupt introduction of remote working, 48% said the changes had slowed down decision–making in planning.
Alleviating the impact of the pandemic poses a far greater challenge than previous global disruptions since it has simultaneously caused both a demand and supply shock. Sporadic flare-ups, shutdowns, re-openings and varying degrees of restrictions around the world make demand forecasts for several industries challenging, resulting in supply chain inefficiencies. The bullwhip effect demonstrates that the unpleasant ramifications of the supply chain disruption are felt most upstream, typically by small suppliers who often cannot withstand the huge reduction in orders. Meanwhile, the supply shock that started in China in February led to shortages of pharmaceuticals, critical medical supplies, and other products in US and European factories. This put manufacturers under great political and competitive pressure to increase their domestic production, grow employment in their home countries, and minimise the amount of inventory held in their global supply chains.
However, the level of sophistication that Chinese manufacturing has attained in terms of cost, speed, responsiveness and capacity is difficult to create elsewhere. Consumers will continue wanting low prices, especially in a recession, and firms will not be able to charge more just because they manufacture in higher-cost home markets. Since domestic self-sufficiency is not an option for many companies, strengthening their supply chains should be on their corporate agenda at present. Actions taken now to mitigate impacts on supply chains can also build resilience against future shocks.
The first step of supply chain risk management is the identification and evaluation of vulnerabilities through supply network mapping. This important risk management strategy is often neglected by businesses because it is complex, time-consuming, and resource intensive. But a surprise disruption that brings business to a halt can be much more costly than a deeper look into the supply chains. Risks can be assessed based on (i) how critical the supplied part is to the production process, (ii) how critical the supplied part is for consumer usability, (iii) the supplier’s capacity to hold inventory, and (iv) the supplier’s financial health.
Once the risks in the supply chain have been identified, the second step would be to design appropriate risk management strategies. These include diversifying suppliers or locations of production, stockpiling key items, and utilising process innovations. Certain companies may balance procurement between China, Southeast Asian countries and Western suppliers, as the perils and pitfalls of overdependence on suppliers from a single geographical location become clear. If alternative suppliers are not available, a company may hold intermediate inventory or safety stock at certain points along the value chain.
The abrupt and unexpected emergence of the coronavirus pandemic has reignited the debate about the supply chain risks associated with international production. However, the shortage of skilled labour and high production costs in the West mean businesses are likely to continue to leverage the benefits that international market integration provides. Managers should use the crisis to invest in supply chain risk mitigation strategies and promote agility and greater transparency. When the pandemic subsides, the more reliant production networks reduce the risk of future disruptions that are certain to occur.
References
Alicke, K. et al., (2020), ‘Resetting supply chains for the next normal’, McKinsey & Company, [Online]. Available at: https://www.mckinsey.com/businessfunctions/operations/our-insights/resetting-supply-chains-for-the-next-normal
Infosys (2020), ‘COVID-19: A wake-up call for supply chains management’, Infosys BPM, [Online]. Available at: https://www.infosysbpm.com/blogs/salesfulfillment/Pages/covid-19-a-wake-up-call-for-supply-chain-management.aspx
OECD (2020), ‘COVID-19 and Global Supply Chains: Policy Options to Build More Resilient Production Networks’, OECD Policy Responses to Coronavirus (COVID19), [Online]. Available at: https://read.oecd-ilibrary.org/view/?ref=134_134302-ocsbti4mh1&title=COVID-19-and-Global-Value-Chains-Chains-Policy-Options-to-Build-More-Resilient-Production-Networks
Shih, W.C. (2020), ‘Global Supply Chains in a Post-Pandemic World’, Harvard Business Review, (September-October Issue), [Online]. Available at: https://hbr.org/2020/09/global-supply-chains-in-a-post-pandemic-world
