Home Finance Can Supply Chains Adapt to a Post-COVID-19 Reality?

Can Supply Chains Adapt to a Post-COVID-19 Reality?

by internationalbanker

By Joseph Moss, International Banker

By now, most of us have been made painfully aware of the sheer magnitude of the coronavirus pandemic’s impact on the global economy. In particular, it has been clear to see how global demand has been affected, as average household income has taken a spectacular nosedive and consumption has taken a beating as the virus continues to restrict people’s movements, and rising unemployment concerns have made people decidedly more cautious about their planned expenditures. Businesses have also put most of their capital-spending plans on hold during this period of marked uncertainty, which has meant investment has also plummeted over the last year or so.

What has been perhaps less visible but just as impactful has been the damage the virus has inflicted on the world’s supply infrastructure and, in particular, global supply chains. From the moment a certain resource is mined or created to the time the consumer receives the final product, COVID-19 has affected every stage of the supply chain in a way few industry leaders will have ever experienced before or anticipated 18 months ago, with most of the world’s manufacturers, wholesalers and retailers being significantly touched in one way or another.

According to research published in November by Capgemini, more than four out of every five organisations reported that COVID-19 had negatively affected their supply chains. “Our research also found that organisations have struggled to respond rapidly to disruptions and to restore operations to a steady state (for instance, restoring inventory levels and the availability of manufacturing and logistics capacity), which further highlights the lack of resilience in supply chains today,” the study noted. “As many as 55 percent of organizations have taken three to six months to recover from supply chain disruptions, while 13 percent expect to take 6 to 12 months to do so.”

Similarly, a September 2020 paper sought to identify the major issues that NASDAQ-100 firms faced as a result of COVID-19’s impact on supply chains as well as the strategic options that they were contemplating. To determine these trends, the researchers used firms’ Twitter data and test analytics tools to generate themes regarding the issues they faced and the strategies they adopted in response to such challenges. “We find that firms are facing challenges in terms of demand-supply mismatch, technology, and development of a resilient supply chain,” the study observed. “Moreover, moving beyond profitability, firms are experiencing difficulties to construct a sustainable supply chain.”

But at which stages of the supply chain are the disruptions being most keenly felt? The Capgemini research found that organisations face significant challenges across all stages:

  • Planning: 69 percent of respondents cited difficulties in supply planning due to lack of information on impacted suppliers, with 68 percent identifying difficulties in demand planning due to lack of data on fluctuating demand;
  • Sourcing: 74 percent faced shortages in critical parts and materials as well as delayed shipments and longer lead times;
  • Production: 69 percent noted difficulties in rapidly scaling production up and/or down, and 68 percent faced problems reconfiguring production lines;
  • Warehousing and distribution: 69 percent faced difficulties in balancing stock between warehouses, and 68 percent faced difficulties with products being held up in ports or across borders;
  • Sales: 71 percent had difficulties switching to online channels, and 67 percent lost sales due to items being out of stock.

What is also particularly egregious about this pandemic as far as supply chains are concerned is that China was the source of its initial impact. With Chinese factories the first to close early last year, and with China being the world’s prime hub for global production—the United Nations put the country’s share of global manufacturing output in 2018 at a hefty 28 percent—disruptions to the availability of goods were created from the very beginning of the virus’s outbreak and weighed heavily on supply in developed markets. What’s more, many manufacturers rely almost exclusively on China for raw materials, meaning that with a lack of supply-chain diversification, their struggles were almost instant once the pandemic became a serious issue. In Japan, for instance, China’s lockdown sent the country’s automaker industry into chaos as those firms that operated factories and those that procured parts from their neighbour were effectively cut off. And with Japan and several other countries also procuring masks and protective gowns from China, the pandemic exposed some extreme vulnerabilities associated with the lack of diversification across the global supply chain.

Both the pandemic and the trade war between the United States and China have forced companies all over the world to review their supply-chain arrangements, with several reports over the last year detailing something of an exodus from China, either to neighbouring countries, such as Vietnam and Taiwan, or back to their home countries as part of a process known as “reshoring”. Nonetheless, it seems unlikely that China will lose its status as the factory of the world anytime soon. A 2020 China Business Report by the American Chamber of Commerce in Shanghai, for instance, found that 70.6 percent of more than 200 respondents confirmed they would not be withdrawing their operations from the country.

So, if most companies are staying put, what can they do to address the problems? Writing in the World Economic Forum (WEF), Jean-Pierre Krause, the global head of risk engineering at Zurich Insurance Group, recently identified four key questions that ought to be addressed:

  1. Is it time to further diversify my supply chain? With COVID-19 uncovering the overreliance manufacturers had placed on China, it seems like the right time to consider other manufacturing hubs such as Vietnam, Mexico and India, which are only likely to strengthen during the coming years. “This can help you navigate geopolitical risks and potential trade wars,” according to Krause. “It is also an opportunity to increase transparency and gain a deeper understanding of the vulnerabilities and hidden risks throughout your supply chain, including your suppliers’ suppliers.”
  2. Do I need to localize manufacturing? By moving a chunk of production towards the end consumer and therefore promoting the localisation of supply chains, manufacturing can be more resilient to global challenges. “This strategy will likely increase costs, but it may also appease governments who sometimes apply pressure to manufacture in-country to boost employment and ensure certainty of supply of critical products, such as medical supplies.”
  3. Should I invest in digitising my supply chain? With supply chains still often using antiquated processes, digitisation offers the chance to build interconnected digital supply networks that more effectively anticipate and respond to potential supply chain shocks in the future. “Digitizing the supply chain, by investing in artificial intelligence and intelligent automation, can create smart and nimble supply chains able to quickly shift production strategies,” Krause noted.
  4. Can I make my supply chain more customer-focused? The pandemic caused demand shocks that left warehouses full of unwanted or outdated goods. But by more closely marketing those products that are in stock and at areas where there is stronger demand, supply chains can be more efficiently utilised. “Instead of waking up worrying about how to solve the next issue to beset your supply chain, you’ll lie awake considering the opportunities to redesign supply chains to be smarter and more resilient.”

It would seem, then, that companies are now well aware of the need to address their supply-chain vulnerabilities. The Capgemini research found that the pandemic had forced organisations to prioritise supply-chain resilience, with 66 percent stating that their supply-chain strategies would have to change significantly to adapt to the new normal and just 14 percent indicating that they were expecting a return to normal.

And a recent survey by Gartner of more than 1,300 supply-chain professionals revealed that 87 percent of respondents plan to invest in supply-chain resiliency within the next two years. The survey, conducted from September 2020 through November 2020, also showed that 89 percent of supply-chain professionals want to invest in agility. “Supply chain executives overwhelmingly recognize the necessity to make their networks more resilient and agile,” said Geraint John, vice president analyst with the Gartner Supply Chain practice. “At the same time, 60 percent admit that their supply chains have not been designed for resilience, but cost-efficiency. The challenge will be to create an operating model for supply chains that combines the best of both worlds and also delivers supreme customer service.”

As for the situation today, however, structural problems and limitations have clearly been exposed throughout the supply chain. And as the world strives to move into a post-COVID-19 reality, it seems highly likely that supply chains will be forever changed. US President Joe Biden’s signing of an executive order in February to review the systemic risks in the supply chains across several important industries, including agriculture, pharmaceuticals and semiconductors, suggests that, at least from a US perspective, the effective management of those risks is being treated as a distinct priority. But companies, and in particular risk managers, must ensure that they not only adapt their supply chains to meet the demands of the new normal but also immediately identify the supply-chain deficiencies exposed by the pandemic and move quickly to correct them.


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