COVID-19 and Supply Chains: Reinforcing the Links

01 July 2020 16:15

COVID-19 and Supply Chains

Unless one was in the logistics business anyway, not many of us gave supply chains much thought before COVID-19. We put items into our actual and virtual shopping carts without giving a second thought about the various raw materials that had to be sourced and then shipped, the manufacturing and assembly of various parts and components (often at different locations), the finished product’s warehousing, etc. It was largely out of sight, out of mind.

But like so much else, COVID-19 has certainly changed that. The World Economic Forum (WEF) reports“sky rocketing” media interest in supply chains. This media attention, combined with shared struggles securing certain products, has made us all hyper-supply-chain-aware.

We used our Nexis® superpowers to see what some thought leaders are saying about the state of supply chains around the world and how the pandemic is likely to change them¾forever.

A Web of Connections Covering the Globe

In April, the WEF reported that 94% of Fortune 1000 companies said they were seeing pandemic-related supply chain disruptions. The scale of this takes on new meaning when you consider that, according to the International Trade Centre (ITC) in Switzerland, more than two-thirds of world trade happens via collections of supply chains, what they call global value chains, or GVCs. Three of the largest GVC’s have been majorly disrupted by the pandemic: China, the European Union (EU) and the United States.

Let’s take a look at the EU. According to the ITC, “The factory shutdown in the  EU will have the strongest repercussion for the supply-chain exports of other countries. Why? Because the EU is the largest importer of manufacturing inputs [and is] the main importer of manufacturing inputs from both Africa and Asia.”

The ITC reports that African exporters may lose $2.4 billion in global manufacturing value-chain exports due to the shock of factory shutdowns in the three GVC’s noted above. It may be a big world, but when it comes to supply chains, it’s a flat and tangled world too.

Supply Chains: Efficient, Yes, But Not So Durable

In recent decades there has been a major push for companies to run as efficiently and economically as possible, hence “rightsizing” automation, offshoring, etc. Supply chains were not spared from the effects of this cost-reduction and efficiency-raising mentality.

As such, supply chains have been designed and managed to be as lean as possible. There’s a clear logic to this, of course. If you ran a company that sold, say, widgets, would you spend more money to have multiple sources of supply in case you needed a backup? Or would you spend more to stockpile inventory? Given that these sorts of investments would likely make your company less competitive, you probably wouldn’t.

But along came COVID-19. Many companies up and down the supply chain didn’t have backup suppliers, nor enough surplus product to weather this storm. A break in the chain, so to speak, was all but inevitable under the pressures of a sustained, global pandemic.

Back to your make-believe widget company. If the pandemic was causing a run on your widgets, would you invest in ramping up manufacturing to meet the demand, knowing that it would likely plummet, perhaps before you recouped the cost of your investment? Once again: probably not.

As these situations make clear, there is a certain rhyme and reason to supply chains. Until a pandemic hits, that is.

New Ways of Managing Supply Chains

With this in mind, it’s not surprising that the WEF also reports that the “traditional metrics of cost, quality and delivery when developing [supply chain] strategies will no longer be enough. Going forward, supply chain leaders must consider the three R’s: Resilience, Responsiveness and Reconfigurability.”

Yes, costs will still matter, but the WEF claims that,“Supply chains will be as much about revenue assurance as they would be about cost optimization.”

This will require companies to think more broadly about their supply chains. The WEF added:

“Most organizations know exactly how much inventory they are holding. Very few know how much inventory is available in their upstream and downstream supply chain.”

This is clearly changing.

As reported in liveMint, new technologies, such as artificial intelligence (AI) and blockchain will play an important role in a more holistic, real-time approach to supply chain management.  “Covid has taught us to look at new ways of patternization, understanding demand and supply and fulfilment…,” said Easwaran PS, a partner with consulting firm Deloitte in India. “One of  the big applications that’s coming up is AI and cloud-based inventory optimization.”

The IMD Business School reports that just like large-scale cyber attacks of the past decade have motivated companies to more carefully review and test how they protect their data, supply chain stress tests will now become the new norm. As noted in their news release: “The supply chain has become a main protagonist everywhere. It has moved from playing a behind-the-scenes organizational role to being a prime driver of the company business.”

In a report entitled “Covid-19 Global Supply Chain Disruptions” from the Conference Board of Canada, senior economist Julie Ades said, “This period of disruptions in global supply chains caused by Covid-19 could be the catalyst prompting businesses to completely rethink the way they operate, interact with suppliers and buyers, and make long-lasting changes.”

It’s hard to see how this could not be true.

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