At the start of the pandemic, manufactures and retailers struggled to source the parts and products they needed as the global supply chain ground to a halt. A year later, what lessons have been learned?
When coronavirus spread rapidly around the world in the early months of 2020, the effects on global supply chains were immediate and obvious. Health services quickly ran short of personal protective. equipment (PPE). Supermarket shelves emptied of staple foods such as rice and pasta as consumers rushed to stock up on store cupboard essentials.
While these shortages made headlines around the world, behind the scenes manufacturers faced their own supply chain challenges. When China went into lockdown early in the pandemic, many businesses struggled to source the equipment and components they needed. As the crisis spread across the globe, supply chains crumbled.
Morito Saito, vice president and director at UHY FAS Ltd, Japan, says that in the early months of the pandemic procurement was a major headache for small and medium-sized businesses in particular. “These businesses could not source the quantity of parts they needed, and they did not know when logistics would recover and parts would be available again, causing great uncertainty. In addition, they did not have the diversified network that could step in and immediately arrange replacements.”
In Brazil, too, manufacturers suffered as Chinese workshops shut up shop. Carlos Bernardo Gonçalves, corporate finance partner at UHY Bendoraytes & Cia – Auditores Independentes, Brazil, talks of a perfect storm created by a scarcity of supply and the exchange rate depreciation of the Brazilian real at a time of global uncertainty.
“We also had some cases of clients who suffered from the lack of components and raw materials, especially in areas such as clothing and electronics manufacturing, which had China as their largest supplier,” he adds.
Around the world, businesses were hit from both sides. As markets shrunk, companies had to fight for every new piece of business, only to see efforts to fulfil hard-won orders hamstrung by malfunctioning supply chains.
BACK TO NORMAL?
The situation a year later is much improved, at least on the supply side. Despite many northern hemisphere nations having endured a winter wave of Covid-19, PPE shortages are not a pressing concern and supermarkets remain well stocked. Manufacturers in many countries might be struggling, but that is more from a dearth of customers than a scarcity of parts and components.
So, is the supply chain crisis over? Is it back to ‘business as usual’ for manufacturers and retailers who have in recent years favoured lean and ‘just in time’ procurement policies? The pre-Covid supply chain was focused on rapid delivery and reducing the costs involved in stockpiling parts and products, but priorities may be shifting. Many experts say it is time for a re-evaluation of our reliance on the kind of complex international supply chains that struggled in the face of a global crisis.
According to these voices, Covid should act as a wakeup call for the global procurement sector. They argue that the pandemic has provided an opportunity to redefine best practice in warehousing and logistics and create stronger supply chains that are better able to withstand global shocks. They argue that resilience should replace cost as the primary criteria of a functioning procurement strategy.
That is partly because the Covid pandemic is by no means over, and partly because global supply chains were stretched to breaking point even before Covid-19. Global warming is leading to more of the extreme weather events – floods, fires, hurricanes – that make ‘just in time’ delivery harder to guarantee. Then there are geopolitical threats, most recently highlighted by the US-China trade war. Research completed before the pandemic found that companies already expected disruption to production lines for one or two months every three to four years. As the researchers noted, “the fact is that the world has more shocks.”
RISKY COST CUTTING
Modern supply chains were created for cost and efficiency, not for resilience. But even stock markets may be starting to re-evaluate the idea that the most valuable companies are those that are best at cutting costs. Lutfey Siddiqi, a visiting professor in practice at London School of Economics’ foreign policy think tank LSE IDEAS, believes that the ‘de-globalisation’ associated with the pandemic “has challenged the value of hyper-efficient, super-optimised supply chains… cost cutting is no longer an unequivocal indicator of returns; it may actually signal increased risk and reduced resilience.”
In other words, lean and complex supply chains may make companies less attractive to investors in future, because they are inherently vulnerable. But how to make supply chains more resilient? Using digital tools and AI to model the effects of various shocks and diversify supply accordingly is one potential solution. Insisting that suppliers implement disaster recovery planning is another.
One idea that has gained considerable support since the start of the pandemic is the ‘onshoring’ of supply chains, which simply means sourcing more parts and materials closer to home. This reduces the risks associated with shipping goods thousands of miles and gives national governments the power to step in and support producers of vital materials who may be struggling.
British economist and author Paul Ormerod believes the pandemic has made the idea of domestic procurement more attractive. “The crisis has obviously led to geopolitical connections being reconsidered in a pretty fundamental way,” he says. “The concept of bringing manufacturing back (to the UK) is underpinned by this as well as by the fragility of links which emerged during the crisis.”
Is onshoring realistic? Many national governments think revitalised local supply chains can help post-Covid economic recovery. The PPE crisis at the start of the pandemic highlighted the risks of relying on distant producers for vital materials, and at the same time showed that it was possible to create new domestic supply chains almost overnight. Alan Farrelly, UHY Board member and managing director of UHY Farrelly Dawe White Limited, Ireland, says local production of PPE was quickly accelerated as the country’s over-reliance on China became clear. “The fact that Ireland needed to acquire 15 years of average annual supply from China during the first half of 2020 showed the need to become more self-sufficient,” he says. “In the race for supply, quality was compromised, and the fact that alternatives have now been sourced more locally could be the way of the future, for PPE and other vital products or materials. In a short space of time Ireland had to create a new industry, and that will allow the country to become more self-sufficient should the need arise in future.”
In the Netherlands, too, there are hints that businesses in some sectors are trying to source parts and components closer to home. “I have heard from Dutch companies in the high-end electronics industry (dominated by low volume and high complexity) that are looking for opportunities to make supply chains more resilient through more regional sourcing,” says Paul Mencke, partner at Govers Accountants/Consultants, Netherlands.
In that case, ‘regional’ sourcing would likely mean the EU, though Paul’s own experience is instructive. The pandemic struck just as the Eindhoven office was having the glass roof in its atrium. replaced, forcing a long delay as the Italian supplier stopped work for an extended period of lockdown.
AN EVOLVING STORY
While shortening supply chains may increase resilience to some extent, no supply chain is invulnerable. There are other issues with local procurement. Morito Saito says that, while Japanese authorities promote domestic procurement by subsidising the purchase of new factories and equipment, in reality local production will struggle to compete with Chinese imports on price. Nevertheless, there is evidence that Japanese businesses are aware of the need to diversify their supplier base.
“Some domestic manufacturers have begun to move their supply chains from China to Thailand, as well as Vietnam and Indonesia, and are further strengthening their local procurement and production systems,” Morito says. But he adds that many Southeast Asian countries have some way to go before they can match China’s advanced manufacturing capabilities, and that China will remain the preferred supplier of a wide range of industrial materials and components in the short term.
In Brazil, Carlos Bernardo Gonçalves agrees that supply chain management is changing thanks to the pandemic, but through evolution rather than revolution. Sectors that are now considered of national importance – the production of basic medical supplies being one – may benefit from public investment and other stimulus measures to encourage self-sufficiency. In other areas, “companies will start to consider the risk of global pandemics and other shocks in supply chain decision-making, tending to geographically diversify suppliers even if margins are reduced,” he says.
Carlos adds that, for business to become more resilient in the long term, investors and stock markets will have to reward organisations for strengthening supply chains without punishing them for increased costs. But change is clearly needed, and the early signs are positive. Manufacturers and retailers are realising that relying on a single supplier on the other side of the world for a vital component or popular product represents a huge business risk. Supply chain shocks are likely to become more common. One positive outcome of Covid-19 would be the widespread re-evaluation of what constitutes best practice in supply chain management.