COVID-19 will fundamentally alter global supply chains

The pandemic has generated a new constellation of business risks and opportunities, the most visible of which arise from disruptions in global supply chains.
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COVID-19 makes clear globalization is a fact of life. The pandemic has generated a new constellation of business risks and opportunities, the most visible of which arise from disruptions in global supply chains.

Companies need to capitalize on these changes by modernizing management of existing supply chains and executing strategies to erect new ones. There are four lessons enterprises should incorporate into their supply chain calculus and the logistics utilized to link them.

Not a one-off

First, one might harbor hope that COVID-19 is a unique event no matter whether a country’s population is rich or poor. This is highly unlikely. In the health field, experts believe a repeat pandemic will require draconian actions that will affect economic activity to mitigate contagion.

The same goes for global warming’s economic consequences. Put simply, there will be other phenomena sharing COVID-19’s characteristic of pervasive harm to economic growth. Failure to organize supply chains today without taking into account such eventualities would be profoundly myopic.

Second, as many businesses learned at the outset of COVID-19, it is hardly a wise supply chain strategy to overly concentrate the sourcing or further processing of a key component in a single geographic market.

Varying levels of reliance

One of the surprising insights some companies’ senior executives took on board when China went “off-line” at the pandemic’s start is the degree to which their firms’ supply chains are atomized. What produced that result?

In pursuit of reducing costs, lower level managers had fashioned multi-tier supply chain configurations. A stylized example illustrates the point. Products label ‘Made in China’ are not necessarily wholly manufactured in China and directly shipped to the US and sold to end-users.

Many such products are combined with other components manufactured in another country (or countries) and then assembled into the final products sold in the US. Indeed, one executive told me he was surprised to learn one of his firm’s most critical “upstream” components — on which the functioning of an entire US market supply chain relies — although manufactured in China, was then transited to Thailand, where it was integrated with another item made there, and then shipped to Brazil, where yet a third component was added.

Only then did the final product make its way to the US. Therefore, when China shut down, many supply chains ossified. Of course, just as errors occur with too much diversification, excessive concentration of supply can be costly. Executives should regularly assess whether their supply chain configurations are optimized in light of changing risks and opportunities.

Ready the back ups

Third, businesses whose operations depend on cross-border supply chains would do well to consider if alterations to the basic framework of such systems are required. Firms should establish supply chain redundancies — for example, by contracting with reserve suppliers as well as with reserve logistics operators (if needed) who can come on-line with short notice should the usual supplier of a particular component be unable to engage in production.

This is analogous to a “firm” vs. an “interruptible” supplier in the electric utility sector. Taking out such an insurance policy may not be cheap; but if it enables the firm to maintain smoothly its supply chain, it will be worth it.

Bring it closer

Similarly, firms should consider establishing new or moving existing storage hubs to mitigate risks of unforeseen production shutdowns of critical components. Finally, government policies may well try to intervene and alter basic configurations of global supply chains. Hence the debate about “decoupling.” However, the notion of decoupling conflates two phenomena.

Firms always enter into and exit out of foreign markets. That is inherent in the process of foreign direct investment. But it is not “decoupling” – decisions are made by businesses themselves to maximize their commercial imperatives.

The decoupling debate is whether firms should be subject to government coercion to exit a market — in particular, China. To the extent such a policy does not employ economic incentives to make firms “commercially whole”, that is “forced” decoupling.

Equally important, this brand of decoupling is framed as firms’ relocating investments from all foreign markets to their “home” markets, often defined by politicians as the country where a corporation’s headquarters is located. As a public policy matter, this may not be an economically meaningful — let alone an attainable — goal.

– Dr. Harry G. Broadman is a Partner and Chair of Emerging Markets Practice at Berkeley Research Group, and on the faculty of Johns Hopkins University.

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