COVID-19 Creates Ripple Effect in Global Supply Chains as Companies Prepare for Future Disruptions

This compilation of recent news articles reviews the impact of COVID-19 on supply chains and the future outlooks related to a global economy.

The first quarter of 2020 saw a global economy turned on its head as the COVID-19 pandemic infiltrated communities, both large and small, across the world. Questions and concerns about the health of global supply chains amid COVID-19 quickly emerged early in the year and continue to keep economists and researchers busy as the world accepts that business will operate differently moving into the future.

A recent article from Just-Style reported on a new study conducted by researchers at the University of Birmingham in the UK and published in Tijdschrift voor economische en sociale geografie that found survival in a post-COVID-19 world requires manufacturers to redesign and reform their global supply chains or global productions networks (GPN). The study used a database of 91 U.S. companies to identify trends in effective GPNs. It was learned that the most effective GPNs balanced production facilities in core markets against over-reliance on facilities located in lower-cost locations, like China. Quoted in the article is researcher and report co-author John Bryson who states “…COVID-19 has highlighted the risks associated with increasing interconnectedness of people and places through economic, political, cultural, and environmental changes.”

U.S. vs. China Relations

At the core of restructuring global supply chains across many sectors comes a reevaluation of relationships with China. The global supply chain had already begun responding to US-China tensions, but COVID-19 accelerated the pace of this response. Sourcing Journal reports that U.S. trade representative Robert E. Lighthizer last week said the U.S. will seek a “broader reset” of tariffs at the World Trade Organization (WTO), in which the U.S. will be working to raise its WTO tariff ceilings. Meanwhile, earlier this week Trump administration advisor Peter Navarro’s comments led to fears that the U.S.-China trade deal was cancelled, though he quickly clarified that was not the case.

That same Sourcing Journal article also examined the results from a recent Gartner survey on sentiments related to Chinese manufacturing. According to the survey, 33 percent of supply chain leaders have already moved their sourcing and manufacturing activities out of China, or plan to do so by 2023. Another survey reported in the article by June Coresight Research found that as many as 47.8 percent of consumers either agree or strongly agree that U.S. retailers should source fewer products from China. In light of the pandemic and the sentiments that have emerged surrounding it, 39.7 percent said they are now less willing to buy products manufactured in China.

There is no simple substitute for China though, reports the World Economic Forum. The country accounts for 60 percent of global consumer goods exports. So where other countries will benefit from supply chain investments will depend largely on their own investments to boost manufacturing capability as well as provide attractive offerings for land, labor, and logistics. Two countries Mexico and Vietnam have grown their markets across the consumer goods and technology, media, and telecoms (TMT) sectors to 12% and 9% by 2019, largely at the expense of China. Vietnam’s clothing and smartphone exports, as well as Mexico’s automobile parts and computer exports, all gained as well.

Reshoring & Near-Shoring

Changing production models has many companies looking stateside at more localized and regionalized manufacturing. The same Sourcing Journal article referenced above states that some businesses are at least starting in that direction with 25 percent of supply-chain executives indicating that they have already shifted production to be closer to demand, according to the same Gartner survey. Retailers looking to bring their supply chains back to the U.S. would have much greater control over their operation. Only 21 percent of survey respondents believe they have a highly “resilient” network today meaning they have good visibility into their supply chain. These executives envision a brighter future though, with 55 percent saying they expect to have a highly resilient network in the next two to three years.

Focusing on Technology

The World Economic Forum also insists that investment in technology and considerations on sustainability in the supply chain will be key moving forward. The COVID-19 pandemic has shown the many different ways businesses can continue to effectively communicate and manage within a remote working environment, which many companies are likely to leverage going forward. Indeed, those operations with stronger digital infrastructure have fared better in the COVID-19 pandemic than those without. Meanwhile, advances in artificial intelligence and new technologies, such as blockchain, may present opportunities for further supply chain innovation.

What about costs? A quote from Kamala Raman, senior director analyst with the Gartner supply chain practice in Sourcing Journal: “Many Western organizations will have to explore new forms of automation on the factory floor to decrease the costs of near- or onshore production.”

Rethinking supply chain operations predated COVID-19. According to the World Economic Forum, broad global developments like increased risk of trade wars, trends of nationalism and protectionism, issues of sustainability and human rights considerations forced companies to evaluate the stability and reliability of their supply chains for an uncertain future.

The importance of supply chain resilience and risk management is more apparent than ever. While many businesses have been nimble and ready to adapt to change, companies that have not already done so should prioritize analyzing their supply chains now, to understand where they might need to make changes or take action to mitigate against future disruptions.

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