Why businesses need to rethink supply chain structuring

First came the trade war between the United States and China, with its tariffs and retaliatory moves that caused supply chain uncertainty within global manufacturing centers.

Before bilateral negotiations could resolve the problem in any satisfactory way, there came the double whammy of the coronavirus, COVID-19, which disrupted the movement of goods across the globe.

The virus outbreak forced city lockdowns and factory shutdowns in China, upending the supply chain of intermediate goods to international destinations and hammering home the risks that companies run in mainly sourcing from one country.

Major supply chain disruptions

According to the Institute for Supply Management, nearly 75 percent of U.S. companies surveyed in early March 2020 reported supply chain disruptions in some capacity due to coronavirus-related transportation restrictions. More than 80 percent believed that their organisation would experience some impact because of COVID-19 disruptions ¹ .

Big American automobile companies like Ford and GM stopped production at their North American factories in mid-March, with no dates announced yet for restarting.

Closer home, a survey by the German Emirati Joint Council for Industry & Commerce on the impact of the virus and related lockdowns on UAE companies, found that half the members and partners expected to see supply disruptions in goods flow—mainly from Germany and Europe followed by China and Middle Eastern countries. Of the respondents, 70 percent believed no substitution of goods would be possible. ²

In another study, released by PwC called COVID-19 CFO Pulse Survey, 55 percent of finance leaders in the Middle East appeared to be more likely than their global counterparts to consider changing their supply chains. This was particularly true in Saudi Arabia, where 67 percent said they would consider a change. ³

In wider MENA, Lebanon, which imports up to 85 percent of its food requirements, is reported to be facing a shortage due to a slowdown in shipping from exporting countries as the pandemic has led to border closures and restrictions on labour movement which affected harvests and loading.

Such scenarios are only set to become more common as the contagion continues its march across the globe.

Looking beyond immediate suppliers

The modern supply chain is a complex system with a multi-stage manufacturing network involving many tiers of suppliers. Very few companies can track their supply chain beyond their Tier-1 suppliers. ⁴

Now they are waking up to the realisation that they need to go much deeper into their international supply chains. Firms need to scrutinize where their various tiers are situated and understand the implications that follow if they can’t source from a particular country.

The impact that second and third layers of suppliers can have is as significant as immediate suppliers.

According to a McKinsey report: “Most industries will need to reactivate their entire supply chain, even as the differential scale and timing of the impact of coronavirus mean that global supply chains face disruption in multiple geographies. The weakest point in the chain will determine the success...” ⁵

Diversifying the supplier base

During the trade war, companies looked at a “China + 1” strategy: sourcing intermediate products from China and one other place, often within the ASEAN (Association of South East Asian Nations) region. Multinationals had themselves moved to secondary manufacturing locations in Vietnam, Indonesia, Thailand and Malaysia to leverage lower costs and wages, and diversify risk and exposure.

Now as COVID-19 disrupts the supply chain, manufacturing MNCs are exploring a “China + 1 + 1” strategy. With supply from both China and ASEAN choked, companies sourced from Europe, where shutdowns hadn’t yet happened.

After learning this hard lesson, future sourcing is likely to be geographically split between China and ASEAN on the one hand, and Europe on the other to ensure diversification of the supplier base.

Others will consider bringing production even closer to Western markets (for example, Türkiye or Eastern Europe), offsetting the additional costs with quicker transit times – the hope being that this will leave companies less vulnerable to any future disruptions.

Already, Turkish textile manufacturers have seen an influx of new orders following the disruption in China. The Turkish Clothing Manufacturers Associations expects 1-2 percent of the orders lost in China to be relocated to Türkiye as European buyers began to question why they are going to China. ⁶

The role of technology

Now more than ever, technology will play a major role in identifying and controlling the supply chain. Blockchain and distributed ledger technology will give better visibility of the full supply chain.

According to a Mckinsey report three new technologies that can benefit supply chain are automation and robotics, open IT platforms and on-demand transportation. ⁷

Automation and robotics makes warehouse options a less labour-intensive step in the supply chain as it helps them handle fast changing channel requirements, increase storage density and lower labour overheads.

IT platforms allow information management throughout the supply chain, enabling data to collected and accessed at each step of the chain. “This streamlines the flow of information, frees organizations from dependence on a single vendor and makes it possible to pick best-in-class solutions that address specific business needs.”

Similar to ride-hailing services, on-demand transportation uses smart software to match supply and demand of truck space in real time. “Companies can use online auction systems to buy and sell space on trucks, pushing utilization up and cost down.” ⁷

For big companies, transparency also means reducing the sustainability challenges in the supply chain and managing environmental, social and governance (ESG) risks.

Banks like HSBC use technology to support suppliers better through structured supply-chain finance, which can allow smaller suppliers to leverage the credit profile of their large clients. They also gain from extremely streamlined workflow for invoice presentment and tracking⁸.

“What if” scenarios

In general, companies look at contingency planning only after a black-swan event has occurred, and even then they tend not to look at the worst-case scenario. The present pandemic is seen as a once-in-a-century occurrence; the last one of this scale was the 1918 Spanish flu.

Global MNCs looking to apply lean and just-in-time production methods bought into the global sourcing model – with China at its epicentre – because it was cheaper and more effective.

While this made sense from a commercial point of view, they should have planned for “what if” scenarios. What if we cannot access China? What if we cannot access Asia? What if we looked at other manufacturing sectors to offset potential disruption?

A shock such as the current situation compels business leaders to see the vulnerabilities in their supply chains. Firms, in general, tend to fight the last war--managements take their learnings from the last crisis they face and build strategies around that. For example, following the global financial crisis in the last decade, banks have taken actions to prepare themselves for any such future crises. But in Covid-19 we are confronting something undreamt of. Even eight months ago it was unlikely there was any company planning for a global pandemic, even though, potentially, such a threat always existed.

Hence, companies need to look at not just the risks they know exists, because they happened before, but to make projections to prepare for the risks that don’t currently exist. The phrase “what if” has to find its way back into the business lexicon.