After wreaking an economic turmoil across the world, the COVID-19 pandemic has driven a noted shift in industries – especially manufacturing, from globalization to regionalization. Modern supply chains continue to face unprecedented stress and increased scrutiny.
Industry experts say today’s globalized supply chain network has been optimized to identify minimum lead times at the lowest possible price. Companies want electronics made in China, so that they can buy them cheap. But rapid political developments, a shift towards consumers buying niche products, and now, global pandemics have revealed the weakness that lies at the heart of manufacturing.
According to IMD, the hidden costs of single-source dependencies and poor flexibility in adapting to real-time shocks have been laid bare. Companies and consumers alike are willing to tolerate higher prices for certain goods, if it means getting them faster and more in line with their aspirations. 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 the past, volume stability enabled the supply chain to deliver with a high level of service while lowering costs at the accepted quality. However, supply chains and manufacturing plants allow minimal flexibility in terms of volume.
IMD notes that as volumes become more viable, supply chains must become more adaptive, as forecasts suggest, large suppliers and logistics operators in the supply chain industry must prepare for major catastrophic events such as natural hazards like floods, fires and tsunami etc., lethal pandemic outbreaks, strikes, social unrest and associated disruptions etc.
The pandemic emerged as a trigger that may induce companies to redesign their production footprint. Four alternative trajectories of international production have been projected by the latest World Investment Report – diversification, replication, reshoring and regionalization, with reshoring and regionalization implying the shortening of global value chains (GVCs) as well as the relocation of manufacturing activities. It is generally accepted that, after the pandemic, governmental decisions are likely to assume a critical role in fostering and boosting such relocation strategies by manufacturing companies. Moreover, the World Economic Forum has specifically recommended managers to aggressively evaluate near-shore options to shorten supply chains and increase proximity to customers.
It has to be noted that the pandemic has created temporary manufacturing deserts, whereby a city, region or whole country’s output drops so substantially, they become a no go zone to source anything apart from essential items such as food stuffs and pharmaceuticals. Mattias Hedwall, Global Chair, International Commercial & Trade, Baker McKenzie said it is clear that the extended shutdown of parts of the world economy is now feeding through the impact supply chains as existing stocks are depleted. “Businesses need to focus on how to minimize supply chain disruption and to adjust rapidly to a changing landscape. This includes among others, infrastructure, tax and employment, implications of changes if the situation stabilizes quickly.”
Companies have to keep in mind that some inputs may necessarily be more critical to the production process than others, in which case delays to certain components could lead to much larger overall losses in production than an initial assessment of vulnerability suggests. This is particularly important for higher-value manufacturing process with longer supply chains. In a worst-case scenario, the absence of a key part may force the shutdown of a whole production line, magnifying the global impacts. Additionally, due to intellectual property issues and complex production processes, or in a bid to reduce unit costs, firms can sometimes become overly reliant on a single company or geography to source particular goods.
Political analysts, on the other hand, believe rising economic nativism has taken various forms within the last few years and has in some cases been accelerated in the wake of the coronavirus pandemic. Politicians have acted out against trade by placing restrictions on mobility, ructions against goods, sanctions and tech bifurcation.