Steel chain with central, broken, red-colored link

The New Normal For Supply Chains

COVID-19 pandemic reveals how globalization can both spread a virus and cripple supply chains

People have been trading goods across vast distances for millennia. The Silk Road and Timbuktu’s trans-Saharan caravan are two examples. Now globalization describes capability, opportunity, scale and speed for production and distribution of goods. That are specialized, manufactured and delivered just-in-time. Creating an economic interdependence between nation-states, industries and consumers.

This interdependence illustrated by Apple’s supply chain provides China-based factories and employees. The necessary parts and plans to assemble thousands of devices per day. Once assembled these devices are shipped all over the world  in a few weeks. Demonstrating how a supply chain eliminates redundancy, produces wealth and reduces what economists refer to as “excess slack” in the economy.

The COVID-19 pandemic is demonstrating how global supply chains are vulnerable.Contrarian COVID-19 Advice for Manufacturers.

The IMF refers to this as The Great Lockdown.

Prompting nation-states to hoard supplies, issue quarantine orders, offer fiscal stimulus programs and restrict trade.  Forcing a major reevaluation for our interconnected global economy. As this pandemic passes, expect government and consumers to demand more domestic-based alternative suppliers, even if, they are more expensive. One example is pharmaceuticals. The Council on Foreign Relations reports 80% of active pharmaceutical ingredients (APIs) for prescription drugs come from China and India. Provoking many to call for appropriate re-shoring for this industry.

C-Suite and business leaders in the future should plan supply chains to fit the new normal. Characterized by no interruption in the supply chain is tolerable and prioritization for which goods receive special treatment, for example, clothing and electronics are less critical than perishable food and pharmaceuticals.

The New Normal Requires:

  • Automation. A sense of urgency exists to automate supply chains to reduce the number of employees by installing robotics. To better manage supplier relationships and production processes.  However, aim small to miss small for robotics is notoriously hard to operate correctly. They break down or malfunction requiring employees on-site to repair them.
  • Certainty. Pressure is mounting for enlisting alternative suppliers, even if, they fit similar goods or processes, rather than rely upon a limited number of overseas partners. China is the first nation to report COVID-19 and then locked down their manufacturing plants, only to see others lock down weeks later.
  • Cost is secondary. Reputation and ethical behavior is primary. Mitigating supply chain risk is more important than finding the lowest cost supplier. Recall the media outrage over gloves, masks and medical devices being outsourced and in short supply.
  • Insurance. COVID-19 is testing contractual (force majeure ) obligations between supply chain partners.  There are no economical alternatives in many scenarios so limits exist as to what you will be able to insure. Nonetheless, revise and possibly renegotiate certain terms, particularly, where intellectual property issues or specialized production processes, rely on a single supplier or geography.
  • Pilot alternatives. Some nation-states will nationalize, some will provide subsidies and others will choose to regulate. Either way the new normal is to redefine supply chain management. Start on a small scale with low volume alternatives while maintaining existing supply chains with the option to expand. Coronavirus Playbook: CEO Pandemic Planning

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Author Disclosure

I am the author of this article and it expresses my own opinions. I have no vested interest in any of the products, firms or institutions mentioned in this post. Nor does the Analyst Syndicate. This is not a sponsored post.

Disclosure

The views and opinions in this analysis are my own and do not represent positions or opinions of The Analyst Syndicate. Read more on the Disclosure Policy.