Recent news about the development of effective COVID vaccines has been a shockingly good way to end the year. It’s very out of character for 2020. After nine months of diligently following health and safety protocols and binge-watching the entirety of Netflix’s catalogue, we are starting to see light at the end of the tunnel.
For businesses, the past year has offered a lesson in adapting to changing circumstances. Many retailers have switched to curbside pickups to promote a safer shopping experience, restaurants have started selling ingredients like traditional grocers, and some hotels even began renting out their available rooms to employees working from home. But when the pandemic is in the rear-view mirror and a sense of normalcy is restored, will companies use their experiences during the pandemic to re-think their operations, or will they revert back to how they were before? Although the full effects of the pandemic are still unknown, it is never too early to start mapping out what the future might hold for our supply chains, and how to manage risk within them. Early research and analysis is encouraging, pointing towards companies across industries making major changes in the way they adapt supply chains to be more conscious of the known and unknown risks that they face.
Why Supply Chains Failed in the COVID Era
In early March, a survey conducted by the Institute for Supply Management revealed that more than 80% of the companies believed their business would be impacted by disruptions caused by the COVID-19 pandemic; at the end of March, this increased to 95%. Much of this disruption was caused by the limited movement of goods, the explosion of e-commerce, and major changes to demand.
Companies are always trying to gain an advantage whichever way they can, but managing supply chains that optimize costs, minimize inventories, and seek to improve asset utilization are not conducive to absorbing global shocks. Susan Lund, a partner at McKinsey & Company who specializes in globalization and trade, says that many businesses have “spent 25 years creating these incredibly complicated, complex global supply chains…designed for cost and efficiency, but without really a thought to what could go wrong along the way.” In the post-pandemic era, executives should put a greater emphasis on building resilience in the entire value chain, ensuring they are equipped to cushion the impacts of more global shocks that are certain to occur.
Future Supply Chains Shouldn’t Make the Same Mistakes
Increased Regionalization
At the beginning of the pandemic, governments and businesses quickly realized the damage caused by an over-reliance on China and other manufacturing nations. The most newsworthy example being the inability of many governments and corporations to secure the necessary protective equipment (PPE) in early March because Chinese export bans “hampered their ability to fulfill international orders”.
Carlos Cordon, supply chain professor at IMD, believes the trend “towards more flexibility and multi-level sourcing will accelerate tremendously”. Businesses will begin to establish logistics hubs around the world to build resilience through diversification. The Taiwan Semiconductor Manufacturing Company (TSMC), for example, has recently announced plans to “build a $12 billion plant in Arizona in order to serve its many US customers”. Mark Mobius, the founder of Mobius Capital Partners, envisions a future where “supply chains get moved into places like Vietnam, Bangladesh, Turkey, and even Brazil” to lessen a company’s risk exposure.
According to Takshay Aggarwal, group lead for IBM Digital Supply Chain, “supply chains broke down because in their efforts to save dollars, companies were single sourcing things. They didn’t have alternatives.” In exchange for a stronger focus on cost optimization and operational efficiency, businesses sacrificed the ability to withstand and mitigate against significant risk events. Developing regionalized supply chains is shaping up to be a necessary progression in the evolution of supply chain risk management.
Increased Risk Visibility
In 2015, the World Economic Forum (WEF) conducted their annual Global Risk Perception Survey, which was conveniently administered directly after the Ebola pandemic. For the first time in a decade, infectious disease was perceived as a top-five risk. Although the survey encourages respondents to consider the most threatening risk events over the next decade, in the 2016 survey, infectious disease was no longer perceived as a top risk at all. According to the WEF, this short-sightedness is dangerous because when a potential risk “gets crowded out of our collective sightlines, it may go unaddressed, and we may be ill-prepared to address it when it does manifest.”
Forecasting risk is extremely difficult, but even risks beyond our sightlines can be managed with proper risk management systems in place. Preparing for future risk events requires businesses conduct a thorough self-assessment of their current operations. Do they understand the importance of “assessing third-party, and even fourth-party risk in terms of finance and business continuity”? Do they have alternative supply routes? Do they have additional inventory should they need it? Answering these questions will provide a clearer view of the hidden vulnerabilities throughout their supply chain so businesses can build more resilience.
Business leaders want to know exactly what lies ahead – whether it be a natural disaster, disease outbreak, or cyberattack – but if that’s not possible, then greater visibility along their supply chains can help them manage the threats that do materialize.
There will come a time in the near future when a sense of normalcy is restored. We’ll be able to go on vacations and even visit friends and family for the holidays. However, for businesses, life after the COVID-19 pandemic will be different than before. Significant changes will need to be made to how risk is managed in their global supply chains.
According to Sean Galea-Pace at Supply Chain Digital, “instead of basing supply chain design on the assumption that materials flow freely globally,” businesses must now consider the possibility of major risk events disrupting their global supply chain network. From a risk management perspective, regionalizing supply chains and increasing visibility will be key to building resilient supply chains “that not only seek to reduce risks but also is prepared to quickly adjust and recover from any unanticipated supply chain disruptions that occur.”
