Manufacturers Rethink Global Supply Chains due to Covid-19
The global supply chain has regularly been impacted by major disruptors such as natural disasters but the impact of Covid-19 is unlike anything major manufacturers and shippers have ever seen before. How supply chain professionals respond to these challenges will result in major shifts of suppliers and trade lanes that will force companies to rethink everything they do.
In 2011, there were serious floods in Thailand, as well as the Fukushima nuclear disaster which impacted global supply chains.
The previous disruptions don’t compare to today’s COVID–19 outbreak. Many companies in the US rely on suppliers from a number of different countries, but even so, many of those suppliers, in turn, rely on Chinese suppliers for some of their own products.
One example of this is Apple which has suppliers spread out in 43 different countries, but every one of these companies source some of their components from manufacturers in China.
The outbreak of the current pandemic and all the subsequent quarantines and lockdowns have shut down close to 10% of global capacity, with a record number of empty container ships populating the oceans today. All this is forcing a number of companies to rethink their global supply chain footprints and international partnerships and to consider alternatives and redundancies to minimize future risk.
Greater use of technology and automation
One of the most prominent reactions to the disruption in the global supply chain has been for companies to make greater use of automation and technology, as opposed to relying on the cheap labor available in countries like China.
This brings the manufacturing process closer to the markets where they will actually be consumed, and it reduces exposure to future unknown global supply chain disruptions. It also increases the speed to market for any new products developed, as well as faster customer order fulfillment.
Technology is also providing alternative manufacturing methods, like 3D printing, which is being implemented very rapidly in terms of more streamlined equipment being used, as well as the types of products which can be made.
As this process becomes more cost-effective, it will undoubtedly see greater adoption among US companies who wish to streamline their operations, and take advantage of homegrown technology, rather than outsourcing manufacturing to countries with cheap labor.
Localizing transport and supply
The global pandemic has caused many companies around the world to take a hard look at their global supply chain,s and the strategic vulnerabilities contained within them. When China was forced to shut down its entire manufacturing operation and cease shipments to other countries that relied on it for components, that immediately magnified the vulnerability in many global supply chains.
This has now happened several times in the last two decades, and it is driving the point home, that changes must be made to reduce the risk for companies that have international supply chains. One of the alternatives which has resulted from the analysis of these kinds of disruptions is the fact that supply chains need to become more regionalized to eliminate unknown future risks.
One example of this is Toyota which is located in Georgetown, Kentucky. More than 350 of the suppliers used by Toyota are located within the US and more than half are in the state of Kentucky. Undoubtedly, more companies will begin to look at localization as a means of reducing risk in their supply chains.
Another result will be the possibility of developing secondary sources of parts and suppliers and rethinking just in time manufacturing philosophies. Of course, there are costs associated with both of these strategies, but the long-term benefit will be a much more reliable and robust supply chain.
Novo Nordisk, which produces approximately 50% of the global supply of insulin at its Kalundborg, Denmark facility is beginning to stockpile medicine it produces for future disruptions. The company maintains a five-year supply of insulin at that location, to eliminate unforeseen supply chain breakdowns. They also have redundant manufacturing facilities in other parts of the world.
Looking beyond immediate cost
It’s becoming more and more apparent that developing a global supply chain strategy for the future will involve greater capital requirements so that a more flexible and redundant process can be put in place, as well as one which is more resilient to external factors.
This, in turn, would reduce the risk that global supply chains are typically exposed to from natural disasters and other unforeseen global political impacts. This will require a change in the traditional approach where companies seek the lowest-cost suppliers, and it will call for paying more in order to establish a more robust and reliable global supply chain to increase reliability.
These systems will help to stabilize supply chains everywhere by establishing alternative suppliers, increasing inventories, and developing other ways of accomplishing distribution. It may take some doing for companies that adhere to the traditional ‘cheapest supplier’ and just in time distribution philosophies, to get them on board with more reliable systems. As companies are forced to endure multiple disruptions new and better processes will be implemented that will solve many of the problems we are facing today.
Part of today’s retooling requires supply chain and logistics professionals to look beyond initial costs and to work with suppliers on engineering new strategies so that companies can better anticipate where and when disruptions might occur. This will allow them to be proactive, and it will allow companies to have a better response window when a future disruption does occur.