BY ISABEL CHING, NIGEL EDWARD, AND KELLY KARN
There were only 18 days between the first reported COVID-19 case in China and the first reported case in the United States, even though the two countries are more than 7,000 miles apart.
The COVID-19 pandemic has shown that the world is more connected than ever before. Just as the virus uses the body’s own genomic defenses to proliferate, COVID-19 has turned one of our greatest strengths into a weakness: globalization.
Covid-19 Global Spread
Globalization was a strategy originally meant to elevate everyone—through the globalization of trade, consumers in the U.S. and Europe have access to inexpensive items made in developing countries with lower labor cost. In turn, developing countries have access to global markets and industry knowledge that can be used to rapidly achieve economies of scale.
Over the past four decades, the globalization of trade has led to the development of global assembly lines known collectively as Global Value Chains (GVCs). GVCs are the division of labor on a global scale; raw materials sourced in one country are sent around the globe to be processed and assembled, before being shipped to the end consumer. GVCs are an attractive selling point for developing countries as they no longer need to produce complete products to participate in the global market. Instead, they can partner with a transnational corporation to produce intermediate goods and insert themselves into one stage of the global assembly line. GVCs have become so entrenched in the global economy that 80% of world trade is now driven by transnational corporations, and the value of trade in intermediate goods is nearly double that of the trade of final goods.
Despite their many benefits, GVCs are not perfect. Participating in a GVC can lock a country’s economy into that particular role in the global production line, which leads to imbalances in global production roles. For example, Africa and Oceania mainly export raw materials which are converted into more specialized intermediates by advanced economies, and then finally assembled in Asia. Due to this status quo, Asia, mainly China, is the beating heart of the Global Value Chain as a whole.
A tremor of disruption in Chinese production can reverberate shockwaves up and down the global supply chain. Like a game of economic Jenga, one crucial block disturbed from its place and the tower comes tumbling down. During the COVID-19 crisis, China, producer of more than 50% of the world’s imports of personal protective equipment (PPE), went into lockdown. Paired with an increase in domestic demand, China’s net exports of protective masks dropped by 24% in January and February 2020 relative to a year earlier. This shock in global supply, paired with increased global demand, led to a 182% increase in Chinese-made respirator and mask prices in just one month. As U.S. federal and state governments outbid one another for Chinese-made PPE, the marketplace for masks became the new “Wild West.” Economically advantaged governments clambered over each other to reach the life-saving resource, while healthcare systems in poorer regions with limited buying power strained to balance the cost of the climb with necessity in a race to the top that had become 182% taller overnight.
This is just one example of many industries that experienced incredible supply shortages and cost increases due to the impact COVID-19 had on our global supply chain.
So, how can organizations respond and be better prepared for the future?
As the smoke begins to clear and companies emerge from the fight for immediate survival to find an economic landscape reshaped by crisis, those that claim victory will be the ones that ask “How will we use what we have learned to build a more resilient tomorrow?” They will look to the new mountains and valleys carved by a sudden shift in the plates that form the foundation of our global marketplace, redraw their maps, and journey on. Companies should re-evaluate their immediate and long-term supply chain strategies to prepare for success in post-COVID-globalization.
In the short term, companies should look to:
- Establish rapid response team structures and governance procedures so that they can react quickly to future disruptions
- Re-evaluate business continuity plans for critical departments to account for quarantine workstreams and decrease in the workforce
- Align change management strategy to educate employees on new workstreams and processes
- Audit immediate supply chain risks and identify alternative sources for supplies
- Identify critical supply needs for the business and update inventory parameters to prepare for future supply chain disruptions
In the mid-term, companies should gather data to evaluate their inbound and outbound supply chain risks
Invest in Supply Network Mapping
Just as virologists track the patterns of a disease through contract tracing, companies should utilize supply network mapping. Supply network mapping involves mapping a company’s supply networks deep into sub tiers. A common approach is to use the bill of materials to drill down the supply chain to assess supplier risks. The downside: this is a resource intensive process. The upside: supply chain technologies are emerging that streamline this process to offer companies visibility across their entire supply chain.
Utilize Supply Chain Analytics
Heat maps and other analytics generated from supply network mapping tools can reveal critical risks in a business’ supply chain. Companies can use these insights to bypass risks and develop contingency plans that allow them to react quickly in the event of a supply chain disruption. These analytics offer insights into which suppliers, sites, and products are at risk during a disruption.
In the long term, companies should consider re-evaluating their Sales and Operations Planning (S&OP) strategy
Re-evaluate Supplier Contracts – The Glue
The Covid-19 crisis showed that not all suppliers are equal, and the cheapest option may not always be the best. Moving forward, businesses should incorporate disruption-related metrics into their supplier selection process. Businesses should word supplier contracts to require participation in supply network mapping efforts. Supplier contracts should also require supplier contingency plans and spell out expected recovery times in the event of a disruption. In turn, suppliers who have taken steps to map their network and develop contingency plans can flex this advantage in customer negotiations.
Balance Cost Minimization vs. Revenue Assurance – The Cushion
The development of GVCs has been driven by the need to minimize production costs. However, as became evident during the COVID-19 crisis, this strategy sets companies up to face disruptions due to imbalanced production roles. Moving forward, companies should consider balancing production assurance with cost minimization for critical products when selecting suppliers. This will provide cushion against loss of cash flow during future disruptions. Procurement, logistics, and supply-chain financing teams need to work together to develop an S&OP strategy to stabilize critical revenue streams.
Diversify Supply Chains – The Safety Net
Consider an X+1 strategy – The COVID-19 crisis has shown that the diversification of supply chain is important in the event of a lockdown. Companies that were heavily invested into Chinese supplies were the ones most affected. However, the low cost of production is an extremely difficult incentive to shift away from. Therefore, many companies are already employing a China +1 strategy, where they set up alternate production facilities near China. In Vietnam, Google is setting up production lines for its Pixel smartphone, and Microsoft is doing the same for its Surface line. The China +1 strategy can help diversify workforces and supply chains and provide access to new markets. Businesses can quickly ramp up production in one country if market or operational conditions deteriorate in another. The adoption of this business model has been accelerated by the U.S.-China trade war and can be expected to increase after the COVID-19 crisis has passed.
Be ready to adapt to shifts in the geo-political landscape – Many governments’ foreign policies have slowly shifted towards the localization or regionalization of trade. For countries, regionalization of trade can reduce vulnerabilities to foreign governments. For companies, regionalization can bring production closer to the buyer market to reduce supply disruption. After the COVID-19 crisis, companies should be ready to adapt to a possibly segmented global market.
With changes in the supply chain landscape, companies should be proactive in protecting their assets, and agile in adapting to new processes and procedures. Investing in a globalized supply chain offers greater efficiency at the cost of greater complexity. Although in theory globalization was meant to elevate everyone around the world, the COVID-19 pandemic has revealed cracks in the foundation of this idea–namely, the gamble of investing in a supply chain with links that cross the vastness of our world.
Investing in a globalized supply chain offers greater efficiency at the cost of greater complexity.