The Coronavirus has wreaked havoc and a huge economic turmoil around the globe. The modern supply chains faced an unprecedented level of stress and were drawn towards an increased level of scrutiny.In months prior to the COVID-19 crisis, trade tensions had been mounting due to the escalating tariff war between US and China and a broader populist streak ran across several other capital cities. This rise in protectionism, coupled with the concrete costs and a number of new financial barriers gave rise to broader challenges and concerns for the logistic networks that were operating at the global level.
The global supply chain network was optimized in such a way so that it involved minimum lead time at the lowest possible price. We wanted electronics made by China, so that we could get them cheap. But, some rapid political developments, a shift towards the consumers buying niche products and now, the global pandemic has revealed the weakness that lies at the heart of this model of manufacturing.
The hidden costs of a single source dependency and poor flexibility in adapting to real time shocks have been exposed. Today, we are ready to tolerate higher prices for certain goods, if it means that we get those faster and more in line with our choice and aspirations. As a result, the change which had already begun, towards more flexibility and a multi level sourcing, will accelerate even more rapidly. In the next few years, we can expect to see a huge overhaul of our supply chain infrastructure and a new order based on three key dimensions which are:
From Globalization to Localization or Regionalization
Logistics hubs will re-emerge at the local or regional level. In order to eliminate the single source dependency and to establish a flexible and adaptable supply chain, the product integrators, the sub-system suppliers and the component suppliers will source, assemble as well as deliver from their own backyards.
This change had already kicked off several years ago because of the increasing Chinese labour costs. After the major attraction for the companies towards Asia, the labour cost differential has shrunk over the past few years. However, what continues to hold foreign attention is the whole supply chain network of suppliers and sub-suppliers which are located in those Chinese hubs.
Today, the top electronic equipment manufacturers source about 40% of the parts from China including the sub assembly. Considering the incredibly high number of parts required – each with different lead times – a return to local or regional supply chains present a few challenges. However, those challenges might be worth taking in the post COVID world. We have already seen the impact of global sourcing in the pharmaceutical industry in Europe, which imported about 80% of the active components for its drug supply from India and China. So in the post COVID times, it’s quite expected that the European governments would ensure they could draw these supplies from their own region. Thus, we could soon see a huge shift to local or regional sourcing.
Supply Chain: The new protagonist and stress tests
A series of large scale cyberattacks in the past 10 years has forced the IT companies to institute penetration tests to scrutinize their cyber security mechanisms. The board of directors won’t have it any other way. In the post-COVID-19 world, the supply chain stress tests will become the new norm. The distributed global business model, optimized for a minimum cost is finished. Future model demands new priorities in optimization.
The supply chain has become the main protagonist everywhere now. It has moved from playing a behind the scene organizational role to being a hero in driving the company business. In the past, volume stability enabled the supply chain to deliver a high level of service while lowering the costs at the accepted quality. However, supply chains and the manufacturing plants allow minimal flexibility in terms of volume – as the struggle to fulfil ventilator demand has exposed. As the volumes become more variable, so the supply chains must become more adaptive, as the forecasts suggest, large suppliers and the logistics operators in the supply chain industry must prepare themselves for the major catastrophic events such as weather events (fires, flood, tsunami), lethal pandemic outbreaks, social unrest, strikes and other associated disruptions.
In order to manoeuver the choppy waters, the navigators need visibility. In certain industries, such as the microprocessor development or consumer technologies, advanced electronics manufacturers have already produced comprehensive dashboards which lay out the full status of production and shipment, right down to the last detail. The dashboards refresh every few minutes to provide a real time overview of the entire supply chain.
This type of technology will inevitably emerge as the new norm. If you consider the pharmaceutical industry, for example, there is no single database, either centralized or distributed, from which to map the critical components for drug manufacturing. For suppliers and ultimately the end users, the visibility on sourcing is critical and should be upgraded.
Back to the Human Dimension: Manual Steering and Volume Flexibility
The human dimension is back and it will play a major role in rebalancing the global supply chain during this crisis and much beyond. The big and unexpected changes in volume render the statistical models useless. These models assess events such as the pandemic as “outliers” and discard them from the data. We need visibility for the people in the supply chain to be able to make decisions, most decisions should be made manually now. So, the human factor is the key.
In this context, The Principle of “autonomation” i.e. automation with a human touch has been proved to be the most beneficial and adaptable. This involves automating around 80% of the system but allowing a 20% opportunity for human expertise to improve the system operation.
Although, the unemployment rates are rising across the world, healthcare, agriculture industries as well as grocery stores and other key “essential work” fields face labour shortages. Some time back, Amazon announced more than 1 lakh new roles in their fulfilment centers and delivery networks, while, in China, the return of the quarantined workers to production plants and factories generated quite a relief in the West. Similarly, despite AI’s positive affect on efficient e-commerce, ‘the last mile’ of delivery – from distribution centres to the doorstep of the customer still needs a human driver or a drone operator.
Labour should be managed as a key asset of adaptation which plays a fundamental role in a crisis response program. For example, the shortage of N95 masks, requires new manufacturing plants to meet the demand, and given the dramatic price increases of up to 5 times in online or the retail outlets, the increases in the labour costs are also both feasible and manageable. However,the opening of a new production line or the modification of the existing one calls for a surge in the human capital.
Conclusion: In short, COVID-19 has revealed the weaknesses of a globalized manufacturing system and in order to respond we need to fundamentally rethink about the supply chains. Our goals should be making them more regional or local, modifying the supply chain as the key business driver and bringing back the human asset as the most important factor in order to help the business keep on growing and succeed.