COVID-19 — Vulnerabilities & Needed Changes in the Supply Chain
The COVID-19 pandemic has affected supply chains and disrupted manufacturing operations around the world. Lockdowns forced people to rely on online services, whilst many companies and SMEs couldn’t complete their orders for lack of parts that would usually be shipped in from other countries. Here we take a quick look at the effects of the pandemic on the global supply chain up to now.
COVID-19: A black-swan event?
The concept “black swan events”, was first defined by Nassim Taleb in 2007; “First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme ‘impact.’ In other words the events likelihood is low but their ramifications are colossal, with both short term and long term effects that are hard to anticipate and to measure.
Pandemics we have seen before, but it is both it’s scale and the combination of events that together have created an economic outcome far beyond any reasonable expectation. In the short-term we have seen nationwide lockdowns, the shutdown of entire areas of industrial output and panic buying. In the long-term, the advance of remote working, labour changes, fragmented supply chains and the redirection of public and private investment.
With a second wave of infections starting to hit and the Northern Hemisphere slowly turning colder, the reverberations of this pandemic are far from over. However, to term COVID-19 as a black swan event risks our dismissing key failures because of the perceived exceptional nature of the event. Instead, we argue that this crisis has acted to expose and exaccerbate already existing vulnerabilities, finally creating the incentive needed for truely transformative supply chain innovation to be embraced.
Supply chain vulnerabilities
To design a resilient supply chain for the future, companies need to look beyond what they can simply do in the moment and instead look to transformative innovations. This is more easily said than done. Supply chain players have been slow to change, with long adoption cycles and resistance to the high cost of transformation. As such, despite the size and importance of the global and interconnected supply chain we all rely on today, it is still largely reliant on basic processes and human endeavour.
But is the corona crisis such a black swan event that forces entire industries to reevaluate and transform their global supply chain model? Although we can’t definitively evaluate the effects of the pandemic yet, it has exposed the vulnerabilities of many companies, especially those who have a high dependence on China.
The pandemic has thus again highlighted the urgent need for even basic digitalisation and data processing to be implemented, removing the huge data silos and black spots that continue to frustrate players along every step of the supply chain. A digitalised supply chain would not only create greater transparency on all tiers, but also improves speed, accuracy, and flexibility for the various players involved in getting goods from A to B.
Flexibility is more urgently needed than ever before as supply chains continue to fragment and the need for resilience changes strategy for shippers and carriers alike. Recent studies reported that as a result of COVID-19, 83% or more of sectors which depend on overseas supply chains are considering, or have implemented, a plan to shift supply chains — with the ability to automate factories closer to their home markets a key enabler (Bank of America Merrill Lynch).
As investors, these vulnerabilities offer opportunities, with areas such as robotics or the need for smart last-mile fulfilment solutions seeing accelerated adoption and growth as supply chain operators look to build resilience.
For more details on where supply chain vulnerability can be found, please see Figure 2 below.
Continued Listening
To learn more on current supply chain vulnerabilities, have a listen to the Shock Proofing Supply Chains podcast by Baker McKenzie with Mattias Hedwall (Partner, Global Chair of the International Commercial & Trade Group) and Christina Conlin (Partner, Chicago and former chief compliance officer for McDonald’s Corporation’s European operations).
