Rethinking supply chains in the wake of the Coronavirus pandemic

As manufacturers, suppliers and exporters around the world are being forced to re-evaluate the reliability and effectiveness of their supply chains, they also have to rethink where to place their on-the-ground operations, giving close attention to location-specific warehousing needs.

“Every client is examining their footprint – where they should manufacture their products, store inventory, source materials from and do their final assembly,” says EY global and America's supply chain leader Glenn Steinberg. “This is increasing the pressure on supply chains and requires a fundamental rethink of the concepts of supply chain management and supply chain strategy.”

The Covid-19 pandemic is not the only unique global event that has led to a change in the way supply chains are thought of – the Tohoku earthquake and the Fukushima Daiichi nuclear disaster also challenged the structure of existing supply chains. However, the impact of the Covid-19 crises has accelerated the necessity for new and unique supply chain strategies.

Secondary sources and additional safety stocks

Firms have also increased focus on building resilient supply chains which includes adding alternative supply sources and enhancing safety shocks. However, supply concentration currently depends on economies of scale in manufacturing, unique characteristics of the supplier, and geographic positioning of the raw material and resources. An important metric to evaluate is the extent of safety stock needed. If developing an alternative source does not require significant resources and capital, then diversifying supply may not be very complex. However, if manufacturing is a complex process that needs licensing and certification, then it may pose greater challenges to diversification. In the past, manufacturers have often deliberated the trade-off between unit cost and supplier diversity, often concentrating their supply if it gives a lower cost return. In order to ensure competitive pricing, long-term production commitments will have to be made to reflect the commitment of firms to expanding supplier sources and will give alternative suppliers the incentive to invest.

Future site selection

Markus van Tilburg, managing director of Global Aldea, a site-selection and FDI support specialist, believes that this situation will encourage companies to find alternative manufacturing locations.

“Companies will think about their strategic global footprint in a way that is more than just a low-cost approach,” he says. “Furthermore, companies will carry more local safety stock and extend their supplier networks.”

This disruption to global supply chains is likely to continue for several months to come. Companies will have to undergo a swift restrategizing of supply chains in order to ensure greater robustness and efficacy in their supply chain processes and to secure themselves from such future disruption in raw material supply and global logistic operations. Managers need to consider the unique situation that they are facing and identify opportunities to safeguard themselves against such future shocks.