If it ain’t broke, don’t fix it, says the old proverb. Amid all the disruptions caused by COVID-19, one thing has become clear – there is something very wrong with our supply chains.
To understand why they were so vulnerable to a risk like COVID-19, we should understand how global supply chains have changed in the past 20 years. In 2020, the top five exporting countries in the world were China, US, Germany, Japan and South Korea. Compare this to how it was in 2000, when US topped the charts, followed Germany, Japan, China and France. Past two decades of rapid globalization and business growth pushed companies to increasingly go for a system where supply chains were as lean as possible. It was based on two primary factors — efficiency and cost. During this period, China emerged as the manufacturing engine of the world. According to United Nations Statistics Division, China accounted for 28% of global manufacturing output in 2018, good ten percentage points ahead of the US.
For decades now, China has been the default choice for electronics manufacturing. The reasons are obvious — cheap labor, lean supply chains and minimal shipping and customs friction. In 2018, China manufactured over 90% of mobile phones and computers, and over 70% of television sets sold globally. Then in March 2020 as COVID-19 crisis peaked, computer shipments from China to the US dropped 64% in the first two weeks, according to S&P Global Market Intelligence. Monitor and TV imports dropped 66%, against a broader 45% drop in total Chinese imports.
This is what happens when China closes its factories. Since it is a major source of components and finished goods, the longer the factories stayed shut, the harder global pipeline of components was hit. And this wasn’t just with computers. There were reports of countries lining up to source medicines and even supplies like masks and PPEs from China.
That was in March and then, the unthinkable happened. Europe and US, and large parts Asia, including India went into a lockdown. And everything collapsed like a pack of cards. This was because most modern businesses in a globalized economy opt for centralized manufacturing — a single factory that can drastically cut down per unit production costs by using the same equipment to produce different goods. However, this practice of centralized manufacturing has resulted in lack of operational flexibility and resiliency, which can pose an existential threat to businesses in the event of a COVID-like global crisis. Now, companies not only have the tough job of sustaining business in a low-demand economy, but also the imperative to restore broken operations in the near term, while redesigning their supply chains to make them shock proof.
While decoupling from China with a more diversified supply chain network will take a few years at least, as Dr Nick Vyas, executive director of the Center for Global Supply Chain Management at the USC Marshall School of Business, puts it the problem is beyond being a “China-only” issue. “We didn’t collaborate in a way that could have helped proactively, or engage in a way that could have prevented the spread, or collaborate on potential mitigation plans,” he said in a recent interview.
The Center foresaw a supply chain disruption way back in January-February when the issue was still localized in China, and warned that the unplanned shutdown there could cause a rapid chain reaction throughout the world.
And it happened by March. For instance,even when there were enough stocks, at times, the system didn’t know what was located where and in what quantity. This affected decision-making even at the height of the pandemic. For instance, nurses in New York were working without proper PPEs while warehouses in California sat well stocked with supplies. Stores ran out of a basic necessity like toilet paper because of constraints in production capacity and lead times. What was required was a sophisticated network of where the raw material was located, the factories where they were produced, or the availability of laborers or truck drivers.
COVID-19 has exposed the chinks in our supply chain network. When the pandemic broke, even Amazon struggled with sourcing and deliveries. That is because of mostly supply chains are managed by analogue, manual processes.
Let’s be clear, the world may be re-opening, but COVID-19 is not gone. It is also not the last disruption the world has faced. Without data-driven tools to enable businesses to plan or track the location of every supply, delivery or blockage, our supply chains will continue to remain vulnerable to events like pandemics, natural disasters, political disturbances and trade wars.
Location-based analytics can help us understand how global manufacturers are managing these disruptions to their supply chains and prepare all businesses to preempt their own responses. “Location data and directing the flow of goods is a crucial enabler to helping customers identify weak spots in their supply chain network. Location as a variable provides day-to-day optimization with real-time ETAs but also can help identify an over-reliance on distribution centers,” according to Peter Kueth, Senior Product Manager, HERE.
Even as the world limps back to normalcy, the cost of supplies from China may increase in the short term. Businesses will also have to work through alternative sourcing strategies, manufacturing and even sales and deliveries keeping in mind varying scenarios, for instance as cases of viral transmission emerge in different regions and countries.
There have been similar supply chain disruptions in the past, but nothing like the COVID-19. At least since World War II. While no one could have predicted the scale and speed with which COVID-19 made the entire world come to a standstill, what we can do is better prepare for future disruptions. And technology will play an essential part in that.