Impact Of COVID-19 On Global Supply Chains and Opportunities In the Post-COVID World
While there are people drawing comparisons with the Spanish flu pandemic of 1918, there are several key differences from a global trade and supply chain perspective
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Several times over the last few weeks, I have heard of 2020 being refered to as a bad movie with a particularly grim storyline. The repercussions of COVID-19 outbreak are being felt more strongly with every passing day, and despite the unprecedented steps and cumulative efforts undertaken by governments, businesses and individuals to stem its growth, the virus continues to rampage unchecked across the globe, causing loss of life and hitting businesses across industries and verticals. The fact that the origins of the virus lie in China, the de-facto "factory of the world', has only served to accentuate the damage from an economic perspective with a significant percentage of supply chains reeling in shock and crumbling with each passing day.
As per a March survey conducted by the Institute For Supply Chain Management, nearly 75 per cent of companies reported supply chain disruptions in one form or the other due to coronavirus-related transportation restrictions, and the figure is expected to rise further over the next few weeks. Other interesting figures that emerged from the survey included the lack of any semblance of a contingency plan for almost half the companies in case of a supply chain disruption leading back to China, and well over 50 per cent of the companies also reported experiencing sudden, unexpected delays in receiving orders, a problem compounded by supply chain information blackout from China.
The figures above serve to bring out the vulnerable state of global supply chains, the lifeblood of our towering economies in sharp relief. However, the writing had been on the wall for quite some time. Consolidation of suppliers by geos, where efficiency has historically been the key strategy driver and limited focus on de-risking procurement and supply chains over the last several years, has contributed to the current state of affairs with shortages of key items globally, barely three months into COVID-19—bringing into question the very foundations of the "ultra-globalized' economies that we see around us and live within today.
While there are people drawing comparisons with the Spanish flu pandemic of 1918, there are several key differences from a global trade and supply chain perspective between the post-World War I scenario of 1918 and the world we inhabit today. The current situation is also different from past pandemics from the recent history, due to the vastly different economic equations. To take just one example, when the SARS virus hit in 2003, China contributed somewhere around 4 per cent of the world GDP. Today, that figure is 17-20 per cent, making the origins of COVID-19 in China, all the more painful and damaging from an industry perspective.
In this article, while alluding to the larger macroeconomic problems, we will focus on the impact of COVID-19 on global supply chains. In the later part of the article, we will also talk about new opportunities that may arise in a post COVID-19 world, as our race puts itself back together and attempts to glean learnings that would make us stronger, should such a situation arise again in the future.
Key macroeconomic challenges associated with global crises
Manufacturing: Manufacturing today is a far complex process, compared with just a few decades ago, with subcomponents required to assemble a single final product sourced from several places across the globe. The raw materials required to manufacture these subcomponents could also come from different countries and continents, and the finished/semi-finished goods may then require to be transported all over the world. This massive dependency upon logistics make import, manufacturing and export a difficult proposition in case of disruption to the supply chains.
Consider a relevant example in the current situation: India imports well over half of its active pharmaceutical ingredients (APIs) from China. Between the Indian government selectively restricting API import and the logistics challenges created by COVID-19, India's pharmaceutical industry is going to find it difficult to maintain its export numbers. Considering that India is the biggest supplier of generic medicines worldwide, this could very easily lead to a global shortage.
Procurement: At the other side of the coin lies the procurement challenge for the sourcing organization.
In a globally integrated world, a drive towards efficiency has caused an increasing consolidation of production in lower cost geos—primarily based in China, Taiwan, Vietnam or other low-cost economies. With the pandemic starting in China and hitting countries across the globe, and the resultant fallout and shortages, the need for distributing risk has become more evident than ever.
- Distribution of products is going through some unique challenges such as staffing of warehouses, a need for direct distribution and more intelligent and responsive allocation across channels.
- Retailing is also been impacted in a peculiar way. The lockdown and curfew scenarios across the world have led to a unique situation where there is demand as far as essentials are concerned, subdued demand in some niche areas, and big challenges in the luxury items segment, and we are likely to see several retailers down their shutters while many others will be severely challenged on operating margins and models.
- On the consumer side, hoarding/stocking of essential commodities and over-the-counter medicines has led to unusual stress on the supply chains. It is not unusual for consumers to panic stock food and other essential commodities during times of crisis. While this leads to stress if the stockpiling goes beyond a few weeks, it is natural for consumers to be anxious about availability and resort to this kind of behavior. This unnatural spikes in demand and the required supply fluctuations are extremely difficult to handle and together create a bullwhip effect in the entire supply chain often leading to artificial shortages.
Post-COVID: The brave new "digital' world
From an industrial perspective, the current situation is likely to accelerate digital transformation initiatives for businesses across the globe, as they are forced to face their weaknesses and vulnerabilities. Technology-led business models will emerge as more critical and important than ever and will play a key role in defining strategy as we reimagine the global supply chains of tomorrow.
Based on lessons that are being reinforced and validated in the current global crises, there are several ways in which businesses can go about creating resilient supply chains in the post-COVID world. For one, there is an urgent need to reduce dependency on physical labor across transportation, logistics and warehousing. This can be enabled through core digital technologies for Industry 4.0 like Internet-of-things, blockchain, control towers, artificial intelligence/machine learning enabled demand forecasting, rule-based and self-adjusting stock allocations, autonomous devices such as AGVs and drones, among others.
Factories that can modularize production and shift/adapt lines due to demand changes, will be the norm of the future. They would be backed by supply networks capable of communicating intelligently with one another, compounding their effectiveness and agility. Businesses are going to pay a lot of attention to making critical systems available on the cloud so that they can be remotely accessed by employees as they work from home. We should also see some of the fence-sitters on cloud migration get that final nudge to the other side—and finally move to the cloud to enable business continuity. Safety will also be a key factor and supplier risk management will be at the core to all planning initiatives. One of the few positives of the COVID-19 scenario has been exposing us to the possibilities of remote working across industries, domains and businesses, and if sustained in the post-COVID world, this trend will lead to a renewed focus on environment-friendly operating principles.
All this notwithstanding, the human element is the most important one that will emerge as we pass through the COVID-19 period over to the post-COVID world. Given the projections on the number of infected/ hospitalized, it will have a cascading impact on the availability of even the core services. The situation in Italy, Spain, the US or China worsened further due to the essential services providers such as medical professionals, nurses and forces being impacted by the virus. This is also visible in some of the newer impacted areas like India as well.
At HCL Tech, our supply chain practice has been at the forefront of leveraging digital technologies to ease and build global resilient supply chains. We continue to be committed to continuing our focus on leveraging key technologies and offerings and to support businesses with our expertise, as they recover and use their learnings from the current crisis to bounce back stronger, and more resilient and capable of handling disruptions than ever.
Some key elements, that will prove crucial in the supply chains of tomorrow include:
- Intelligent procurement: To help organizations understand where and when to source using advanced machine learning algorithms based on past purchases, commodity pricing, agro and industrial trends, among others.
- Supply chain control tower: A single source of truth from sourcing to delivery for all trading partners to see and adapt to changing demand and supply scenarios across the world.
- Supply chain data management with intelligent automation and analytics: End-to-end information management, taking the form of a data vault of sorts to capture supply chain transactions accurately with high consistency and minimum redundancy. This will help supply chain organizations gather insights around supplier performance, supply chain diagnostics, market intelligence and risk management.
- Supplier risk management: N tier risk management helping organizations model cost structures, trend performance data and visibility in to extended value chain to keep abreast of any supply disruptions and secure capacity. This could help companies avoid sudden disruptions in supply chain and deal with lack of information, something that many major global companies including Sony, are facing today.
- Supply chain simulation: Modeling new supply chain strategies based on business/operating model change, current and/or future supply/demand/logistics constraints. Helps to validate and identify the best cost-efficient network to achieve the necessary service level across the value chain.
To conclude, the one thing that humans are better at than any other sentient life-form is our ability to learn from our cumulative experiences and implement those learnings to come back stronger. From a purely business perspective, COVID-19 presents a slew of serious and sometimes unprecedented challenges for organizations cutting across the business environment, including a possible liquidity crunch, global supply chain disruptions, increase in trade barriers, and a shifting consumer mindset. However, the post-COVID world will see digital technologies playing a critical enabling-role in delivering improvements throughout the breadth of businesses, including more resilient supply chains, significantly enhanced user-experiences, and intelligent optimized processes to deliver business outcomes.