supply chain disruption

Managing Supply Chain Disruption in 2022

Managing Supply Chain Disruption in 2022

Firms started developing wide-ranging plans to more effectively become resilient. Locations that had been seen as highly desirable in a pre-pandemic situation started looking more fragile under heavy disruption. Having many just-in-time operations became more of a liability when logistics delays lengthened to weeks or even months. In response, some firms started developing action plans to near-shore or even re-shore some production. In some instances, these activities were already underway as the pandemic followed several years of highly disrupted trade, particularly during the height of the US-China trade war from 2018 onward. For most companies, however, heading in 2022, the actual changes made by firms to adjust to the pandemic has been considerably more modest than might have been assumed. Why? At least four reasons seem important. First, adjustments to supply chains can be quite expensive. At a time of widely fluctuating supply and demand projections, most companies did not want to deploy capital to actually change production or distribution locations. Many of the “resilient” suggestions can also involve substantial costs. Holding additional inventory can be expensive. Creating duplicate chains or even duplicate suppliers for critical parts can involve substantial additional costs. There are often sensible reasons for how a firm organized its supply chain in the first place.

US-China Decoupling: Implications for Asia

US-China Decoupling: Implications for Asia

While firms have shifted some production already out of China, it is economically risky for companies to completely ignore the unique advantages that China offers including its quality infrastructure and sizable domestic market, which serve as strong incentives for firms to stay put. Most companies that believe they may be exposed to an ongoing set of trade tensions between the US and China have engaged in internal reviews and scenario planning. COVID-19 has both put a hold on and, paradoxically, accelerated some of this thinking. While the pandemic has made it difficult for many companies to focus on strategy not directly related to immediate survival and management of a series of supply chain disruptions caused by market shutdowns, it has also amplified the risks of potential exposure to new challenges. Every company has begun talking about building more resilience into their systems. What, exactly, such resilience will mean is less clear. For some, it means holding more inventory. For others, it means identifying key chokepoints in the supply chain and looking for additional sources of supply to lower risks in these specific aspects of the chain. For others, it means shifting production closer to final markets to reduce disruptive effects caused by border closings and other specific obstacles. At this point, however, most firms have already instituted supply chain reshuffling between internal locations, if such options are available. For example, companies that have overlapping capabilities in multiple locations have ramped up production in some markets while lowering production elsewhere. Internal swings to mitigate risks have already been put in place wherever possible.

Unlocking the Chain: Gaining a Competitive Edge with FTAs

Unlocking the Chain: Gaining a Competitive Edge with FTAs

Firms of all sizes are currently experiencing unprecedented pressures as a result of COVID-19, the ongoing US-China trade war, and even climate change. Such quickly changing market signals have put enormous pressure on margins, leaving companies with sub-optimal networks and trading partners, and making firms more vulnerable to further disruptions and market fluctuations. In such an environment, building a more transparent and robust supply chain risk management program that monitors and responds proactively to potential disruptions has become a C-suite agenda item. Firms need to re-examine their existing supply chains and ensure that they are fit for purpose in a new, widely disrupted, trade environment. Companies that did not see the point in engaging in potentially complex reengineering of their footprint may be forced to look more closely. Areas of the chain that were previously unimportant may become a top-line challenge while other markets that have traditionally sustained business may no longer do so. To help lower risks, one key, typically underutilized, tool for companies is effective use of free trade agreements (FTAs). These agreements can limit the scope for sudden shifts in government regulations, policies, tariff levels and services and investment restrictions. Proper use of FTA rules can generate thousands or even millions of dollars in annual savings, providing consistently lower tariffs, plus rules between partners that bring greater certainty and lower risks for regional supply chains.

Shifting Supply Chains in Disruption

Shifting Supply Chains in Disruption

The extreme level of disruption appears to have caused firms to finally think seriously about their existing supply chain footprints. Companies in multiple sectors have now vowed to develop more resilient chains. In many cases, firms have supply chains that have evolved organically, with little coherent planning. Staff, to pick one example, often run disparate parts of global firms from locations that may not make sense if viewed from the perspective of today. Companies might have an office in one location that was originally set up because a key staff member liked the area, only to watch it evolve into a much larger operation than ever anticipated at the outset. Companies typically do not design supply chains from scratch, but bolt on different parts over time, as the firm grows or acquires new companies or moves into new sectors. The net result is often supply chain footprints that actually make little rational sense. Warehouses might be located in places that no longer have the transport links originally intended. Traffic, as an example, could be so heavy that goods are stuck in transit much longer than planned. With so many staff locked down in houses or slowly venturing back to offices, it makes sense to seize the opportunity to re-examine supply chains and determine whether and how the existing footprint can be adjusted to cope with new stresses.

The Future of Trade

The Future of Trade

In a world of fear and panic, compounded by a global rulebook that is increasingly being suspended, firms are struggling. Companies do not manage increasing risks and growing uncertainty very well. The natural inclination is to suspend all decisions—to not hire any additional staff, to retrench, to cut costs, and to limit future investments. Contraction by firms only exacerbates the challenges. Companies that are in shutdown mode are not buying goods or services. Suppliers are caught, unable to manage their own costs. Many of these challenges are going to be hard to manage, no matter what responses governments provide. Companies and citizens will make their own decisions about employee and personal health risks. Individuals that end up with radically altered lifestyles as a result of prolonged periods at home or out of work may permanently change their buying patterns. Unlike companies or households, government cannot simply shut down. It has to do two things that are hard: manage the immediate situation and plan ahead to limit future damage. Understandably, the former task occupies most of the time and attention for officials. But the latter also needs focus or countries will come out of this current crisis unprepared for accelerating growth and supporting future development.