Supply Chains After COVID-19
By the 1990s, just-in-time (JIT) inventory systems were everywhere. JIT allowed companies to hold little or no inventory. Since storing inventory costs money, deploying JIT systems saved money. Then the world changed.
In the late 2010s, trade wars developed — especially between the US and China. Protective tariffs were on the rise. Yet, JIT systems proved they could weather the storm. Then COVID-19 came.
The Impact of COVID-19 on Supply Chains
In the late 1980s and early 1990s, the Cold War ended with the fall of the Soviet Union. The world was more stable than it had ever been. Globalization of supply chains benefited from stable and predictable relationships among nations.
Inventory works like insurance. It costs money to carry inventory, and it’s only necessary if supply can’t meet demand. Why pay the cost of storing excess inventory when you have a stable supply? Why not use the least expensive labor in the world when there’s no geopolitical instability?
The world ran on global capitalism. Authoritarian communist countries like China implemented free market and democratic reforms. Communist China had many self-made billionaires, like Jack Ma. Then the facade of democracy and capitalism fell in nations like China and Russia.
Jack Ma disappeared for a few months after criticizing the Chinese government. The world’s business publications noticed Jack Ma’s disappearance. In Russia, business leaders that criticized Putin disappeared.
Americans from both major political parties demanded an end to globalization. The result was trade wars. American taxpayers indirectly paid for new tariffs.
There wasn’t only instability in the authoritarian countries. The most advanced nations experienced political instability.
In America, the Make-America-Great-Again movement and the Bernie Sanders wing of the American Democratic Party brought instability. In France, Marine Le Pen destabilized the political system. In the UK, the issue was Brexit.
Global supply chains were already strained. Then came COVID-19. Highly fragmented supply chains, like the automobile industry, were especially hard hit.
Supply Chain Disruptions in 2020–2021
Automobile supply chains are notoriously difficult to track. Cars have about 30,000 parts. A firm may design a semiconductor in one country. Another firm may manufacture the semiconductor in another country. Yet another firm in another country embeds the semiconductor into an airbag system. The raw materials for the semiconductor may come from another country.
It’s no surprise that between May 2020 and May 2021, half the increase in the Consumer Price Index was related to automobile prices. Tracking down supply chain disruptions in vehicles sourced across so many nations is a nightmare.
It’s not only international supply chains that were disrupted. With demand remaining high, and production slowed by COVID-19, there were dramatic price increases.
For example, framing lumber for new home construction cost about $7,000 for a 2,000-square-foot house in the US. With COVID-19 lockdowns, the price jumped to around $27,000 for the same amount of lumber.
Many of these price increases were transitory. Framing lumber prices fell when production resumed. But many prices have not fallen. COVID-related supply chain shocks have continued into the summer of 2022.
Finding enough truckers to clear backlogs at American ports helped ease supply chain disruptions. The solution to that supply chain issue had no effect on other disruptions. When China went into another COVID-19 lockdown in the summer of 2022, offloading at ports was the least of our concerns.
There are many potential supply chain disruptions besides COVID-19. For example, the war in Ukraine has caused disruptions. Still, at this moment, we must ask, when will COVID-related supply chain disruptions end?
Many would say these disruptions will end when COVID ends. No one can project with significant confidence when COVID will end.
What the world needs are agile supply chain strategies that minimize issues regardless of how long COVID continues. What are these resilient strategies?
Resilient Global Supply Chains
Our new normal requires that we adjust our supply chain strategies. Risk management analysis must be a part of every supply chain manager’s toolbox. Often, this means the deployment of new software solutions. These solutions leverage the power of big data, isolate and identify supply chain vulnerabilities.
Too many companies have relied too heavily on China and other East Asian countries. Pandemics don’t stop at a nation’s borders. But, when a disease spreads in a region, supply chains are slowed.
COVID-19 isn’t the first coronavirus pandemic to affect China in this century. SARS and MERS affected China and Korea in 2002 and 2012, respectively. The economic impact of those pandemics was mild compared to COVID-19.
With the likelihood of future pandemics and future COVID-19 variants, it isn’t wise to rely on a single region. Companies must diversify their supply chain risks across the globe.
Other necessary upgrades to supply chain management include safety inventories and new manufacturing innovations.
Why companies need Analytics Software
Unless you have good analytics software, you won’t identify vulnerabilities in your supply chain. McKinsey reports the use of digital analytical software strongly impacted organizations’ supply chain planning success through the pandemic.
Without the right software, it is a laborious task to track down each supplier of your suppliers. Is there a supplier three steps up the chain from you that is the sole producer for a supplier two steps up the chain?
You need software to spot these potential bottlenecks and adjust your strategy accordingly.
McKinsey surveyed the following sectors to see if they planned on investing in advanced analytics:
- Construction, engineering, and infrastructure
- Automotive, aerospace, and defense
- Chemicals and advanced materials
- Consumer and retail
- Advanced electronics and high tech
Over 50% of survey respondents, across the first six sectors, said they had invested in analytics since the beginning of the pandemic. These sectors planned more investment — except for one sector. Healthcare was the sector with the lowest interest in advanced supply chain analytics.
Some supply chain management software can provide a 360-degree view of every aspect of each shipment. These programs leverage sensors and QR codes so you’ll know products stay at the correct temperature. Such functionality is especially important for healthcare companies.
These companies must keep items like vaccine shipments at certain temperatures. Healthcare supply chains are critical to defeating COVID-19. Without COVID-19, there are no COVID-19 supply chain issues.
Geopolitical Diversification of Supply Chains
Most financial advisors will tell you to minimize risks by holding a diversified portfolio of investments. The same principle applies to minimizing supply chain risks. By having suppliers across multiple regions, you reduce the risk of a supply chain disruption caused by an outbreak in one region.
Disease outbreaks aren’t the only risks reduced by regional diversification. The same diversification strategies can protect supply chains from geopolitical instability. What happens if China invades Taiwan? Are you ready?
According to American CIA director Bill Burns, the question isn’t if China will invade Taiwan. The questions are when and how they will do it. President Biden says the US will intervene militarily to protect Taiwan.
There is some ambiguity surrounding America’s one-China policy and its willingness to protect Taiwan. But one thing is certain. Aggression by China will cause severely disrupted supply chains.
The strain on supply chains could expand far beyond China to include any shipments across East Asia. These disruptions could even expand to shipments going through the Suez Canal. That’s because of China’s naval base at the southern end of the Red Sea.
Should you cut ties with suppliers in China? No. But you should diversify your risk. Is it good enough to use China plus a Southeast Asia supplier like Vietnam? This strategy may not work since China doesn’t respect 12-mile limits on their territorial claims at sea. They claim most of the South China Sea and the Taiwan Strait.
The solution is to diversify suppliers to the extent possible across geographic regions. At the same time, you must maintain a presence in the least expensive regions to be competitive. Risk assessment, like anything else, always comes back to cost-benefit analysis.
A Move Away From JIT Inventory — Safety Inventory
There are limitations to how much geopolitical diversification is possible over the short run. Some products are only produced in certain regions. Creating new production facilities takes time.
The Harvard Business Review reports that nucleoside phosphoramidites come primarily from China and South Korea. These are chemicals few have ever heard of. But, they’re essential for developing mRNA vaccines for COVID-19. Conflict in East Asia could disrupt this crucial supply.
There isn’t enough time for geo-diversification to reduce risks related to these rare chemicals. The best way to manage such risks in the short run is to increase inventory.
Just-in-time inventory is great. Why? Because it costs money to store excess inventory. But JIT inventory systems require global stability. With pandemics and geopolitical risks, inventories act as insurance against supply chain shocks. And you can build inventory much quicker than new production facilities.
Of course, you don’t want to move completely away from JIT inventory. You only want enough excess inventory to meet quantified risks. Quantifying these risks requires supply chain software and big data analytics. You don’t want to spend a penny more on inventory than what’s necessary to reduce global supply chain risks.
The Harvard Business Review lists innovative production systems that could solve supply chain issues. These processes include:
- Additive manufacturing
- Other new technologies
The common denominator with these technologies is they reduce the need for labor. By reducing the need for labor, cheap labor in developing nations loses its appeal.
Automation through robotics has been gaining ground for decades. Additive manufacturing, also known as three-dimensional printing, has made dramatic leaps in recent years. There are even companies that print houses and print human organs. These industrial three-dimensional printers can also produce machinery and tools.
These new technologies can do a lot to reduce supply chain risks, but they take time to develop and deploy. Companies can deploy supply chain risk analysis, supplier diversification, and safety inventory immediately.
The world was relatively stable for almost thirty years. COVID-19 and geopolitical stability changed that. The days of relatively risk-free global trade are over. So, should we go back to a world of protectionism? No. The key is to adapt to the current environment.
Successful companies have always faced challenging events. How did they survive and thrive? They changed to meet these new challenges. That’s what all supply chain managers must do in 2022. But before they can meet these challenges, they must detect these challenges.
Logmore is a software and logistics company that can help you with supply chain issues. Logmore turns your supply chain operations into data that can be analyzed. Logmore’s cloud-based solutions spot bottlenecks, deviations, and trends. It can monitor every aspect of shipments — including temperature, tilt, humidity, and more.
Logmore also provides special sensors for extra cold shipments such as vaccines. Logmore’s Dry Ice Loggers ensure shipments within healthcare supply chains aren’t spoiled.
Contact us today for a demonstration of our products. We can eliminate many of your supply chain concerns.