By Jean-Pierre Krause, Global Head of Risk Engineering, Zurich Insurance Group
For the past 12 months, anyone involved in logistics or the supply chain will have suffered sleepless nights. Severe winter weather, Brexit and trade tensions added significant challenges and a raft of new regulatory hurdles. And that’s before you consider the impact of COVID-19.
The pandemic delivered one of the most significant shocks ever to hit global supply chains. Global trade was turned on its head. It resulted in supply shocks as governments, businesses and individuals struggled to procure basic products and materials; and demand shocks as people stayed home and curtailed their usual consumption patterns, which had a ripple effect on the supply side again.
The hope is that the roll out of vaccines and ongoing preventative measures will allow us to finally see lockdowns lifted and our lives – and supply chains – return to normal as if we’ve jumped back to 2019.
But before we get there, risk managers and others need to take a close look at their supply chains to determine whether they are resilient against the kinds of shocks we saw from COVID-19. And, disruption from the pandemic may have created opportunities for managing supply chains in new ways.
In the meantime, anyone thinking the issues that have plagued our supply chains in the past year will magically disappear will be in for a nasty surprise.
Out of the pan and into the fire
As lockdowns ease and life begins to resemble a pre-pandemic normality, businesses will be looking for their demand and supply dynamics to normalize too. But will that be possible?
Will your suppliers still be in business? And if they are, will they have the same capacity as pre-pandemic? Many suppliers downsized or closed manufacturing plants to remain financially viable. Getting manufacturing capacity back to pre-pandemic levels will not happen overnight.
There is a similar issue with skills. As supply chains slowed down, many employees were forced to find jobs in other sectors. Truck drivers, port operatives and production managers became delivery drivers, supermarket employees or worked in the health sector. Will they return to their previous careers supporting the supply chain?
And finally, will your customers return? The pandemic has made everyone reorder their priorities, review their financial commitments, and it has introduced new trends that may be here to stay. All this could change future demand for your products and services.
It all means that when the pandemic ends, a fresh wave of challenges will impact supply chains.
Sleepless nights ahead
Big strategic decisions lie in wait. COVID-19 exposed the fragility of our global supply chains. Production strategies, lean inventories and just-in-time replenishment were found to be vulnerable when there were material scarcities and freedom of movement was restricted. It may be time for a rethink.
This was particularly evident in the healthcare sector, where shortages of protective equipment highlighted the risks of inventory and single-sourcing models driven by cost control. But it was seen in the supply of other products as diverse as toilet paper, hand sanitizer and bicycles.
COVID-19 is not the first major event to disrupt supply chains. In 2011, the Thailand floods and Japan’s Fukushima disaster interrupted the global supply of vital components and equipment for the computer, electronics and automobile industries. It acted as a wake-up call that led to greater focus on dual sourcing and supply chain transparency.
But the pandemic has had far deeper consequences. Not only is it a truly global crisis, it also delivered global demand shocks – whereas the Thailand and Fukushima events only impacted the supplier side and was geographically limited.
It means that there will be urgent pressure to redesign supply chains to be smarter, stronger and more diverse, as they are optimized for cost, service and resilience. That’s a huge task.
These are questions to ask about your supply chain strategy:
1. Is it time to further diversify my supply chain?
When Chinese factories closed in early 2020, manufacturers struggled to switch to other suppliers. Diversifying your supply chain needs to be a major consideration. Instead of relying only on China, consider manufacturing hubs such as Vietnam, Mexico and India, which are likely to gain greater prominence.
This can help you navigate geopolitical risks and potential trade wars. It is also an opportunity to increase transparency and gain a deeper understanding of the vulnerabilities and hidden risks throughout your supply chain, including your suppliers’ suppliers.
2. Do I need to localize manufacturing?
An alternative is to move some or all production closer to the end consumer. Localized supply chains can be more resilient and are not as susceptible to trade wars or other global events. But this strategy only works if your suppliers are local and their materials are sourced locally, too. Otherwise global risks will remain in your supply chain.
This strategy will likely increase costs, but it may also appease governments who sometimes apply pressure to manufacture in-country to boost employment and ensure certainty of supply of critical products, such as medical supplies.
3. Should I invest in digitalizing my supply chain?
Many supply chains still rely on outdated processes. This is an opportunity to build interconnected digital supply networks that can anticipate and respond to future shocks in the supply chain and minimize their impact.
Digitalizing the supply chain, by investing in artificial intelligence and intelligent automation, can create smart and nimble supply chains able to quickly shift production strategies.
4. Can I make my supply chain more customer-focused?
The demand shocks caused by the pandemic left warehouses full of unwanted or outdated products. Align your marketing strategy with your supply chain so you push items that are in stock and reroute goods to where there is demand (e.g. from retail outlets toward ecommerce fulfillment centers).
It is also an opportunity to use your supply chain to increase brand value. Consumers care about responsible sourcing, including labor standards and sustainable practices. Turn this potential reputational risk into a marketing opportunity by learning about your suppliers and leveraging any positive narratives.
Unfortunately, those sleepless nights endured by those working in logistics or the supply chain are not going away. But on a positive note. Instead of waking up worrying about how to solve the next issue to beset your supply chain, you’ll lie awake considering the opportunities to redesign the supply chains to be smarter and more resilient.