The Future of Global Supply Chains Post-Covid
Applied Business Strategy - Issue 1
There has never been more attention –in both the media and boardrooms – given to supply chains. The pandemic caused severe shortages of lumber, semiconductors and even baby formula, as well as shipping containers and the ships (and crews) to handle them. This emptied shelves and dealer lots, fueled inflation, and ravaged balance sheets and economies. Later, the huge demand spike caused by an unexpectedly quick recovery caused unprecedented consumption shocks and further logistics problems, exacerbating inflation. As backlogs and frustration mounted, corporate leaders and supply-chain executives began a wholesale rethink of the value of global supply chains.
These chains had evolved over the last 30 years as part of a broader embrace of globalization (“the world is flat”). Their goal was to exploit low labor costs in developing nations, cheaper shipping, and falling trade barriers. Companies broadened the application of comparative advantage (developed by David Ricardo almost 200 years ago to describe the trade of English textiles for Portuguese wine) beyond finished goods to components, services, and other steps in the value chain. Global supply chains were efficient. They increased profitability and global economic growth. But they were vulnerable to natural disasters and trade wars, and then devastated by Covid-19.
Supply-chain teams have become experts at crisis management, but what can and should they do for crisis preparation and avoidance? A recent issue of California Management Review suggests what changes will and should be made. Despite the vulnerabilities the pandemic exposed, the authors argue against overreacting by extensive reshoring, since decades of specialization, locational advantages and market access have made its cost too high. Instead, they predict and recommend smaller adjustments to increase resiliency like 1) more regionalization of the supply base, 2) selecting for and building suppliers’ risk management capabilities, and 3) greater two-way information-sharing and coordination between suppliers and lead firms. These changes seem desirable: a simulation model described in the issue predicts that regionalization significantly increases the robustness of global supply chains.
However, these incremental steps are insufficient, especially in light of a more recent disruption: the war in Ukraine. The war has not only disrupted supplies of food, fuel and selected manufactured goods; it has triggered new sanctions and will likely create long-term barriers to trade with Russia and her allies. It may also spur conflicts in other areas of the world. Companies must now pay greater attention to where their suppliers are located, and who owns them. Supply-chain professionals must place much greater weight than ever before on geopolitical, climate, governance and logistics risks. This will require a new approach to decisions on sourcing.
To reduce risk, companies should also take actions outside their purchasing departments:
Many products are offered in multiple variations that yield little or no extra profit while adding complexity to supply chains and inventories. Reducing the available choices can improve profitability, resilience – and even sales volumes. In one study, customers at a gourmet food store had an opportunity to encounter one of two displays: one with 24 jams and the other with only six. They were invited to sample as many as they wished, and offered a discount on any purchase. Shoppers who visited the larger display were much less likely to buy than those who visited the smaller one.
Risk can be reduced by shrinking a supply chain’s footprint (decreasing the number of suppliers or manufacturing locations) and movements within it (fewer separate processes, fewer shipping routes). This can also increase purchasing power, reduce transactional costs, and improve supplier relationships.
Making parts simpler and more interchangeable also increases resilience. In response to the two-year shortage of semiconductors, GM recently announced that it would develop three new microcontroller families, to reduce the number of unique chips in its vehicles by as much as 95%.
These and other forms of risk reduction are likely to have high returns. Companies must adjust to the new economic environment, and to the increased likelihood of supply-chain disruptions.
Sources
Lopez J, “General Motors Working on New Microcontrollers to Curb Chip Shortage”, GM Authority (gmauthority.com), 2021.
Panwar R, J Pinske and V De Marchi, “The Future of Global Supply Chains in a Post-COVID-19 World”, California Management Review vol. 64 issue 4, 2022.
Schwartz B, “The Paradox of Choice—Why More is Less”, Harper Perennial, 2004.
Tripp J, “Benefits of Supplier Consolidation”, SRI (specialtyresources.com), 2017.