The corona virus (COVID-19) has devastated supply chains globally due to which the manufacturing entities have been particularly badly impacted. .
Indeed, COVID-19 has proven to be a crisis where manufacturing companies have faced supply, demand and work force availability shocks.
Several questions arise regarding this issue: (1) What will the manufacturing and associated supply chains look like in the days, months and years to come? (2) Will Michael Porter’s
cost leadership (1980) still be relevant in choosing supply chain partners or will there be other considerations like reduction of supplier and buyer concentration risk? (3) Will domestic manufacturing increase at the expense of globalisation and what factors will propel it? and (4) Will we see more nationally integrated supply chains in the future? These and other questions are taken up in a series of articles.
During the COVID-19 crisis, manufacturing supply chains have been disrupted in many countries because of their over-dependence on China due to lower cost of production and the overall favourable environment in China for manufacturing.
However, having suffered greatly because of lack of access to components, intermediate goods and even finished products due to the COVID-19 crisis and the Chinese lock-down during January – March 2020, many countries are now waking up to the fact that they need to diversify sources of supply and also have fall back domestic suppliers because none of them wants to get locked down again.
The key that companies are now looking for is reduction in supplier concentration risk from a single country or geographic source or location.
Thus, there is going to be no one preferred location as countries and companies are all trying to diversify away the concentration risk of suppliers and supplies—be it for components, intermediate goods or finished products. That is very clear and Mike Porter’s cost leadership being a key factor in choosing (global) suppliers has been substituted by the need for multiple, reliable, valid and consistent, even domestic suppliers from alternative locations.
The converse is also true whereby suppliers are also looking for diversification of buyers including domestic buyers across locations to reduce buyer concentration risk. Clearly, risk diversification across global supply chains to reduce concentration risks in suppliers, buyers and other stakeholders in the chain is very much in vogue and a trend that is here to stay.
As a very knowledgeable industry observer from the US notes, “I believe supply chains will focus more on complete diversification and resilience and optimize cost within that constraint. This would take the shape of national diversification, beyond just firm diversification. If you have diversified your vendors from single source to three or four, but they are all in one country, then we have not eliminated geographic supply shocks. Single source diversification is not enough and we would need single country diversification.”
All of this, of course, implies multiple suppliers from multiple countries including one or two mandatory domestic suppliers. That would be the new normal.
A second change that is coming is to the just-in-time
(JIT) inventory system, based on the innovative Toyota Production System
. Having been locked out of supplies due to shutdowns across and within nations, companies are now being forced to use the just-in-case
(JIC) inventory system—this implies use of more and larger warehouses and increase in inventory carrying costs, all of which will have to ultimately be borne by the customers. Of course, supply chains will still try to optimise cost; but, all said and done, costs for the end consumers are bound to increase.
A third issue that is relevant here is the one of enhanced domestic production. Certainly, every country will have domestic suppliers, which could enhance cost of production depending on the strategic context, but that is a cost that countries and customers would gladly bear rather than be locked out.
However, that could be offset by the huge advantages that come with automated production and other aspects that accrue now from Industry 4.0
—apart from increased productivity you are also going to see other advantages with the use of robotics and artificial intelligence (AI), including machine and deep learning.
Industrial giants like US and Germany should lead the way here as they have had very strong manufacturing bases for decades and also because they are perhaps more amenable to assimilating automated production and associated aspects.
In fact, the US may perhaps well and truly become the leader here, in the post COVID-19 world. While increase in domestic manufacturing may sound like music to ears of politicians in the US, like Bernie Sanders or Joe Biden or even President Donald Trump, it necessarily will not mean employment for the same kind of folks who worked in manufacturing decades ago. New kinds of skills are going to be required and a lot of that will have to do with robotics, AI and related fields.
And for countries like India, to take advantage of the above global changes and become one of the many preferred destinations, we need major taxation, labour law, land acquisition, ease of doing business and other reforms. In other words, the entire ecosystem must be productive—"ecosystem productivity is a function of a number of factors: political stability, business friendly regulations and favourable taxation, cooperative unions, infrastructure quality, and well-developed industrial clusters"
Much will also depend on how well India is able to contain COVID-19 and its fallout economically as well as how many Indian manufacturing SMEs and large companies live out and survive the COVID-19 crisis.
To summarise, given the on-going COVID-19 crisis, the re-engineering of supply chains is going on and the objectives are to ensure lower supplier and buyer concentration risk, greater chain resilience and enhanced chain adaptability.
If this re-engineering works out as planned, it should result in several aspects such as the following:
(a) vulnerability reduction for primary producers and other chain stakeholders—one important aspect is ensuring seamless flow of materials and components. Most stakeholders in the supply chain became extremely vulnerable to due to dearth of raw materials, intermediate products and finished goods during the COVID-19 shutdown and thereafter;
(b) improved and stable returns to various chain actors;
(c) productivity increases in the entire chain especially due to automation and use of robotics, artificial intelligence and related tools to offset the cost increases caused by diversification of supplier/buyer concentration risk and also adoption of just-in-case inventory system;
(d) newer kind of employment generation across the supply chain, although the skills-sets required may be very different from those necessary in the past; and
(e) reliable and consistent supply of quality and affordable goods and services to chain customers at various levels of analysis as well as end users and the like.
(Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31 years