How Covid-19 might affect the global supply chain: broadening and localisation of supplier choices

Spend Matters welcomes this guest post from Craig Powell, Managing Director at Balloon One, specialists in integrated ERP, warehouse and transportation management systems.

Almost six months on from the world's first coronavirus lockdown, we are beginning to get a clearer picture of the long-term effects Covid-19 will have on the global supply chain. In an adaptable industry well used to dealing with disruptors and crises, this outbreak poses the biggest challenge yet, but we're already seeing the grass roots of recovery.

Increased inventory levels

When the coronavirus hit, suppliers and stockists quickly ran out of inventory. While the pandemic had an unprecedented and unpredictable effect on supply chains, it served to highlight just how finely balanced things are.

Many will be looking to increase inventory levels so that there's a bigger emergency net for possible contingencies. The fear of a second wave in winter will likely have some businesses squirreling away stock, just as many consumers find themselves keeping more essentials in their cupboards at home.

With further outbreaks and lockdowns looking likely, it's a strategy that could well pay off in the coming months, hugely benefiting businesses in the right markets and with the space and capital required to build a buffer. But once things are more under control, it will be interesting to see how suppliers and stockists will strike the balance.

Hygiene practices slowing down supply chain efficiency

More stringent health and safety practices are likely to stay in place until near eradication of Covid-19. With most experts predicting that a vaccine will be available mid-2021 (BBC), it's a long time before we can safely wave goodbye to new hand-washing procedures and social distancing guidelines. And even once the coronavirus is under control, we can expect many measures to be adopted for the long term. People and processes will have adapted to suit, and previous approaches may feel reckless in hindsight. All of this means that there could be long-term disruption to supply chain efficiency.

However, with technological advancements increasing productivity all of the time, it's unlikely we'll see growth come to a standstill or decline. Innovation is often borne of necessity and we may see new and improved solutions come to market. Businesses will however need the courage to invest in more efficient processes and facilities at a time when money is likely to be tight.

Another possible silver lining is that improved hygiene measures should reduce labour absence caused by contagious diseases and viruses like the common cold. Minor illnesses like these were responsible for 38.5 million sick days in the UK in 2018, according to the Office for National Statistics ONS, so there could be a net positive impact on productivity.

Broadening and localisation of supplier choices

Price is often the determining factor when it comes to choosing suppliers. Globalisation has meant that importing materials and goods from the other side of the world is often more affordable than sourcing them from locations right on your doorstep.

However, businesses with far-flung suppliers have been stung by travel restrictions and other rules imposed due to coronavirus. This, combined with increasing consumer demand for environmentally friendly products, could mean that geography becomes a bigger deciding factor. Plus, governments across the world, keen to recover jobs and economies, are likely to hit the brakes on globalisation for the long-term by implementing tariffs and other regulatory measures. This, combined with other global trade disruptors, such as Brexit, could make outsourcing a huge challenge.

Last year, experts were already recognising "increased interest in re-shoring, especially in the US and other developed economies, where there is pressure to re-examine sourcing strategy and to promote 'bringing manufacturing back' (or at least closer) to home" (Designing the Right Global Supply Chain Network, Cohen and Lee, 2019).

The crisis has also highlighted the benefits of supply diversification. Those with all their eggs in one proverbial basket generally suffered more than those who had multiple routes and relationships to harness. We are likely to see businesses enlisting more suppliers to ensure their supply chain is more resilient.

All of this could present great opportunities for new businesses to plug gaps in the supply chain. And while some bigger suppliers will no doubt lose out, a more diverse customer base makes for a more secure business.

Summary

Until now, the global supply chain has broadly taken on big risks in order to maximise returns. With many learning hard lessons from the Covid-19 pandemic, we’re likely to see businesses become more risk-averse. While that could make recovery and growth slower, it should result in better stability. And in an increasingly globalised world, where everything from disease outbreaks to natural disasters have a widespread ripple effect, stability could be just what we need.

 

Disclaimer: the opinions expressed are those of the author and not necessarily those of Spend Matters.

Share on Procurious

Discuss this:

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.