Donald Trump has come under fire recently for the repeated referral of the COVID-19 virus as the ‘Chinese virus’. Of course, it is completely wrong to target and blame a country for the outbreak in such a manner, but the fact is the virus did originate in Wuhan, China. This will undoubtedly have long term consequences for the businesses that work with and are supplied by China.
In mid 2019, things were looking good for the Chinese economy. In August the IMF found the quality of growth had improved. Firstly, the pace of debt accumulation had slowed. Secondly, the financial system is better regulated and supervised. Finally, the current account surplus is no longer excessive, despite the trade wars with the US (IMF, 2019). Then COVID-19 hit. China’s industrial output reduced at the fastest pace on record (13.5%). In addition, within the first two months of 2020 urban unemployment hit its highest rate ever as the coronavirus brought the world’s second-largest economy to a standstill (Financial Times, 2020).
It is often said that China is the world’s ‘workshop’, therefore, this slowdown has a huge business impact and the root cause of this stems from globally connected supply chains who rely heavily on China. For example, China accounts for around one-quarter of global automotive production, provides 8% of global exports of automotive components and approximately 30% of electrical components. With this in mind, and with the economy in lockdown, firms must take action.
Companies across the world have had to take provision to maintain business-as-usual the best they can. For example, Jaguar Land Rover has taken to shipping parts from China to their factories in suitcases. In the US, Apple have been working closely with Foxconn to plan for alternative methods of sourcing.
But the question is, will these short-term mitigation strategies have long term effects on what ‘Business as usual’ looks like? At 4C, we believe there are 3 factors organisations should considered in the design of their supply chains:
1. Network set up
Today, many supply chains are long and complex. This is often a result of sourcing decisions, identifying the most cost-effective source of supply. However, when external events like COVID-19 hit, ‘fixing’ the supply chain is much more complex. As can be seen in today’s environment, the more suppliers in a network, the more opportunities there are for it to fail. Fewer supply chain partners may well be the way forward in the future for critical goods or services. However, these partnerships need to be close so all involved in the supply chain can support collaboration at times of disruption. But this relies on proactive SRM, which we predict will be a key focus in the new world.
2. Onshoring & Nearshoring
Nearly every organisation, at some stage in its supply chain, utilises offshoring. However, this creates distance in the value chain and can lead to factors such as the Bullwhip effect, costing organisations millions. Onshoring or nearshoring is a strong alternative. It often increases visibility in a supply chain and critically foreign disruption is mitigated. This may attract higher operational costs, but for the benefits of disruption mitigation, reduced lead times and closer partnerships, it may be a price worth paying.
3. More robust business continuity and contingency planning
Sourcing strategies are likely to come under greater scrutiny, ensuring critical goods and services have robust contingency plans and alternative sources of supply. Critical suppliers’ business continuity plans will come under greater scrutiny as part of supplier selection due diligence, and once selected more robust testing and auditing of such plans. This puts an even greater emphasis on the need to develop robust and sustainable relationships with your critical suppliers, and the need for effective SRM.
Many firms have built a global supply chain that runs on outsourcing and thin margins, and the coronavirus has exposed just how delicate this practice is. China will remain to be the one of the world’s economic engines, but will that be as connected and integral as in the past? Only time will tell.
Coronavirus has taken a lot of things out of our hands. However, procurement is vital in maximising the control we still have. Procurement has a critical role to play ensuring that we continue to work constructively and respectfully with the supply base and ensure we come out of this crisis business ready. Here at 4C, we are committed to addressing the broader impact of the effects of COVID-19 in our businesses, in our communities and society. Please contact us with any questions or concerns about your procurement and supply chain – we are here to help.
To contact 4C Associates, book a meeting with us here.