What to expect from post Covid-19 Supply Chains?
In recent months, global economic activity has undergone severe changes as a result of the Covid-19 pandemic.
Modern supply chains have also been impacted, so much so that for the World Economic Forum, this crisis revealed the fragility of the supply chain, in view of the difficulties faced by governments, businesses and consumers in obtaining basic products and materials due to the total lockdown policies implemented by many countries.
The report published by The Economist – Intelligence Unit (EIU) predicts significant changes for different sectors of the global economy and, consequently, for supply chains.
In this article, the main challenges raised by the authors of this material will be discussed, as well as forecasts from other experts in the field.
Challenges for global supply chains
The EIU claims that the global economy has become dependent on China since its inclusion in the World Trade Organization in 2001.
This is because companies have approached the Chinese market as a place for production, mainly because of its cheap labor and source of demand – ores, oil and agricultural products are some items that place China as Brazil’s largest trading partner, for example. In some trade sectors, the participation of this emerging country exceeds 50%.
However, it is expected that this scenario we know will probably change. Even some areas were already moving their operations to other Asian countries as a result of the increase in Chinese workers’ wages and the trade war between the country and the United States.
The pandemic will force other sectors to make the same decision, with the relocation of parts of their supply chains. What we will see is a network of chains less focused on China, more diverse, and a possible movement to be replicated in other regions of the world.
Supply chains are difficult to change, especially for some sectors (such as automotive), but the development of regional chains is a solution to face difficulties, making organizations less prone to possible collapse and crisis. Companies that already had this diversification were able to change production stages from one region to another during plant closures during the lockdown period.
Another concern will be the organization of production time and product assembly along the chain, in addition to the storage of final and intermediate goods in strategic locations of easy access – it is worth remembering that, even though it is very important, the reduction of expenses in production and transportation must be well thought out and planned, so as not to compromise the efficiency of the entire production chain process.
Post COVID-19 Supply Chain: possible answers
The time is still uncertain, but there are some possibilities that may ease the obstacles in supply chain, brought by the crisis caused by the new coronavirus.
1. Scenario planning
In a slowing global economy, with increasing risks in trade (reduced sales, closure of establishments, loss of jobs, changing consumer habits, etc.), scenario planning and the use of technological tools to accomplish it become more recurrent, in order for companies to deal with the impacts of the pandemic. The COVID-19 outbreak generated plant closures and supply disruptions, but the impact of this crisis on the global economy is not limited to these issues.
The Economist Intelligence Unit’s forecasts indicate that we should experience the largest recession since the 2008 financial crisis, with a slow recovery and a projected reduction in demand for goods and services by 2020. Thus, planning techniques are relevant to prevent impacts on supply chains, such as adapting goods to markets where consumption possibilities are higher or switching suppliers.
2. Digitization of business models
Companies are changing their business models to one that is more technological by necessity and opportunity. The online shopping habits created by consumers in 2020 are likely to endure, and it is important for companies to rethink their digital presence and map efficient ways to deliver products and services to their customers.
The report published by the World Trade Organization also discusses this issue, suggesting increased investment in virtual shopping platforms (e-commerce).
In addition, more and more data will be used in the production process, promoting an increase in the digitalization of supply chains, and making them more intelligent. However, these changes will bring challenges as countries have different information systems and customs control procedures.
Suppliers will also need to disclose their data, but this may generate privacy and competition problems.
3. From tactics to strategy
The adoption of a greater digital presence is a tactic in response to the current pandemic – and companies already aligned with the technological revolution proposed by Industry 4.0, are ahead. However, organizations will have to define a medium and long term strategic planning in face of the “new normal”.
For manufacturing and consumer goods companies (including small and medium enterprises), it will be an opportunity to participate in regional supply chains due to the restructuring that will occur in global networks.
It may also be a time for price models to be rethought, since the regionalization of supply chains and the increase of strategic stocks will lead to an increase in the final value of products, challenging competitiveness among competitors.
4. Bringing risk to the core of the business
The latest impact cited in the EIU report relates to concern about risk management, which should be maintained after this current period. Even before the pandemic, the global economy was surrounded by uncertainties and geopolitical issues were already influencing the scenario.
The US-China trade war, for example, shows how conflicts between actors impact the economic environment and can continue regardless of the results of the US elections in 2020 as a result of competition over technological domination.
Climate change will also have an impact, and it is crucial to manage risks in the face of threats to business operations.
Other future prospects
The EIU report reinforces the discussion by experts in the field about the future of supply chains. In an article published on the Forbes magazine website, Michael Mandel, economic strategist at the Progressive Policy Institute, also advocates changes in supply chains, making them simpler and shorter in order to contribute to sustainable production. Mandel explains that when chains are more complex, it becomes more difficult to keep up with emissions of polluting gases, to cite just one difficulty.
On the other hand, The PwC consultancy states that changes in business models, focused on the circular economy (a concept based on education, reuse, recovery and recycling of materials, including passing items from one industry to another, aiming at extending their life cycle) and the creation of shared value and sustainability – when physical, intellectual and human resources are shared among several organizations – will promote changes in global supply chains, maximizing the use of resources and the lifetime of products and services to ensure, satisfy and align consumer expectations.
In this article, we show what to expect from post-Covid-19 supply chains, which will become more regional, digital and sustainable.
Thus, working with foreign suppliers remains a very important option and having a company specialized in indirect material procurement may be the best way to keep this practice secure.
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