Key Benefits of COVID-19 Resulting in a Localization of Supply Chains

Key Benefits of COVID-19 Resulting in a Localization of Supply Chains

Author: | Published: 09 Jun 2020

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The disruption caused by the coronavirus has led global supply chains to re-think globalized market strategies. Before the pandemic, Chinese producers were often selected as the first choice, and China’s share of the global GDP was sitting at 20%. When Covid-19 hit China, its factories were shut down. Many other countries had to additionally deal with the closing of local ports.

The unprecedented ripple effect on the global supply chain was felt very soon after.

The COVID-19 effect on pharmaceuticals and PPE supplies

The disruption to drug supplies in the United States was severely impacted as the supply from many of the Chinese based pharmaceuticals manufacturers was hit by factory closures. The issue was twofold – Chinese manufacturing was obviously interrupted but there was also a re-distribution of drug supplies to fight the pandemic locally rather than export them internationally. The real issue here is that most of us did not realize that most of the world’s pharmaceuticals, face masks, and personal protective equipment (PPE) were manufactured in China prior to COVID-19.

This is not the first time major global events have disrupted supply chains and it will not be the last, but none have come close to the havoc that the COVID-19 pandemic has unleashed. The 2011 tsunami in Japan impacted car manufacturing, whilst the 2011 floods in Thailand affected the supply of semiconductors, and the 2010 volcanic eruption in Iceland hit supplies to and from the rest of Europe.

The preference for localized supply chains

Global supply chains are overly complex and can lead organizations down a path to increased risk and vulnerability. On-shoring, a recent trend, is the “bringing home” of offshore manufacturing. It may create a stronger localized supply chain but will most likely increase manufacturing costs, and ultimately create higher prices for consumers, but it brings with it a number of material benefits. By re-establishing local manufacturers and bringing these smaller local businesses into your supply chain, you will be helping to bring much needed financial relief to your regional and national economy, increase tax revenues and boost the job market.

In addition, the environmental impact of the localized supply chain would be reduced as the carbon footprint of products that need to be transported long distances would be much less. Tighter supply networks could also result in enhanced product quality and improved enforcement of supplier standards.

Localized supply chains would obviously require a complete rethink of the preferred corporate model of utilizing low-cost suppliers, but I believe the COVID-19 pandemic has illustrated many of the weaknesses of this model that have been previously downplayed. It is important to state that diverse regionalized supply chains would better protect against regional or global disruptions in the future, possibly even caused by the predicted second or third waves of the Coronavirus pandemic as happened with the Spanish Flu in 1918.

There is always going to be a requirement for certain goods and raw materials to be manufactured and transported globally, such as cars, domestic appliances, oil, uranium, iron ore, and coal. But ultimately more localized supply chains, especially in essential industries such as pharmaceuticals and PPE, could provide security for our Government and our local manufacturers, as well as resulting in environmental benefits, and improved product quality and this will increase our resilience in these times of global uncertainty.

Supply chain strategy switch

A transformed understanding of supply chains is going to be one of the more positive and lasting impacts of the COVID-19 pandemic. I have heard manufacturers saying that the pandemic has been a catalyst to a rethink of their supply strategies and inventory management to iron out the vulnerabilities this pandemic has highlighted in their supply chains.

However, as things evolve in response to the pandemic, manufacturers will come under increasing pressure to prioritize supply chain digitalization to improve delivery while remaining competitive. What has been exposed by COVID-19 is that while many manufacturers can closely track their tier-one suppliers, many are unaware of the full extent of their complex global supply chains.

Those manufacturers that have already implemented digital supply chain technologies will be reaping significant rewards now, in terms of the ability to foresee issues with their supply chain that allowed them to switch their suppliers quickly away from China. And the more cautious were left behind, for what might previously have been considered low risk, judicious decision making.

We are going to see significant changes as production and sourcing moves closer to the consumers and companies localize or regionalize their global supply chains. Rather than disperse their manufacturing across the globe to the cheapest common denominator, regionalization is going to be a more viable option and local Australasian & ASEAN organizations will undoubtedly benefit from producing goods closer to home.

 


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