Coronavirus Could Change the Global Supply Chain

Doug Voss Commentary

Coronavirus Could Change the Global Supply Chain

The COVID-19 experience could alter the makeup of our global supply chains and change the way products reach consumers. At the very least, it should make companies reassess the way they do business.

The global pandemic has brought product shortages that supply chain managers must now solve.

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Before the pandemic, we occasionally encountered out-of-stock products at stores. Now, shoppers are facing longer-term shortages.

Retailers, hospitals and others now face shortages from the mundane, like toilet paper, to the lifesaving, like personal protective equipment, pharmaceuticals and COVID-19 testing kits.

Supply chain managers have to fix this issue. Supply chain management involves the global coordination of product purchasing, manufacturing, storage and transportation to meet customer needs at the lowest possible cost. Offshore manufacturing coupled with lean inventory models are used to economize. However, global supply chains increase the risk of supply disruptions, and a lack of buffer inventory means that shortages quickly follow any disruptions.

Supply chain disruptions are not new. In 2010 ash from an erupting Icelandic volcano shut down air freight and travel across much of Europe. In 2011, an earthquake and tsunami caused a nuclear disaster in Fukushima, disrupting the flow of Japanese-made cars and parts.

Those previous disruptions affected product supply. COVID-19 is affecting supply and demand. It spurred a short-term spike in demand for consumer goods coupled with prolonged increased demand for medical goods. Decreases in supply coupled with spikes in demand — hoarding toilet paper, for example — cause shortages.

How can firms prepare their supply chains for these black swan events?

First, they must map their supply chains to understand where their suppliers are, the types of supply disruption risks associated with those sites, and their likelihood. While some firms have a good grasp of their first-tier suppliers, few have mapped their second- or third-tier suppliers, a necessity.

Second, firms should understand how they would be impacted by supply disruptions of varying lengths for various products; some products are more critical than others. Third, firms should take steps to prevent supply disruptions or mitigate their impacts.

As an exercise, let’s follow these steps and consider a U.S. medical supplier that sources goods from China. Our nation gets many critical products overseas — including defense goods, transportation and energy production — but Chinese-made medical goods are relevant here.

Firms face several disruption risks in sourcing from China, and those risks may be rising. Outside of serious diseases linked to China — SARS, bird flu and COVID-19 — geopolitical tensions continue to fester in the South China Sea and trade disputes will likely continue.

COVID-19 has demonstrated these disruptions may have severe and long-lasting effects on our hypothetical health care supplier. Shortages of products would hurt revenue, damage its public image and alienate customers.

To address these risks, our firm might choose to avoid them by repatriating production to the United States. That would shorten the supply chain and reduce problems associated with global sourcing. It would also provide well-paying jobs to Americans. However, big challenges exist, too.

Repatriation would require more manufacturing automation in order to approach the manufacturing scale available abroad. Automation would also help reduce the labor price disparity between U.S. workers and foreign counterparts.

There are other workforce considerations. Jobs in automated factories would require already-scarce skilled labor. Repatriated products could cost more, and thus must meet higher standards to justify the cost.

Alternatively, holding more inventory would mitigate disruption impact. Companies hate just-in-case inventory, but the alternative could be government regulation of inventory. To protect the nation from future shortages, inventory levels of critical goods could be regulated similar to bank liquidity.

One thing is certain. Supply chain structure and strategy will change as a result of COVID-19. Firms must learn from this experience because their customers will not easily forgive shortages next time.

Doug Voss is an associate professor of logistics and supply chain management at the University of Central Arkansas. He holds the Scott E. Bennett Arkansas Highway Commission Endowed Chair of Motor Carrier Management and is on the Arkansas Trucking Association board of directors.