The coronavirus pandemic has laid bare the vulnerabilities of global supply chains. While the recent U.S.-China trade war revealed an overdependence on Chinese sources, many U.S. companies were still heavily dependent on China until the coronavirus outbreak forced a prolonged shutdown of many Chinese factories. In fact, even before the coronavirus outbreak was declared a pandemic, it had already caused disruptions to supply chains on every continent, according to Beata Javorcik, chief economist at the European Bank for Reconstruction and Development.[1]
As efforts to contain the virus led to lengthy shutdowns around the world, companies in many industries have been forced to deal with dips in financial stability along with the vulnerability — and even disappearance — of their supply chains. Even if suppliers are in operation, they may not be operating at full capacity or with full staffs. In response to high demand, some suppliers may have also changed their prices or payment policies, causing further disruption to business as usual.
Now, as business leaders determine how to move forward in preparation for a post-pandemic environment, many will rethink and reorganize their supply chain management processes. Consider these three key approaches to adapting supply chains for recovery and mitigating risk for future crises.
1. Build redundancy and diversity into the supply chain. The pandemic may have shown that many supply chains are too dependent on China, but just leaving one country for another location isn't the answer. Instead, it may be smart to source the same supplies from various areas. That builds supply chain redundancy so that if one region experiences problems, others may remain viable.
“The answer [to overdependence in one area] should not be moving all your operations out of China and putting all of them in, say, Vietnam or Bangladesh, where labor is cheaper for now," says Goker Aydin, an expert in operations management and business analytics at Johns Hopkins University's Carey Business School.[2] “The better solution is to diversify the supply base, so as to have uncorrelated sources of supply. So that when one set of suppliers may be down due to a regional problem, another set might still be in operation."
In some industries, such as healthcare, suppliers are seeing exponentially higher demand, and buyers that can offer supplier-friendly payment terms are more likely to win the deals. Supply chain finance, which may allow a supplier to receive financing from the buyer's bank at a lower cost of funding than they could achieve on their own, could be one option. As a result, buyers may be able to negotiate better terms with suppliers without tying up their cash.
2. Embrace digitization. To ensure a resilient supply chain, a company must be able to detect early warning signs of a disruption so it can respond by shifting production to alternative sources. But “for a business to detect that a disruption is on the horizon, it must have a good handle on what its supply chain looks like," says Johns Hopkins' Aydin. “It's not enough to know your suppliers; you must also know who your supplier's suppliers are, and so on. Without that kind of detailed map of the supply chain, it is difficult to know the vulnerable links."[2] Digital solutions can help to improve visibility throughout the supply chain.
While switching to smart, digitized processes requires more cost upfront, it may make it easier for more companies to depend on domestic supply chains. Industry Week predicts that “50% of all manufacturing companies will be using AI in some form by the end of 2021 … Pick-and-place robots will put away 25% of manufactured goods by the end of 2020.”[3]
3. Maintain more inventory. In recent years, many companies have focused on leaner processes, including just-in-time inventory. Holding only as much inventory that is needed at the moment has allowed companies to cut down on storage and other costs. However, when the supply chain is threatened, that strategy can leave many with near-zero inventories and no way to access more supplies. As a result, many companies will consider moving away from low-inventory policies and work to build a stable supply in-house or nearby, with domestic suppliers.
Building inventory, implementing digital solutions and inking deals with new suppliers requires cash, a resource that is running low for many companies in the midst of recovering from the pandemic. Many will rely increasingly on strong financial institutions to help devise lending and cash flow management solutions to help create efficiencies and strengthen supply chains.
Make the Next Right Decision
For more information on improving your business resiliency, maximizing cash flow, mitigating risk and going digital, contact your PNC Relationship Manager or visit pnc.com/businessresiliency.
