by Wayne Forster          July 2020

For business leaders, one of the main learnings from COVID-19 has been the fact that supply chains can be vulnerable in the face of a global pandemic. Since at least the 1970s, businesses have spent much time and effort structuring their supply chains to be as efficient and low-cost as possible through initiatives like just-in-time inventory management, globally integrated supplier networks, sourcing of inputs from low-cost jurisdictions, and others. Unfortunately, gains in efficiency and cost have made supply chains less resilient and more vulnerable – a fact the COVID-19 pandemic has laid bare.

Perhaps the most glaring example is medical equipment. In the U.S., the supply of ventilators and respirators during the early days of the pandemic was grossly inadequate. Inventory levels were dangerously low, with no easy way to boost domestic production given that the supply base was largely international and reliant on a complex web of suppliers for individual components. The automotive industry provides another example, where parts production shortages in China in the early days of the crisis resulted in production disruptions for automakers in Japan and South Korea. The production of automobiles, ventilators and any other product requires 100% of the required components to be available. 99% is not enough.

Fortunately, industry has done a remarkable job responding to the current crisis. In the case of ventilators, companies from across multiple industries with no prior experience of producing medical equipment, including some here in Atlantic Canada, came together and partnered with existing suppliers to manufacture these units on a large scale. And while production shortages have caused issues in certain cases, the restart of the manufacturing sector has gone more smoothly than many observers anticipated.

That said, the experience has highlighted the importance of maintaining supply chains that are resilient, with some layer of protection in case of unforeseen events. Some level of efficiency will need to be sacrificed in order to achieve this. As an example, companies may choose to carry more of an inventory buffer in case of unexpected production disruptions at their own operations or those of their suppliers. Supplier networks may have to be re-tooled to be less complex, more local, and less reliant on any single supplier or small number of suppliers.

Government regulations are also an important driver. The United States-Mexico-Canada Agreement (USMCA), which supersedes the North American Free Trade Agreement (NAFTA), contains more onerous terms regarding rules of origin, minimum labour wage requirements and intellectual property protections. Trade disputes and tariffs between the US and China, as well as Britain’s exit from the European Union (Brexit), appear likely to disrupt global trade to some extent and may result in some repatriation of manufacturing production to domestic markets. These trends, which were already well-established prior to COVID-19, are likely to accelerate as a result of the pandemic.

Interestingly, this phenomenon is not unprecedented. A recent Wall St. Journal article titled “How the Coronavirus Will Reshape World Trade” (https://www.wsj.com/articles/how-the-coronavirus-will-reshape-world-trade-11592592995) reminds us that “a century ago, the Spanish flu and World War I abruptly halted growth in global trade, finance and migration. The war, the 1918 pandemic, nationalism and protectionism severed international links so thoroughly that it took more than half a century for global economic integration to recover to early-20th-century levels.”

The long-term effect that the pandemic and trade disputes will have on the world economy remains to be seen. But it appears likely that supply chains will undergo some level of structural change. And these changes will come at a cost. Profit margins will come under pressure and business leaders will have to find innovative ways to offset these pressures in order to protect the bottom line. So what can be done? Expect to see more automation – in both production processes and service delivery. The focus on well-established improvement initiatives such as LEAN management also appears likely to accelerate. Companies providing supply chain and logistics management software and analytics on a subscription basis are likely to witness an increase in demand for their services (Descartes Systems Group and Kinaxis are two Canadian success stories in this area).

In challenging times with lots of uncertainty and ambiguity, the notion that supply chains will undergo profound structural changes seems all but certain. If you’re a supplier in this region, now is the time to sharpen your sales pitch and strike while the iron is hot!