COVID-19 Impact on Supply Chain and The Way Ahead

by Dr. S.P. Sarmah - 1 May, 2020, 12:00 3791 Views 0 Comment

COVID-19 pandemic has paralyzed economic activity across the globe. Production activities fell sharply across Asia in March 2020, with a sharp fall in export powerhouses such as Japan, South Korea, China, and India. For instance, China’s Caixin Markit Manufacturing Purchasing Managers’ Index fell to a record low of 40.3 in February 2020. On a similar note, South Korea’s IHS Markit PMI lowered to 44.2, its lowest since January 2009 when the economy was affected by the global recession. Japan’s PMI fell to a record low of 44.8, its lowest since April 2009. Due to the pandemic, the Indian manufacturing industry is expected to lose $31 billion during more than one month of lockdown. World Economic Forum, 2020 has made a prediction that global gross domestic product is likely to fall by more than 3 percent in the year 2020.  All these figures of loss due to COVID 19 are based on prediction and nobody knows exactly what will be the actual after effect impact of this disruption in the economic front. Also, this pandemic is bound to make changes in the socio-political front across the globe.

Increasing pressure on companies over time to reduce supply chain cost has forced companies to look for low-cost supplier and production facilities located at different locations of the globe. In the process, companies have become global and developed a diversified complex supply chain network structure. COVID-19 comes out as a major disruptive event of massive consequences in the global supply chain. This disruptive event has raised questions on the last three decades popular manufacturing strategies of outsourcing, offshoring, etc. It has shaken the operation of the global supply chain and has compelled firms and industries as a whole to reconsider and transform its global supply chain network model. This disruption has put an important question mark on a collection of raw materials from one place, produce in another country and sell it in a different market place to keep the sourcing, production and distribution cost at a minimum. By acquiring global suppliers, companies take advantage of quality, flexibility, environmental sustainability, cheap labour, specialized skills and capabilities. However, a globalized supply base also results in many challenges that may include uneven information, increased lead time and so on which lead to various risk events. The COVID 19 pandemic has imposed a severe stress test on the global supply chain in terms of its resilience, robustness and fragility to continue its operation.

This disruption has shown us how vulnerable the supply chain when many sources of supplies are located in one place like China and when the market place is far away from the source of supply. This disruption has also exposed the vulnerabilities of many firms who have relied on a small number of suppliers to fulfil their need for raw materials or finished components. Most of the companies are facing such a crisis because of its overdependence on a single source destination.

This coronavirus global pandemic forces companies to evaluate how well they are prepared to manage such a crisis and what they need to do to make sure that the supply chain remains in operational mode. There is no simple solution for such kind of massive disruption.  A novel kind of supply chain management approach is needed to overcome this level of disruptions. The new supply chain design must allow companies to quickly reconfigure their supply chain and be responsive to the disruption of this magnitude. At the same time, there is most likely other political events are going to happen across the globe like a more stringent entry and exit barrier between countries, change in trade policies between countries like the USA and China which will have a global impact. Each national government may ask companies to relook for use of local resources.

The question needs to be addressed here is how the companies should design their supply chain so that it can operate efficiently under such circumstances. There are many alternatives but it depends up to what level of risk a firm is willing to bear. More risk mitigation strategies will lead to an increase in cost and therefore the firm needs to make a trade-off between a number of mitigation strategies and cost bearing capability of the company.

Expansion of supply base network may be a solution that will help in spreading the risk of disruptions across more than one supplier. This will provide a backup capacity of supply for the companies and companies must judiciously allocate capacity to their backup suppliers.

Again, the identification of local suppliers will also help to spread out the risk. Definitely, the scale of economies for such suppliers will be low and the cost of capital will be high. This may lead to a higher price of the material or component. But for the buying firm, transportation costs will be low and lead time will be less and thereby the number of days’ inventory to be kept by the company will be less. Looking at this kind of disruption and its massive impact, companies must look for such an alternative source of supply. In recent times, India has introduced Make in India program to put India upfront as the world’s leading manufacturing country. The government of India has launched various programmes under the umbrella of this scheme to endorse a constructive environment for the growth of the manufacturing sector such as a phased manufacturing program aimed at manufacturing more smartphone’s components, thereby providing an impetus to the domestic manufacturer of smartphones. The government makes the provision of incentive in the form of income tax rate cut down to 25 percent for all companies having a turnover of less than $38.75 million and so on. These initiatives have triggered the manufacturing sector growth at a considerable pace and COVID-19 experience will boost these initiatives of the Indian government to develop a local source of the supply base.

In the complex supply network structure, the vast majority of global companies do not have complete knowledge of the location of the second and third tier of suppliers that provide parts to their direct supplier. Mapping of the supply network will provide better visibility of the supply network structure and a digital tool like IOT can help to a great extent to trace the origin of the product. Under such a situation, a lot of information will be available with the supply chain manager within a moment of potential disruption. Those companies who can map their supply network exactly will be able to know which specific supplier, location, components and products are at risk.  This will allow them to take appropriate action to protect the inventory of items and capacity at alternative locations.

It is impossible to anticipate the arrival of global crises such as the coronavirus outbreak, but companies must be ready to mitigate the impact of such risk by taking the preparedness to a higher level. Companies must deploy systematic supply chain risk management practices to identify and assess risk sources. To implement such risk mitigation strategies into practice, the presence of professional expertise on the top management team of the company in the form chief supply chain officer or its equivalent designated officer is a must. Our prior research reveals that many Indian companies do not have a proper supply chain risk management strategies and designated supply chain professional expertise at the top management level of the company.

Dr. S.P. Sarmah
Author is Professor at Department of Industrial and Systems Engineering, IIT Kharagpur, WB, India.

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