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The Ongoing Impact of COVID-19 on Global Supply Chains

A plane and large cargo ship is passing through a port

The COVID-19 pandemic has changed the business environment for many organizations around the globe and highlighted the importance of adaptability and crisis management to weather situations of uncertainty.

As the acute restrictions and lockdowns created many urgent situations that required immediate attention in the early days of the pandemic, many companies have now begun to move to a "recovery mode" and started planning for the longer term.

As companies seek to strengthen operations and business resilience, the importance of supply chain resiliency and risk management is more apparent than ever.

What happened?

Around the world, many companies are reliant on production and supplies in China, Southeast Asia and other low-cost jurisdictions. In recent years, broad global developments have forced these companies to rethink their supply chains and their stability and reliability for an uncertain future.

This is not just in relation to COVID-19 but many other trends and government actions throughout the world — developments such as trade tensions, issues of sustainability and human rights considerations.

The overall impact of the COVID-19 pandemic and the resulting emergency measures on international trade remain to be seen. However, companies have faced substantial business and operational disruptions, including everything from mitigating the effects of reduced supply to managing disruptions to logistics suppliers and hurdles in meeting their own contractual obligations to customers.

Baker McKenzie recently produced a podcast on shock-proofing supply chains, which covers many of these hurdles in detail.

While many businesses have been nimble and ready to adapt to change, companies that have not already done so should prioritize analyzing their supply chains to understand where they might need to make changes or take action to mitigate against future disruptions.

“As companies seek to strengthen operations and business resilience, the importance of supply chain resiliency and risk management is more apparent than ever.”

Considerations should include reviewing contractual obligations, assessing force majeure clauses, tax implications, relocation costs, entry and visa issues for staff, exit possibilities, as well as the option of swiftly reversing changes if the situation stabilizes or if new developments require the supply chain to adapt quickly.

COVID-19 has presented a unique situation in which to observe how these various systems and processes respond to acute severe stress and change. It has also put a spotlight on the importance of investing in supply chain resilience to build stronger long-term operations. As we move into the future, it is vital to use these learnings to prepare for new global crises.

What will happen?

During the past decades, the discussion around optimizing supply chains has focused primarily on cost efficiency and commercial outcomes. However, as recent history has demonstrated, future supply chains will need to begin factoring resilience and adaptability into their calculations.

Before the COVID-19 pandemic, some companies began anticipating this next evolution, but this crisis has exposed those weaknesses in the modern supply chain, such that many are looking at what to do next.

Such decisions should of course not only focus on the supply side patterns but must also consider that demand patterns may look different going forward — the key here is to have a holistic approach and ensure that many different perspectives are considered.

“The discussion around optimizing supply chains has focused primarily on cost efficiency and commercial outcomes. Future supply chains will need to begin factoring resilience and adaptability into their calculations.”

Analyzing supply chains

Amid global disruption, we have seen low-cost production moving mainly to Mexico and Vietnam. Together, the two countries have grown their market across the consumer goods and technology, media and telecoms (TMT) sectors to 12 percent and 9 percent by 2019. Vietnam’s clothing and smartphone exports, as well as Mexico’s automobile parts and computer exports, all gained as well.

There is no simple substitute for China. The country accounts for 60 percent of global consumer goods exports and 41 percent of global TMT exports.

However, we expect companies will increasingly consider China-plus-one strategies. Where other countries will benefit from supply chain investments will depend largely on their own investments to boost manufacturing capability, as well as provide attractive offerings for land, labor and logistics.

At the same time, continued efforts to conclude free trade agreements (FTAs) could further impact where and how businesses seek to restructure their supply chains.

Investments in technology and sustainability

As we review supply chains, we should also consider developments in technology and sustainability.

The COVID-19 pandemic has shown the many different ways business can continue to effectively communicate and manage within a remote working environment, which many companies are likely to leverage going forward. Indeed, those operations with stronger digital infrastructure have fared better in the COVID-19 pandemic than those without.

“Continued efforts to conclude free trade agreements could further impact where and how businesses seek to restructure their supply chains.”

Meanwhile, advances in artificial intelligence and new technologies such as blockchain may present opportunities for further supply chain innovation. Furthermore, those looking to change their supply chains should consider how to integrate elements and practices around human rights, including labor rights, environmental protection, product sustainability, inclusive economic growth and ethical business practices.

Radically changing an existing supply chain is not easy, as creating a robust and secure supply chain will still need to balance the demands for cost efficiency.

At the same time, new logistics considerations may also have an impact on supply chains and the changes thereto. In the near term, companies will begin seeking out a more diversified supplier base while looking to develop a flexible and cost-efficient supply chain.

For the longer term, however, companies will need to undertake a more holistic analysis, which may lead to more drastic changes such as moving supply chains nearby or to different countries. They could also create increasingly digital supply chains, with a goal of creating a more sustainable operation for the future.

A holistic analysis should be based on facts and include the modeling and testing of different scenarios. Change scenarios should also include a contingency plan that provides for the possibility of quickly reverting and adjusting elements of the supply chain.

Republished with permission, this article first appeared on World Economic Forum.

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