Will the corona-crisis lead to a turnaround in supply chain management?

Since the outbreak of corona one of the most debated subjects from a business perspective has been the effects on supply chains, particularly from a cross-border perspective. As factories came to a halt in countries like China and subsequently plants across e.g. Spain also had to close already prior to the sanitary lock-down, it became clear how dependent many Western manufacturing sites are on Chinese supply.

As an intuitive reaction to this situation it was not so hard to encounter (opinion) articles that proclaimed the end of globalization or a rearrangement of established supply chains, encouraging firms to opt for more domestic and/or nearby supply solutions.

Restore

In the longer run this may certainly be an option, but in the short term it remains to be seen how realistic this is. In fact, most companies are in the midst of a desert storm where the sight on alternatives is limited.

I.e., how plausible is it that alternative suppliers will be up-and-running in no-time if a (Spanish) company decides to discontinue a (Chinese) sourcing relation?
And will the average company that acts as a buyer be able to start from scratch with a new vendor without having to pay opt-out costs from an existing supply relationship?

When looking at B2B markets the truth is that many buyer-supplier relationships are built up carefully over time, that they are often governed by long term contracts, confidentiality clauses and/or joint development and knowledge exchange processes. Hence, it may be more logical for companies to see whether their established supply partners can get back on track as soon as possible and to take it from there.

Reconsider/Redesign

Off course, just doing this will not mean that if there is a new crisis or shock to the supply system, these companies will be safe from harm. To lower their vulnerability to that kind of situations they may be better off diversifying their supplier bases through multiple sourcing (and perhaps also by keeping safety stocks and strategic reserves).

This is a practice that over the past decade was considered largely incompatible with most of the ruling logistics and purchasing philosophies (such as: Just-in-Time delivery, lean production, single vendor purchasing, zero stock/inventory, …). However, it may become more fashionable again as creating adequate redundancy in supply chains may serve as a hedge against the circumstances that many firms are going through at present.

In fact, the problem that our companies are facing currently may not be their dependence on China as such, but the fact that many firms have evolved towards a model of working with exclusive suppliers for specific inputs. It is this choice that puts companies at risk in the present context.

Reorganize/Remediate

If (Spanish) purchasing firms succeed in setting up alternative/parallel supply relations with providers that are located closer to home, we could be in for a transition towards more localized supply chains. While this could give way to a process of regionalization inside the world economy, it can be questioned whether this will go all the way. Because just like our firms will not want to renounce to transcontinental sales altogether, it is not so evident that global supply chains will come to a full stop either.

Hence, instead of buyer firms disrupting current supplier relations completely, it can be envisaged that they will invest in multiple sourcing strategies as a safety mechanism against shortfalls in supply. One implication of the former is that it may become more important for companies to invest in supplier development programmes and to scout (locally) for “supply talent”.

As a closing word: beyond the fact that this crisis shows us that it is better not to rely on a single source, it is also showing in a very powerful manner how important it is to count with proper industrial capacities, and that the secondary sector is vital to be able to make things (happening).

For further reading, see:

Shih, W. (2020). Is It Time to Rethink Globalized Supply Chains? Sloan Management Review, MIT, 19th March, pp. 1-13.Tucker, T.N. (19/03/2020). Stronger domestic supply chains. From: www.politico.com: Coronavirus Will Change the World Permanently. Here’s How.