Finally, when coming out of the crisis, companies and governments should take a complete look at their supply-chain vulnerabilities and the shocks that could expose them much as the coronavirus has. To supply Western Europe with items used there, companies could increase their reliance on eastern EU countries, Turkey, and Ukraine. .chakra .wef-10kdnp0{margin-top:16px;margin-bottom:16px;line-height:1.388;}What is the World Economic Forum doing to manage emerging risks from COVID-19? The figure shows that while retailers had 43 days of inventory in February 2020, today they have just 33 days. We have to admit that with deep global economic interdependence, more serious disaster planning must become the defacto standard. Just under half of the companies in our survey say they understand the location of their tier-one suppliers and the key risks those suppliers face. Other environmental impacts result from land, fertilizer, water, and energy that are also wasted. The tools you need to craft strategic plans and how to make them happen. Just under half of all respondents also say they are looking at network-modeling tools to help them improve supply-chain design in the longer term. In our 2020 survey, just over three-quarters of respondents told us they planned to improve resilience through physical changes to their supply-chain footprints. As firms relocate parts of their supply chain, some might ask their suppliers to move with them, or they might bring some production back in-house. They will allow companies to replace large plants that serve global markets with a network of smaller, geographically distributed factories that is more resistant to disruption. As we continue to face an uncertain road ahead, there are a handful of lessons that the industry can learn from to ensure we adapt this year and beyond. Understanding where the risks lie so that your company can protect itself may require a lot of digging. Supply-chain recovery in coronavirus timesplan for now and the future. These photos were taken in various fulfillment centers and manufacturing plants in California and Germany. Consequently, even as companies look to ramp up production and make up time in their value chains, they should prebook logistics capacity to minimize exposure to potential cost increases. The first alliance to accelerate digital inclusion, Why refugees need a better chance at professional development, 5 reasons why the G20 needs a sustainable blue economy. Each time, the weather normalized, harvests improved, and prices fell back towards their previous levels. The COVID-19 outbreak that started engulfing various nations across the globe is forcing governments, national and international authorities to take unprecedented measures such as lockdown of. Companies will need all available internal forecasting capabilities to stress test their capital requirements on weekly and monthly bases. And few appear to have converted factories from scratchier commercial toilet paper to retail varieties, unlike the rapid retoolings that allowed U.S. manufacturers to ramp up production of cleaning wipes and hand sanitizer. Others do not have enough of their products in inventory to avoid running out of stock. Supply chain resilience depends both on the product and on the retailer that engineered that particular chain. But regionwide problems like the 1997 Asian financial crisis or the 2004 tsunami argue for broader geographic diversification. Lockdowns, shelter-in-place orders, and travel restrictions were disrupting activity in every part of the economy. Domestic Supply Chains. Homebuilders appear to be responding to these shortages in part by delaying new construction, as housing starts have been volatile for several months. Thomas Y. Choi, Dale Rogers, and Bindiya Vakil, David Simchi-Levi, William Schmidt, and Yehua Wei, Clayton M. Christensen, Stephen P. Kaufman, and Willy C. Shih, From the Magazine (SeptemberOctober 2020), China has the second-largest economy in the world, Bringing Manufacturing Back to the U.S. Is Easier Said Than Done, Its Up to Manufacturers to Keep Their Suppliers Afloat, Coronavirus Is a Wake-Up Call for Supply Chain Management, Coronavirus Is Proving We Need More Resilient Supply Chains, From Superstorms to Factory Fires: Managing Unpredictable Supply-Chain Disruptions, Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things. How durable is this system, how long a period of time can it continue to operate without a major disruption? Turcic describes a supply chain as a logistics network made up of suppliers, manufacturers, warehouses, distribution centers, and retail outlets. These include: Port chokepoints and trucking bottlenecks that slowed down deliveries of critical supplies; Not having enough workers to produce and transport products because workers were out sick or were not showing up to work; Knut Alicke is a partner in McKinseys Stuttgart office, Xavier Azcue is a consultant in the New Jersey office, and Edward Barriball is a partner in the Washington, DC office. While markets will eventually adjust, they can be slow and the impact on producers and consumers can be costly. Almost 90 percent of respondents told us that they expect to pursue some degree of regionalization during the next three years. COVID-19 Companies should analyze supply chains now to mitigate against future disruptions. The supply shock that started in China in February and the demand shock that followed as the global economy. Modern products often incorporate critical components or sophisticated materials that require specialized technological skills to make. For the first time, most respondents (95 percent) say they have formal supply-chain risk-management processes. Many companies hadnt rigorously identified and addressed hidden vulnerabilities. Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Next CEA Post: The Employment Situation in May, https://www.whitehouse.gov/cea/written-materials/2021/06/17/why-the-pandemic-has-disrupted-supply-chains/?utm_source=link, Office of the United States Trade Representative, new home sales to their highest level in 14 years, auto sales to their highest level in 15 years, Between May 2020 and May 2021, prices of commodities tracked within the Producer Price Index rose by. Indices of current delivery times are at record highs in surveys of manufacturers by three regional Federal Reserve Banks, but Fed indices for future delivery times are in their typical ranges. Those products are then shipped to warehouses for storage and then to retailers or customers. The Administration has established a Supply Chain Disruptions Task Force to monitor and address short-term supply issues. The success of an organizations planning was strongly linked to its use of modern digital tools, especially advanced analytics. Shortages, e.g., lack of hand sanitizer and paper products, which comes down to manufacturing constraints. 3. For risks that could stop or significantly slow production linesor significantly increase cost of operationsbusinesses can identify alternative suppliers, where possible, in terms of qualifications outside severely affected regions. This pandemic has had a major impact on the exchange of goods throughout the world. The COVID-19 pandemic has caused considerable damage to various industries worldwide. Many chief executives now identify supply chain turmoil as the greatest threat to their companies' growth and their countries' economies. To make their supply chains more manageable, many retailers have been reducing product variety. Finally, as COVID-19 affects food and agricultural supply in complex ways, the retail sector should also consider the resilience of its supply chain where needed, notably by relying on more diversified sources of goods, by improving inventory management and by leveraging data analytics to improve forecasts on sales and supply chain tensions. And who can forget the Ever Given saga, in which a mammoth cargo ship blocked the Suez Canal, stranding 400 vessels and holding $9 billion in global trade hostage each day? Natural disasters you can plan for, like hurricanes. Theres no doubt that the tumultuous events of the past 18 months led to the massive disruption of many key supply chains. Others invested in their distribution systems, so that they could anticipate and respond more quickly to local shortages. Entire industries that shrank dramatically during the pandemic, such as the hotel and restaurant sectors, are now trying to reopen. [2] Core inflation is a measure that removes from the price index those products, like food and energy, whose prices are usually volatile. The problem is having a lot of suppliers or large safety stocks is more expensive than having fewer suppliers and smaller safety stocks. During the pandemic, when demand surged in many product categories, manufacturers struggled to shift from supplying one market segment to supplying another, or from making one kind of product to making another. Most worryingly, these new problems are emerging just as senior leaders are turning their attention away from supply-chain issues. While consumers are returning to restaurants in droves, supply chain issues in the restaurant industry continue in the wake of the Covid-19 health pandemic. Let us think of a supply chain as a supply network. The love affair with just-in-time manufacturing may be over. . .chakra .wef-facbof{display:inline;}@media screen and (min-width:56.5rem){.chakra .wef-facbof{display:block;}}You can unsubscribe at any time using the link in our emails. Talent remains a major barrier to accelerated digitization, however, and the skills gap is widening. If we look at the past several decades, geopolitical trade wars, shipping delays, plant closings, raw materials shortages, earthquakes and tsunamis have all exposed supply chain vulnerabilities and sent ripples throughout regional and global manufacturing. Recent crises such as the Ebola outbreak in West Africa and the COVID-19 pandemic severely reduced supply chain capacities on international and local levels. The obvious way to address heavy dependence on one medium- or high-risk source (a single factory, supplier, or region) is to add more sources in locations not vulnerable to the same risks. To improve contingency planning under rapidly evolving circumstances, real-time visibility will depend not only on tracking the on-time status of freight in transit but also on monitoring broader changes, such as airport congestion and border closings. Consider the growing electronics content in modern vehicles. A further 59 percent of companies say they have adopted new supply-chain risk management-practices over the past 12 months. And by this year, that figure had dropped dramatically, to only 1 percent (Exhibit 6). Many businesses are able to mobilize rapidly and set up crisis-management mechanisms, ideally in the form of a nerve center. Todays ongoing and planned digitization efforts are most likely to focus on visibility, as companies strive for a better picture of their supply chains real-time performance. Most businesses would be surprised by how much inventory sits in their value chains and should estimate how much of it, including spare parts and remanufactured stock, is available. Why are we seeing shortages of certain products like toilet paper? The White House As the coronavirus pandemic subsides, the tasks will center on improving and strengthening supply-chain capabilities to prepare for the inevitable next shock. Expecting weak demand, they cancelled orders of semiconductors, an item with a long lead time and with a secular increase in demand from other industries. This problem is compounded by the fragmentation in recent decades of the auto supply chain across many countries and many firms. In order to understand why, its helpful to know how supply chains work. The goal of the mapping process should be to categorize suppliers as low-, medium-, or high-risk. As a consequence of all this, manufacturers worldwide are going to be under greater political and competitive pressures to increase their domestic production, grow employment in their home countries, reduce or even eliminate their dependence on sources that are perceived as risky, and rethink their use of lean manufacturing strategies that involve minimizing the amount of inventory held in their global supply chains. Reduction in the number of SKUs (stock keeping units) that many retailers offer. During each move, workers redesigned steps to use less space and less labor, boosting productivity. or mixed yarn, cotton yarn and textile fabrics, and accessories like tag, button, zipper, elastic from china or Vietnam depending on buyers demand. This stage of planning should include asking direct questions of tier-one organizations about who and where their suppliers are and creating information-sharing agreements to determine any disruption being faced in tier-two and beyond organizations. Supply chains are resilient if the retailer has relationships with multiple suppliers for the same product or when the retailer holds large safety stocks. Japans 2011 tsunami and earthquake temporarily impacted consumer electronics and automotive industries. In our increasingly data-driven and electrified world, the products of a growing number of companies now require semiconductors, making them dependent on the chip supply to bring products to market. By building and reinforcing a single source of truth, a digitized supply chain strengthens capabilities in anticipating risk, achieving greater visibility and coordination across the supply chain, and managing issues that arise from growing product complexity. Advanced-analytics approaches and network mapping can be used to cull useful information from these databases rapidly and highlight the most critical lower-tier suppliers. From stay-at-home orders to travel bans and quarantines, supply chains were interrupted like never before. Its vital to ascertain how long your company could ride out a supply shock without shutting down, and how quickly an incapacitated node could recover or be replaced by alternate sites when an entire industry faces a disruption-related shortage. Supply-chain disruptions are also having a material impact on consumer prices, especially in the motor vehicle sector. While efforts to effectively treat and eradicate the coronavirus continue, so do the efforts of supply chains to support the provision of patient care in the event of a resurgence or future pandemic. You can unsubscribe at any time using the link in our emails. Data also suggest these shortages are holding back business activity in some sectors. What is a supply chain and what kinds of disruptions in the global supply chain has the COVID-19 pandemic caused? The Challenge of Rebuilding U.S. Businesses should question whether demand signals they are receiving from their immediate customers, both short and medium term, are realistic and reflect underlying uncertainties in the forecast. Electrification megatrend means more companies are semiconductor-dependent. The just-in-time manufacturing mantra born in the auto industry during the 1970s enabled companies to adapt to fluctuating market demands and bolster bottom lines through inventory reduction. If that supplier produces the item in only one plant or one country, your disruption risks are even higher. Exhibit 4 describes the major sources of vulnerability. As the number of confirmed cases of a novel coronavirus named COVID-19 surges past 100,000, the impact of the disease has taken a toll on the . But, as the economy recovered and demand increased, businesses have not yet been able to bring inventories fully back to pre-pandemic levels, causing inventory-to-sales ratios to fall. Even with the support of government incentives, it took 20 years for the country to build a local base capable of supplying the vast majority of electronic components, auto parts, chemicals, and drug ingredients needed for domestic manufacturing. But were any lessons learned and new practices put into play? Overcoming barriers to multitier supplier collaboration, Visit our Manufacturing & Supply Chain page. Factory fires were a leading reason for supply chain disruption in 2020. The supply shock that started in China in February and the demand shock that followed as the global economy shut down exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere. Separating demand into many different SKUs makes forecasting more difficult, and trying to fill needs by substituting products during periods of shortage causes a real scramble. Processes and tools created during the crisis-management period should be codified into formal documentation, and the nerve center should become a permanent fixture to monitor supply-chain vulnerabilities continuously and reliably. These low inventories have caused cascading issues in industrial supply chains. With the winding down of the worst of the pandemic, businesses have added jobs at a rate of 540,000 per month since January. The last 18 months of the Covid-19 pandemic have shown us that we can no longer think about the supply chain the way we used to. Vulnerability must be an everyday, not a 100-year, planning event consideration. The pandemic underscored the imperative of manufacturers and supply chain partners to do more than plan for infrequent and 100-year events. The Biden-Harris Administration is working to speed up the resolution of these transitory shortages and supply-chain disruptionsto make our supply chains more resilient to future shocks and to build back better,. UCR professor explains the pandemics impacts from toilet paper shortages to potential labor issues. But the demand fluctuations for items like toilet paper, hand sanitizer, hair clippers, and other household items are well outside of the normal fluctuation ranges. Its time to adopt a new vision suitable to the realities of the new eraone that still leverages the capabilities that reside around the world but also improves resilience and reduces the risks from future disruptions that are certain to occur. By contrast, only 22 percent of automotive, aerospace, and defense players had regionalized production, even though more than three-quarters of them prioritized this approach in their answers to the 2020 survey. Adding to the complexity, different retail chains wanted their own packaging and assortments. Another proposed action would address international vulnerabilities to supply chains. These actions should be taken in parallel with steps to support the workforce and comply with the latest policy requirements: In the following sections, we explore each of these six sets of issues. While automotive and commodity players were reluctant to commit to additional investments amid the uncertainty of early 2020, for example, 100 percent of the respondents in those sectors eventually did so (Exhibit 4). Determine how quickly those that are most vital for you could either recover from a disruption or be replaced by an alternative. The manufacturing base simply isnt set up for it, nor should it be, because in a regular time, it doesnt make sense to have such overproduction of these particular items. The majority of companies did not heed the lessons of the natural disasters of the last decade and, as a result, suffered severe supply disruptions when the Covid-19 pandemic struck. Integrate market intelligence into product-specific demand-forecasting models. One of the most visible impacts of the coronavirus pandemic has been the strain on the global supply chain, with consumers noticing certain goods are harder to find at their local store. Temporary trade restrictions and shortages of pharmaceuticals, critical medical supplies, and other products highlighted their weaknesses. For example, since May 2020, 30 percent of respondents had implemented new digital performance-management systemsan important enabler of supply-chain visibility. This is because as part of the change, you can unfreeze your organizational routines and revisit design assumptions underpinning the original process. This Task Force is convening meetings of stakeholders in industries with urgent supply-chain problems, such as construction and semiconductors, to identify the immediate bottlenecks as well as potential solutions. Vendors diversified into providing services to other industries that needed them during the earlier stages of the pandemic. For more details, review our .chakra .wef-12jlgmc{-webkit-transition:all 0.15s ease-out;transition:all 0.15s ease-out;cursor:pointer;-webkit-text-decoration:none;text-decoration:none;outline:none;color:inherit;font-weight:700;}.chakra .wef-12jlgmc:hover,.chakra .wef-12jlgmc[data-hover]{-webkit-text-decoration:underline;text-decoration:underline;}.chakra .wef-12jlgmc:focus,.chakra .wef-12jlgmc[data-focus]{box-shadow:0 0 0 3px rgba(168,203,251,0.5);}privacy policy. Fundamentally, managing supply chains during the crisis is not business as usual. The authors wish to thank Viktor Bengtsson, Chris Chung, Curt Mueller, Hilary Nguyen, Ed Paranjpe, Anna Strigel, and Faaez Zafar for their contributions to this article. The survey was conducted . The supply chain has become a main protagonist everywhere, it has moved from playing a "behind the scenes" organizational role . That will mean more transshipment through Singapore, Hong Kong, or other hubs and longer transit times to reach markets. Please enable JavaScript to use this feature. When creating it, the company had started with the designs of its U.S. and Japanese factories and then improved on them by introducing newer equipment and ways of working. Address the vulnerabilities by diversifying your suppliers or stockpiling essential materials.

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