Over the past year, supply-chain leaders have taken decisive action in response to the challenges of the pandemic: adapting effectively to new ways of working, boosting inventories, and ramping their digital and risk-management capabilities. This pandemic has had a major impact on the exchange of goods throughout the world. In the past, many industries have been surprised by strong demand and caught with too little inventory of specific goods. So far, the supply chain in which Americans get most of their goods is holding up well, he said, with consumers able to get most products. Last year, most companies planned to pull multiple levers in their efforts to improve supply-chain resilience, combining increases in the inventory of critical products, components, and materials with efforts to diversify supply bases while localizing or regionalizing supply and production networks. High inflation and a decrease in economic growth are strictly related to supply chain disruptions. Construction is the only sector in which respondents say they are less likely to invest in digital supply chain technologies in the coming years. The situation has been especially difficult for businesses with complex supply chains, as their production is vulnerable to disruption due to shortages of inputs from other businesses. 1600 Pennsylvania Ave NW We analyze shocks that affect the supply chain end-to-end (international and local . Create a free account and access your personalized content collection with our latest publications and analyses. 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. Others do not have enough of their products in inventory to avoid running out of stock. 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. Vendors diversified into providing services to other industries that needed them during the earlier stages of the pandemic. 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. How coronavirus will affect the global supply chain. 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. It vows to reverse long-time policies that have prioritized low costs over security, sustainability and resilience. Researchers such as Barry Schwartz of Swarthmore College and Patrick Spenner, a consultant who was formerly at CEB (now part of Gartner), have long argued that more choice isnt always better. World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use. How did U.S. toilet-paper manufacturers respond to the shortages? 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. 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. Interrupted Supply Chain for Meat Expected to Contribute to Food Insecurity The largest effects are being felt in the pork industry where more than 10 million hogs are being eliminated from the supply chain between April and September 2020. 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. For consumers, the system is designed to provide more variety and lower costs, Turcic said. These shortages and supply-chain disruptions are significant and widespreadbut are likely to be transitory. 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. But only 2 percent can make the same claim about suppliers in the third tier and beyond. The goal of the mapping process should be to categorize suppliers as low-, medium-, or high-risk. Ensure dynamic monitoring of forecasts in order to react quickly to inaccuracies. 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. In a standard supply chain, raw materials are sent to factories where goods are manufactured. Overcoming barriers to multitier supplier collaboration, Visit our Manufacturing & Supply Chain page. 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. A small minority (4 percent) set up a new risk-management function from scratch, but most respondents say they have strengthened existing capabilities. In many sectors, there are signs that the rate of investment in digital supply-chain technologies is slowing down. Electrification megatrend means more companies are semiconductor-dependent. In our homes, there are semiconductors in air conditioning temperature sensors, rice cookers, refrigerators, LED lighting systems and, of course, in all of our digital devices from phones to laptops. Take coffee, for example. In commodities, for example, 75 percent of companies are currently increasing their use, with the remaining 25 percent saying they plan to do so in the future. One of the big challenges is to keep the workforce healthy. If alternative suppliers are unavailable, businesses can work closely with affected tier-one organizations to address the risk collaboratively. New technologies already or soon will allow companies to lower their costs or switch more flexibly among the products they manufacture, rendering obsolete the installed bases of incumbent competitors or suppliers. Do I qualify? Businesses have a habit of projecting optimism; now they will need a strong dose of realism so that they can free up cash. Chinese firms that want to protect their global market share are already looking to Egypt, Ethiopia, Kenya, Myanmar, and Sri Lanka for low-tech, labor-intensive production. 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. To make their supply chains more manageable, many retailers have been reducing product variety. Another proposed action would address international vulnerabilities to supply chains. The distributed global business model, optimized for minimum cost, is finished. Things like furniture, clothing, and household goods will be relatively easy to obtain elsewhere because the inputslumber, fabrics, plastics, and so forthare basic materials. Businesses are also experiencing a greater need in areas such as data centers, renewable energy systems and the increasingly automated processes of Industry 4.0 factories and warehouses. The views expressed in this article are those of the author alone and not the World Economic Forum. Determine how quickly those that are most vital for you could either recover from a disruption or be replaced by an alternative. 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. The biggest shifts occurred in industries that were the lowest users of these approaches before the pandemic. [2] Core inflation is a measure that removes from the price index those products, like food and energy, whose prices are usually volatile. Many companies hadnt rigorously identified and addressed hidden vulnerabilities. But a surprise disruption that brings your business to a halt can be much more costly than a deep look into your supply chain is. The White House Vulnerability must be an everyday, not a 100-year, planning event consideration. Companies should consider business risk in new ways to reflect this. Some retailers will have shortages of different items, possibly because they planned differently from their competition. Estimating a medtech companys degree of connectiveness helped it expand its supplier base by 600 percent, while an industrial-tools maker identified request-for-qualifications-ready suppliers for highly complex parts that it had been previously unable to source. As the finance function works on accounts payable and receivable, supply-chain leaders can focus on freeing up cash locked in other parts of the value chain. 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. Investment in technology and considerations on sustainability in the supply chain will be key. As the coronavirus pandemic subsides, the tasks will center on improving and strengthening supply-chain capabilities to prepare for the inevitable next shock. This sector also accounted for one-third of the economy-wide increase in prices compared to a year ago.[2]. The transition to remote working was one of the most immediate and pronounced effects of pandemic-era restrictions on mobility and access to workplaces. The COVID-19 crisis put supply chains into the spotlight. During peak COVID-19 fears, supply chain touchpoints all over the globe were affected in different ways. Washington, DC 20500. We need to transform the pain of that experience into new ways of thinking about and acting on relationships in our complex global supply chains. Over time, stronger supplier collaboration can likewise reinforce an entire supplier ecosystem for greater resilience. The Challenge of Rebuilding U.S. It will be harder to find alternative sources for sophisticated machinery, electronics, and other goods that incorporate components such as high-density interconnect circuit boards, electronic displays, and precision castings. Changing consumer demand impacted supply chains, as well. COVID-19 has disrupted all aspects of our lives, including international trade. Riverside, CA 92521, tel: (951) 827-0000 email: webmaster@ucr.edu, How COVID-19 is affecting the global supply chain, UC Agricultural and Natural Resources news, 2023 Regents of the University of California. 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. As the crisis takes its course, constrained supply chains, slow sales, and reduced margins will combine to add even more pressure on earnings and liquidity. As the fight against the coronavirus continues and the country wrestles with when to reopen the economy, Zach G. Zacharia, associate professor of supply chain management and director of the Center for Supply Chain Research at the College of Business, addressed the potential impact of the COVID-19 pandemic on global supply chains.. Zacharia also discussed how the pandemic will likely impact . 900 University Ave. As the coronavirus pandemic subsides, the tasks will center on improving and strengthening supply-chain capabilities to prepare for the inevitable next shock. An overwhelming majority of survey respondents say they have invested in digital supply-chain technologies during the past year, with most investing more than they originally planned. As some coffee drinkers can remember, coffee prices have spiked repeatedly due to frosts that damage coffee harvests, most recently in late 2010. So, it comes down to pricing and to striking some kind of balance. These are essential for all companies developing DNA- or mRNA-based Covid-19 vaccines and DNA-based drug therapies, but many of the key precursor materials come from South Korea and China. Inventories of cars and homes are also at or near record lows, sufficient for just one month of car sales and 4.4 months of home sales, as compared to pre-pandemic levels of about two months for cars and 5.5 months for homes. Once youve identified the risks in your supply chain, you can use that information to address them by either diversifying your sources or stockpiling key materials or items. The U.S. government has, at critical moments, provided such support: helping Japan respond after the 2011 earthquake, for instance, or producing COVID-19 vaccines through Operation Warp Speed. The Coronavirus and Its Impact on the Supply Chain. Investments in new capacity can take years to complete. How are companies responding to the coronavirus crisis? Manufacturers in most industries have turned to suppliers and subcontractors who narrowly focus on just one area, and those specialists, in turn, usually have to rely on many others. Hundreds of thousands of small and large businesses have to reopen, millions of laid-off workers have to find new employers, and manufacturers have to bring back production lines idled during the pandemic. [1] Lumber prices have now rapidly come back down, falling 38 percent from their record high, in an early sign that some shortages may be short-lived. Other environmental impacts result from land, fertilizer, water, and energy that are also wasted. Further regression shows a substitution effect between customer and product diversification. What particular impacts are we seeing now due to the coronavirus? They were designed for maximum business cost savings. Companies will need all available internal forecasting capabilities to stress test their capital requirements on weekly and monthly bases. The Administration has established a Supply Chain Disruptions Task Force to monitor and address short-term supply issues. As Prof. Sheffi explains, this is not just a an issue of disruption in supply. Several years ago I spent a week at a new Chinese factory of a major American industrial-equipment company. Others invested in their distribution systems, so that they could anticipate and respond more quickly to local shortages. Compared to a generation ago, there are fewer but much more efficient operations capable of. The demand-planning team, using its industry experience and available analytical tools, should be able to find a reliable demand signal to determine necessary supplythe result of which should be discussed and agreed upon in the integrated sales- and operations-planning (S&OP) process. By acting intentionally today and over the next several months, companies and governments can emerge from this crisis better prepared for the next one. Opt in to send and receive text messages from President Biden. This is because as part of the change, you can unfreeze your organizational routines and revisit design assumptions underpinning the original process. Building a new supplier infrastructure in a different country or region will take considerable time and money, as Chinas experience illustrates. Entire industries that shrank dramatically during the pandemic, such as the hotel and restaurant sectors, are now trying to reopen. In terms of supply chain, what were experiencing now is like a 100-year-old flood. With so much interest in advanced analytics, it comes as little surprise that the crisis has been a catalyst for further digitization of end-to-end supply-chain processes. .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? Car manufacturers are among those stocking up on parts due to supply chain issues. That will mean more transshipment through Singapore, Hong Kong, or other hubs and longer transit times to reach markets. The typical focus is naturally short term. 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. Many consumers are making large purchases with savings accumulated during the pandemic, sending new home sales to their highest level in 14 years and auto sales to their highest level in 15 years. Although disruptions are inevitable, we need to plan and respond differently if we're to ensure global economic resiliency in the future. This paper investigates the effect of supply chain disruption on production activities, in particular by exploiting the difference in the timing of the lockdowns in China and Japan. Reducing dependency on China will be easier for some products than others. In order to understand why, its helpful to know how supply chains work. By this year, an overwhelming majority (92 percent) said that they had done so. Shifting production from China to Southeast Asian countries will necessitate different logistics strategies as well. Danko Turcic is an associate professor of operations and supply chain management. How durable is this system, how long a period of time can it continue to operate without a major disruption? Between May 2020 and May 2021, prices of commodities tracked within the Producer Price Index rose by 19 percent, the largest year-over-year increase since 1974, in part reflecting base effects. The U.S.-China trade war and the supply and demand shocks brought on by the Covid-19 crisis are forcing manufacturers everywhere to reassess their supply chains. 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. 4. ), Bringing Manufacturing Back to the U.S. Is Easier Said Than Done Willy C. Shih HBR.org, April 15, 2020, Its Up to Manufacturers to Keep Their Suppliers Afloat Tom Linton and Bindiya Vakil HBR.org, April 14, 2020, Coronavirus Is a Wake-Up Call for Supply Chain Management Thomas Y. Choi, Dale Rogers, and Bindiya Vakil HBR.org, March 27, 2020, Coronavirus Is Proving We Need More Resilient Supply Chains Tom Linton and Bindiya Vakil HBR.org, March 5, 2020, The 3-D Printing Playbook Richard A. DAveni HBR, JulyAugust 2018, Find the Weak Link in Your Supply Chain David Simchi-Levi HBR.org, June 9, 2015, From Superstorms to Factory Fires: Managing Unpredictable Supply-Chain Disruptions David Simchi-Levi, William Schmidt, and Yehua Wei HBR, JanuaryFebruary 2014, Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things Clayton M. Christensen, Stephen P. Kaufman, and Willy C. Shih HBR, January 2008, Does America Really Need Manufacturing? Gary P. Pisano and Willy C. Shih HBR, March 2012, Restoring American Competitiveness Gary P. Pisano and Willy C. Shih HBR, JulyAugust 2009. Talent remains a major barrier to accelerated digitization, however, and the skills gap is widening. You have JavaScript disabled. Respondents report a range of ongoing actions to address the digital-skills gap, including reskilling (55 percent) or redeploying (30 percent) existing staff, hiring new talent from the labor market (52 percent), and taking on specialist contract staff for specific projects (21 percent). Temporary trade restrictions and shortages of pharmaceuticals, critical medical supplies, and other products highlighted their weaknesses. Likewise, improved logistics, such as through smarter fleet management, can allow companies to defer significant capital costs at no impact on customer service. These ratios measure how many days of current sales that businesses and retailers could support out of existing inventories. 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. Because it does not make sense to produce everything at home, and because U.S. security also depends on the security of our allies, the United States must work with its international partners on collective approaches to supply chain resilience, rather than being dependent on geopolitical competitors for key products. 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. Estimating all inventory along the value chain aids capacity planning during a ramp-up period. How can supply-chain leaders also prepare for the medium and long termsand build the resilience that will see them through the other side? Modern products often incorporate critical components or sophisticated materials that require specialized technological skills to make. .chakra .wef-10kdnp0{margin-top:16px;margin-bottom:16px;line-height:1.388;}What is the World Economic Forum doing to help the manufacturing industry rebound from COVID-19? Similar transitory price spikes have occurred in markets for agricultural goods and other commoditiespeanut butter amid a drought in 2011, or eggs amid an outbreak of bird flu in 2015. In 2013, the SK Hynix fire rattled smartphone manufacturers supply chains. Where possible, a digital, end-to-end S&OP platform can better match production and supply-chain planning with the expected demand in a variety of circumstances. The benefits of advanced analytics in supply-chain management are now being recognized across industries. Managers should consider a regional strategy of producing a substantial proportion of key goods within the region where they are consumed. When the Covid-19 pandemic subsides, the world is going to look markedly different. Disruptions and shortages during the Covid-19 pandemic exposed weaknesses in global supply chains, which already faced threats from trade wars. Trade wars, global politics and national policies will influence the future of supply chain structures. Each time, the weather normalized, harvests improved, and prices fell back towards their previous levels. This article provides advice to make your supply chain more resilient without sacrificing competitiveness. An integrated approach of exploratory factor analysis (EFA) and grey-decision-making trial and evaluation laboratory (G-DEMATEL) was used to reveal the causal . We'll be in touch with the latest information on how President Biden and his administration are working for the American people, as well as ways you can get involved and help our country build back better. For example, since May 2020, 30 percent of respondents had implemented new digital performance-management systemsan important enabler of supply-chain visibility. It is very difficult for a single firm to possess the breadth of capabilities necessary to produce everything by itself. 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. The success of an organizations planning was strongly linked to its use of modern digital tools, especially advanced analytics. The actions taken by companies varied according to the precrisis maturity of their supply-chain risk-management capabilities. Understanding where the risks lie so that your company can protect itself may require a lot of digging. Supply-chain leaders should analyze the root causes of suppliers nonessential purchases, mitigating them through adherence to consumption-based stock and manufacturing models and through negotiations of supplier contracts to seek more favorable terms. Data also suggest these shortages are holding back business activity in some sectors. Below, we describe the disruptions, the ways that supply chains have adjusted to disruptions in the past, and how the Administration is working to address both short- and long-term supply chain issues. Some streamlined their product offerings, reducing machine downtime and, in particular, shifting to large-roll products that could get more paper to households without costly changes to machinery. 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. That is because the modern toilet-paper manufacturing process is highly mechanized and capital-intensive, requiring four-story-tall machines that cost billions of dollars and months to assemble before a single roll comes off the line. Managers everywhere should use this crisis to take a fresh look at their supply networks, take steps to understand their vulnerabilities, and then take actions to improve robustness. Image:Reuters/Babu. The pandemic pushed risk to the top of virtually every corporate agenda. How did the pandemic affect the food supply chain? For weeks at the start of the year, as COVID-19 was taking its toll on China, experts were focusing on 'supply shocks'. Worried they would be left without toilet paper, Americans cleaned out store shelves. Supply-chain recovery in coronavirus timesplan for now and the future. The lesson that needs to be learned: We cant assume suppliers will always be there if we dont treat them well during difficult times. Prioritization, e.g., online retailers prioritize supplies and deliveries of certain items (household and medical). A key reason for the acute problems in motor vehicles is that automakers appear to have underestimated demand for their products after the start of the pandemic. 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. 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. A farmer who is used to supplying five local restaurants that are shut down cannot easily switch production to supplying to the local supermarket, where there is a lengthy process where they vet you before they allow you into the store. (Disclosure: I am on the boards of directors of Flex, a large manufacturing and supply-chain services provider where Linton is a senior adviser, and Veo Robotics, a company that has developed an advanced vision and 3D sensing system for industrial robots.) Over the past year, supply-chain leaders have taken decisive action in response to the challenges of the pandemic: adapting effectively to new ways of working, boosting inventories, and ramping their digital and risk-management capabilities. Some companies will build upon the momentum they gained during the pandemic, with decisive action to adapt their supply-chain footprint, modernize their technologies, and build their capabilities. Supply chains are complicated, typically consisting of a number of complex factors and a large network of players. In addition, the pressure to operate efficiently and use capital and manufacturing capacity frugally will remain unrelenting. Revisit your product strategies. More than any of these past events, the Covid-19 pandemic exposed the degree to which our global supply chains are fragile and lethargic in their ability to respond to unexpected changes in demand. trade friction between the U.S. and China (paywall), leading reason for supply chain disruption, increased investments in Amazon Logistics, made moves to the century-old concept of vertical integration (paywall). A record share of homebuilders, surveyed by the National Association of Homebuilders in May, reported shortages of key materials such as framing lumber, wallboard, and roofing. Heres how. A pandemic is not a latest happening encountered in the history of people due mankind has faced various pandemics in history. But the savings from those practices have to be weighed against all the costs of a disruption, including lost revenues, the higher prices that would have to be paid for materials that are suddenly in short supply, and the time and effort that would be required to secure them. Healthcare players stand out as resilience leaders. Once the immediate risks to a supply chain have been identified, leaders must then design a resilient supply chain for the future. Despite these challenges, regionalization remains a priority for most companies. Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Many businesses are able to mobilize rapidly and set up crisis-management mechanisms, ideally in the form of a nerve center. The majority of the LMI metrics were in the range of 40s, 50s and 60s, Rogers said, noting it's the first time since the onset of the pandemic that the indices haven't been in the 70s or 80s . ERS' research program considers links in the farm-to-consumer supply chain that may be affected by the pandemic, including farms, processors, handlers, retail outlets, and trade. The supply chain has become a main protagonist everywhere, it has moved from playing a "behind the scenes" organizational role . Below, Turcic explains his thoughts in more detail. A weekly update of the most important issues driving the global agenda. In the latest U.S. Census Small Business Pulse survey, held from May 31 to June 6, 36 percent of small businesses reported delays with domestic suppliers, with delays concentrated in manufacturing, construction, and trade sectors, as shown in Figure 2.