How Has COVID-19 Impacted The Global Supply Chain?
During the early 2000s, the world became a global village. This is because technological advancement made the world come closer. As a result, companies built international supply chains. This is because they were quickly able to acquire raw materials, even if the source was physically located far away. However, with the emergence of coronavirus, the free movement of goods, as well as people across the globe, was severely impacted. As a result, there has been a significant negative effect on the global supply chain.
In this article, we will understand the impact that coronavirus has had on the global supply chain.
Food Supply Chain: The good news is that the food supply chain of the world is not facing any shortfall as of now. Analysts have reported that the world has enough stock of food grains and other essential items, even if this pandemic goes on for the rest of the year.
However, countries are facing problems in moving the product around from the breadbaskets of the world to the locations where these products are consumed. Right now, the prices are low because of higher availability. However, if this crisis continues for a while, it is quite likely that the stocks will start getting depleted. In such a situation, panic buying may start, driving the prices higher. This is when the situation will become problematic for the poor people of the world. If the situation continues to be grim, then the poor people as well poor countries could suffer from the risk of starvation.
Since the poorest households of the world spend the largest proportion of their income on food, they are likely to be disproportionately impacted.
Exposed The Problem With Centralization: Prior to the coronavirus crisis, most companies have had their supply chains located in and around China. Surveys have revealed that as many as 80% of the companies have their supply chains dependent upon China because it has emerged as the global manufacturing and logistics hub. In 2019, China contributed to about 20% of the GDP of the world. Even the production of critical equipment such as medical supplies is dependent upon China.
Having all the eggs in one basket is always a risky strategy. The coronavirus crisis has just shown the downside of this strategy to the world. Coincidentally, China has been the place from where the Coronavirus crisis started. Hence, most of the factories and warehouses in China had to be shut down or were forced to work at a lower capacity. This had already started impacting production worldwide even before the coronavirus spread out of China and became a global pandemic.
The biggest learning for companies around the world is that locating all their operations in one geographic region might reduce the cost. However, it also increases the risk. Apart from coronavirus also, China and the United States were already in a trade war as they were levying duties on each other’s goods and services. Therefore, American corporations have more than one reason to start moving their factories out of China. In the aftermath of this crisis, it is likely that the major companies of the world will spread out their supply chains to other geographical regions around the globe.
Geared To Produce Non-Essential Products: The coronavirus crisis has completely changed the demand curve. The entire demand is concentrated around sixteen to twenty essential items. As far as other non-essential items are concerned, the demand is completely non-existent. For instance, the sales of automobile vehicles have almost gone down to zero during this period.
Hence, there is a situation wherein, at one end, there is excess production capacity lying idle, whereas, on the other hand, there is a shortage of production capacity. In order to make sure that supply meets demand, governments all over the world are mandating that idle factories start production of essential items. For instance, in the United States, the government has ordered General Motors to start the production of essential medical items such as ventilators. Similarly, many distilleries have been asked to start the production of alcohol-based sanitizers.
Going forward, supply chain experts would want to build supply chains that are flexible enough to allow the production of different products in the hour of need. Today, most of the products consumed in the world are discretionary. However, now we know that in the event of a natural calamity, these products are not sold. Hence, this part of the supply chain becomes useless and hence must be converted in order to meet the demands of essential products.
The bottom line is that supply chains cannot be built overnight. These changes take a long time to build. Hence, they are also expected to last for a long time. Up until now, the various decision-makers have only taken into account factors such as speed, cost, and capacity. However, the recent geopolitical tensions between China and America, as well as the COVID19 crisis, have changed their perspectives. It is now likely that going forward companies will value flexibility more and build business continuity planning into their business models. This is the reason why they are likely to include metrics such as the ability to reconfigure production as well as the resilience of the supply chain when they make decisions in the future.
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