It’s often tempting to think that recovering from major events such as the COVID-19 pandemic will be nearly impossible, due to its effect on our world and daily life, and the amount of effort and attention they consume. While this may be the case in some areas – for instance, it is certainly likely that mask-wearing will become more common during flu season and direct-to-consumer delivery will become more prevalent – in other places the pandemic will simply cement or continue to push along trends that were already evident prior to early 2020.
There has been much talk of “decoupling” supply chains from foreign suppliers, and Chinese-based suppliers in particular, and “reshoring” production where possible. This may occur to some extent, but supply chains are not as easily rearranged as is commonly thought, and companies can still improve the resiliency of their supply chains without relocating their supplier base.
In large part, many of the trends motivating companies to diversify their supplier base away from China were already in place prior to the COVID-19 pandemic. Labor costs in China have been steadily rising, and it had become increasingly clear that tariffs on Chinese-produced products were likely to remain in place. Most industries, from apparel to electronics, had already started looking further afield in an attempt to reduce their manufacturing costs.
For example, the United States imports from Vietnam grew 5.8 percent from 2017 to 2018 (the latest year for which statistics are available) and grew 281 percent from an admittedly low baseline in 2008. Given these trends, it is likely the post-COVID-19 world will remain highly globalized, but with a reshuffled deck of supplier countries. The net effect will be a more diverse and potentially less China-centric supply chain, but the fundamental cost advantages of sourcing from overseas remain unchanged.
It’s important to remember as well that the Chinese market itself is sizable and continues to grow. China’s middle class could grow to a staggering 550 million people by 2022, more than one and a half times the size of the entire US population. Given this growth, demand for all types of products, but especially goods like consumer electronics and automobiles, will continue to increase.
Interestingly, the proportion of the Chinese population aged 65 and older is expected to increase to 26 percent by 2050, becoming the world’s largest population of older people; therefore, it is expected that as this population ages, the demand for pharmaceuticals treating “diseases of affluence” and those associated with longer lifespans, such as diabetes and cancer, will increase as well.
Given these trends, it makes sense for most companies to continue to maintain some suppliers in China to serve the domestic market or in nearby countries like Vietnam, in the similar way many American companies source from Mexico.
More complex or specialized supply chains, such as those serving the automotive or pharmaceutical industries, will find it especially hard to decouple form their foreign suppliers. In these industries companies have spent years, if not decades, honing their relationships with suppliers. These relationships cannot be easily rebuilt and the supply chains quickly relocated to the United States. In some cases, the bottlenecks for production are not related to key ingredients from China- or India-based suppliers, but glassware and syringes. Relocating production to the United States or even “nearshoring” in places like Mexico would do little to solve these bottlenecks.
Given these realities – a global trade environment that will be less reliant on China but still reliant on overseas suppliers and complex supply chains that cannot be easily shifted – what options are available to companies who are justifiably concerned about the impact that an event like the current coronavirus pandemic can have on their business?
In some cases, supply chain managers and planners will be able to argue for greater slack in the supply chain in the form of buffer stock and less emphasis on “just in time” production. However, as the cost of keeping that buffer stock becomes visible and the memory of COVID-related disruptions fades, they’ll face increased pressure to return to the old way of doing things. Perhaps more importantly, sourcing managers should evaluate resilience as a criteria alongside more traditional metrics like cost, quality, and financial health when assessing new suppliers.
Suppliers’ business continuity and emergency management plans, along with their ability to source components or raw materials from a wider variety of sub-tier suppliers, should be considered and weighted when choosing suppliers. Once the supplier relationship has been established, companies should develop more frequent touch points with supplier and evaluate supplier response to disruptions alongside more operations-focused performance indicators, correcting small issues before they become full-blown disruptions. While companies may find it more difficult than anticipated to rearrange their supplier base, they can certainly improve their relationship with and insight into the practices that will help their suppliers avoid or mitigate the next big disruption.