Why COVID-19 will result in the localisation of supply chains

Opinions expressed in this article are those of the author.

Rob Stummer, CEO Asia Pacific, SYSPRO
This article is by Rob Stummer, CEO Asia Pacific, SYSPRO

With the globalisation of markets and economies the world over, it is common practice for companies to rely on low-cost manufacturers in cheap labour markets. However, the impact of the coronavirus and the disruptions that many companies have experienced in their global supply chains will undoubtedly result in a major re-think of these globalised market strategies.

Huge production facilities manufacturing immense quantities of goods have been the preference, with Chinese producers often selected as the first choice. Before the pandemic, China’s share of global GDP was about 20 per cent and consequently when COVID-19 hit China and its factories were shut down. The unprecedented ripple effect on the global supply chain was felt very soon after.

The COVID-19 effect on pharmaceuticals and PPE supplies

The disruption to drug supplies in the United States was severely impacted as the supply from many of the Chinese based pharmaceuticals manufacturers were hit by factory closures. The issue was twofold – Chinese manufacturing was obviously interrupted but there was also a re-distribution of drug supplies to fight the pandemic locally rather than export them internationally. The real issue here is that most of us did not realise that most of the world’s pharmaceuticals, face masks and personal protective equipment (PPE) were manufactured in China prior to COVID-19.

This is not the first time major global events have disrupted supply chains and it will not be the last, but none have come close to the havoc that the COVID-19 pandemic has unleashed. The 2011 tsunami in Japan impacted car manufacturing, whilst the 2011 floods in Thailand affected the supply of semiconductors and the 2010 volcanic eruption in Iceland hit supplies to and from the rest of Europe.

The preference for localised supply chains

Global supply chains are overly complex and can lead organisations down a path to increased risk and vulnerability. However, a consistent factor that has been a positive contributor to both globalisation and regionalisation is technology. How industries learn to leverage and apply manufacturing technology, has enabled organisations to create regional supply chains.

The result of localising supply chains would certainly be an increase in manufacturing costs and higher prices for consumers, but it would also result in many other material benefits. For instance, a knock-on effect would be a boost to the local job market and increased tax revenues for our Government – both of which are high on the priority list for Australia right now.

In addition, the environmental impact of the localised supply chain would be reduced as the carbon footprint of products that need to be transported long distances would be much less. Tighter supply networks could also result in enhanced product quality and improved enforcement of supplier standards.

Localised supply chains would obviously require a complete rethink of the preferred corporate model of utilising low-cost suppliers, but I believe the COVID-19 pandemic has illustrated many of the weaknesses of this model that have been previously downplayed. It is important to state that diverse regionalised supply chains would better protect against regional or global disruptions in the future, possibly even caused by the predicted second or third waves of the Coronavirus pandemic as happened with the Spanish Flu in 1918.

There is always going to be a requirement for certain goods and raw materials to be manufactured and transported globally, such as cars, domestic appliances, oil, uranium, iron ore and coal. But ultimately more localised supply chains, especially in essential industries such as pharmaceuticals and PPE, could provide security for our Government and our local manufacturers, as well as resulting in environmental benefits, improved product quality and this will increase our resilience in these times of global uncertainty.

Supply chain strategy switch

A transformed understanding of supply chains is going to be one of the more positive and lasting impacts of the COVID-19 pandemic. I have heard manufacturers saying that the pandemic has been a catalyst to a rethink of their supply strategies and inventory management to iron out the vulnerabilities this pandemic has highlighted in their supply chains.

However, as things evolve in response to the pandemic, manufacturers will come under increasing pressure to prioritise supply chain digitalisation to improve delivery while remaining competitive. What has been exposed by COVID-19 is that while many manufacturers can closely track their tier-one suppliers, many are unaware of the full extent of their complex global supply chains.

Those manufacturers that have already implemented digital supply chain technologies will be reaping significant rewards now, in terms of the ability to foresee issues with their supply chain that allowed them to switch their suppliers quickly away from China. And the more cautious were left behind, for what might previously have been considered low risk, judicious decision making.

We are going to see significant changes as production and sourcing moves closer to the consumers and companies localise or regionalise their global supply chains. Rather than disperse their manufacturing across the globe to the cheapest common denominator, regionalisation is going to be a more viable option and Australian organisations will undoubtedly benefit from producing goods closer to home.

This article is by Rob Stummer, CEO Asia Pacific, SYSPRO

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