After Covid; re-evaluating global sourcing, rethinking global supply chains

Are we rethinking global supply chains after COVID-19 or should we be worried about geopolitics?

Rethinking fundamentals

Covid-19 sent shockwaves through global supply chains and exposed vulnerabilities in complex, hyper-lean, global supply chains where goods are sourced from half-way round the world. In the second quarter of 2020, the WTO estimated that global trade dropped by 18.5% whilst organisations scrambled to manage the disruption to just-in-time supply chains.

This wasn’t the first time. Following the 2011 Fukushima earthquake and tsunami, the disruption to goods sourced from Japan and, in particular, automotive supply chains were significant. However, back then, and in 2020, these supply lines have got back up-and-running reasonably quickly and proved their resilience. This time, it helped that the demand for goods was dampened but Chinese manufacturing in particular has been quick to get back up to speed.

However, the debate is now around the source, length of just-in-time supply chains and whether they have just become too lean with minimal inventory in the system. Whereas before, the economic benefits were given an overwhelming prioritisation in procurement thinking, now the assessment of risk versus cost is more balanced.

Our survey of procurement leaders immediately following the crisis (you can download it here) identified cash management and the spectre of a new credit crunch in supply chains. The challenge for many businesses is whether they could absorb the additional cash requirement to build-up stock and warehousing.

Global Sourcing: Diversification, On-shoring and Near-shoring?

Many discussions now revolve around sourcing more locally. Bringing supply back to sourcing regions which are still low-cost compared to domestic supply markets; near-shoring. Or even returning to domestic sources; on-shoring, although many countries no longer have the skills and capacity in certain manufacturing sectors. A long, deep recession (and combined with the possibility of a second-term for Donald Trump) may drive more nationalistic, anti-globalisation political directions.

From a purely procurement perspective, mitigation strategies may be more around diversification; spreading risk through dual and multiple sources, and it will be interesting to see how sourcing strategies change in the next twelve months.

Geopolitics may have more of an impact than Covid-19

A more significant factor may be the geopolitical situation. Politics overlays on global trade, tariffs, drives the onshoring/offshoring debate and influences the smooth running of cross-border supply chains. Covid-19 put the spotlight on China, but Donald Trump was already pitting the two largest world economies against each other before the pandemic. Looking forwards, Australia is already in a trade dispute with China, and with Brexit and the possibility of a second Trump administration in the offing, Procurement Leaders may be more concerned about geopolitics than Covid-19.

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