how covid 19 affect supply chain
900 University Ave. Such changes take time. 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. There were a variety of factors that led to the health care supply chains' slow response to the COVID-19 emergency. In most cases, neither the automaker nor the semiconductor manufacturer can trace what goes on in these intermediate layers (or tiers) of the supply chain, due in part to lack of trust among parties in supply chains, who fear that the information might be used to replace them or to bargain for a price reduction. In situations in which tier-one suppliers do not have visibility into their own supply chains or are not forthcoming with data on them, companies can form a hypothesis on this risk by triangulating from a range of information sources, including facility exposure by industry and parts category, shipment impacts, and export levels across countries and regions. In this past year, semiconductor shortages and supply chain woes have impacted a wide range of industries, from cars back-ordered for months (paywall) to TVs and everyday appliances (paywall). Nor did many sell commercial toilet paper to households. A weekly update of the most important issues driving the global agenda. This pandemic has had a major impact on the exchange of goods throughout the world. As they struggled to keep their businesses running, companies were planning significant strategic changes to the configuration and operation of their supply chains. Relationships between supply chain partners must evolve. These are times of rapid transition for the U.S. economy. 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. Doing so allowed both to focus and to make more storage space for items that are currently in high demand. Some of these differences among sectors can be attributed to the structural characteristics of the industries involved: for example, chemicals and metals are asset-intensive sectors with large, expensive production sites. Its vital to ascertain how long your company could ride out a supply shock without shutting down, and how quickly an incapacitated node could recover or be replaced by alternate sites when an entire industry faces a disruption-related shortage. Shifting production from China to Southeast Asian countries will necessitate different logistics strategies as well. The transition to remote working was one of the most immediate and pronounced effects of pandemic-era restrictions on mobility and access to workplaces. Theres no doubt that the tumultuous events of the past 18 months led to the massive disruption of many key supply chains. Because these policies ignored the costs of being unprepared for risk, the United States has ended up with brittle supply chains that are, adjusted for the costs associated with this risk, also quite expensive. Investment in technology and considerations on sustainability in the supply chain will be key. To prepare for such instances effectively, organizations should take the following actions: With many end customers engaging in shortage buying to ensure that they can claim a higher fraction of whatever is in short supply, businesses can reasonably question whether the demand signals they are receiving from their immediate customers, both short and medium term, are realistic and reflect underlying uncertainties in the forecast. We are accelerating blockchain technology across supply chains, Helping companies avoid disruptions to global supply chains. Improved planning tools, either for specific aspects of the supply chain (such as logistics management) or broader end-to-end planning systems, come a close second among the companies in our survey, with more than three-quarters saying they were a priority. COVID-19 has imposed shocks on all segments of food supply chains, simultaneously affecting farm production, food processing, transport and logistics, and final demand. Heres how. How are companies responding to the coronavirus crisis? In the face of new challenges, finishing the job is even more urgent. Pressure testing each suppliers purchase order and minimizing or eliminating purchases of nonessential supplies can yield immediate cash infusions. Companies have only partly addressed the weaknesses in global supply chains exposed by the coronavirus pandemic. What particular impacts are we seeing now due to the coronavirus? How coronavirus will affect the global supply chain. This Task Force is convening meetings of stakeholders in industries. But you are left vulnerable when you depend on a single supplier somewhere deep in your network for a crucial component or material. But our survey revealed significant shifts in footprint strategy. How companies can accelerate and galvanize food system transformation, John Blasberg, Jenny Davis-Peccoud, Sasha Duchnowski and Vikki Tam, Global chip shortages: Why suppliesmust be prioritized for healthcare capabilities, Chief Executive Officer and Vice-Chairman of the Board, is affecting economies, industries and global issues, with our crowdsourced digital platform to deliver impact at scale. Many of these advances also present an opportunity to make factories more environmentally sustainable. The supply shock that started in China in February and the demand shock that followed as the global economy. Organizations should build financial models that size the impact of various shock scenarios and decide how much insurance to buy through the mitigation of specific gaps, such as by establishing dual supply sources or relocating production. With the winding down of the worst of the pandemic, businesses have added jobs at a rate of 540,000 per month since January. 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. You can unsubscribe at any time using the link in our emails. The analytical underpinnings of this risk analysis are well understood in other domains, such as the financial sectornow is the time to apply them to supply chains. As the coronavirus pandemic subsides, the tasks will center on improving and strengthening supply-chain capabilities to prepare for the inevitable next shock. .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? Please enable JavaScript to use this feature. 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. Recently, major automotive manufacturers have made moves to the century-old concept of vertical integration (paywall) to gain more control of the inner workings of their supply chain by moving responsibility for more core components from long-standing vendors to inside their own four walls. Over half of the May increase in core inflation as measured by the Consumer Price Index comes from this sector, if we include prices of new, used, leased, and rental automobiles. If that happens, particularly for companies that are harvesting crops, where the work is very labor intensive, and they have a hard time doing it in any other way, then this is a serious constraint for them. In addition, the pressure to operate efficiently and use capital and manufacturing capacity frugally will remain unrelenting. Schwab Foundation for Social Entrepreneurship, Centre for the Fourth Industrial Revolution. The public sector can play a valuable role in reducing these costs by facilitating short-term adjustments and by addressing vulnerabilities in U.S. supply chains. Reducing finished-goods inventory, with thoughtful, ambitious targets supported by strong governance, can contribute substantial savings. How much are consumers willing to pay? Assessment of the COVID-19 Supply Chain System - NOW AVAILABLE. 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. 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. But only 2 percent can make the same claim about suppliers in the third tier and beyond. The pandemic pushed risk to the top of virtually every corporate agenda. The Administration has established a Supply Chain Disruptions Task Force to monitor and address short-term supply issues. Competition will ensure that. To plan on how to use available capacity, the S&OP process should determine which products offer the highest strategic value, considering the importance to health and human safety and the earnings potential, both today and during the future recovery. In terms of supply chain, what were experiencing now is like a 100-year-old flood. Despite these challenges, regionalization remains a priority for most companies. We need to recognize that todays reality may eclipse just-in-time reactivity. Homebuilders appear to be responding to these shortages in part by delaying new construction, as housing starts have been volatile for several months. Consumers will continue to want low prices (especially in a recession), and firms wont be able to charge more just because they manufacture in higher-cost home markets. And because China has the second-largest economy in the world, it is important that firms maintain a presence to sell in its markets and obtain competitive intelligence. The White House Explore production-process improvements or new technologiessuch as automation, continuous-flow manufacturing, and 3D printingthat could lower your costs or increase your flexibility when faced with a shock. How durable is this system, how long a period of time can it continue to operate without a major disruption? If alternate suppliers are not immediately available, a company should determine how much extra stock to hold in the interim, in what form, and where along the value chain. 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. In the current landscape, we see that a complete short-term response means tackling six sets of issues that require quick action across the end-to-end supply chain (Exhibit 1). Most businesses would be surprised by how much inventory sits in their value chains and should estimate how much of it, including spare parts and remanufactured stock, is available. The majority of companies did not heed the lessons of the natural disasters of the last decade and, as a result, suffered severe supply disruptions when the Covid-19 pandemic struck. Examples of the latter include production of the most advanced smartphone chips, which is concentrated in three facilities in Taiwan owned by the Taiwan Semiconductor Manufacturing Company; fabrication of exotic sensors and components, which happens largely in highly specialized facilities in a handful of countries, including Japan, Germany, and the United States; and refining of neodymium for the magnets in AirPods and electric-vehicle motors, almost all of which is done in China. 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. 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. How you nurture and respect every partnership within the supply chain makes a difference. 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. The benefits of advanced analytics in supply-chain management are now being recognized across industries. When creating it, the company had started with the designs of its U.S. and Japanese factories and then improved on them by introducing newer equipment and ways of working. 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. 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. A case in point is the U.S. groceries market, where companies had difficulty adjusting to the plunge in demand from restaurants and cafeterias and the rise in consumer demand. Almost 90 percent of respondents told us that they expect to pursue some degree of regionalization during the next three years, and 100 percent of respondents from both the healthcare and the engineering, construction, and infrastructure sectors said the approach was relevant to their sector. 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. But the extent of pandemic-related shortages across vast ranges of goods now challenges whether these benefits are worth the tradeoff if the result is a significant lack of preparation for future disruption. Opinions expressed are those of the author. Next CEA Post: The Employment Situation in May, https://www.whitehouse.gov/cea/written-materials/2021/06/17/why-the-pandemic-has-disrupted-supply-chains/?utm_source=link, Office of the United States Trade Representative, new home sales to their highest level in 14 years, auto sales to their highest level in 15 years, Between May 2020 and May 2021, prices of commodities tracked within the Producer Price Index rose by. One of the big challenges is to keep the workforce healthy. How did U.S. toilet-paper manufacturers respond to the shortages? Share to Linkedin. Hospitals and other healthcare providers have been hit particularly hard. Some businesses report that they have been unable to hire quickly enough to keep pace with their rising need for workers, leading to an all-time record 8.3 million job openings in April. 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. These were disruptions to the availability of goods sourced from China; both finished goods for sale and products used in factories in developed markets. Processes and tools created during the crisis-management period should be codified into formal documentation, and the nerve center should become a permanent fixture to monitor supply-chain vulnerabilities continuously and reliably. Almost every company also plans for further digital investment in the future. The biggest shifts occurred in industries that were the lowest users of these approaches before the pandemic. .chakra .wef-facbof{display:inline;}@media screen and (min-width:56.5rem){.chakra .wef-facbof{display:block;}}You can unsubscribe at any time using the link in our emails. It is very difficult for a single firm to possess the breadth of capabilities necessary to produce everything by itself. And explore new manufacturing technologies that could increase flexibility and resilience. To improve contingency planning under rapidly evolving circumstances, real-time visibility will depend not only on tracking the on-time status of freight in transit but also on monitoring broader changes, such as airport congestion and border closings. 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. In 2013, the SK Hynix fire rattled smartphone manufacturers supply chains. Adding to the complexity, different retail chains wanted their own packaging and assortments. Of the companies that had difficulties managing their supply chains during the crisis, 71 percent say they are ramping up their use of advanced analytics. Thoroughly map your supply chain to uncover risks. ), 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. 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. . This is because as part of the change, you can unfreeze your organizational routines and revisit design assumptions underpinning the original process. Other Black Swan events include . Many chief executives now identify supply chain turmoil as the greatest threat to their companies' growth and their countries' economies. 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. 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. First, the supply shocks. Global supply chains (GSCs), which had shown a high level of robustness and resiliency against several disruptions in recent decades, are genuinely compromised. This is time-consuming and expensive, which explains why most major firms have focused their attention only on strategic direct suppliers that account for large amounts of their expenditures. Although disruptions are inevitable, we need to plan and respond differently if we're to ensure global economic resiliency in the future. The result was a streamlined operation that was much more efficient than those in the United States and Japan. Separating demand into many different SKUs makes forecasting more difficult, and trying to fill needs by substituting products during periods of shortage causes a real scramble. 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. Incorporating key-stakeholder interviews, a . Likewise, improved logistics, such as through smarter fleet management, can allow companies to defer significant capital costs at no impact on customer service. In the past, many industries have been surprised by strong demand and caught with too little inventory of specific goods. Supply chains are complicated, typically consisting of a number of complex factors and a large network of players. Opt in to send and receive text messages from President Biden. Several years ago I spent a week at a new Chinese factory of a major American industrial-equipment company. In part, that is because they cant easily shift products bound for restaurants into the appropriate sizes, packages and labels necessary for sale at supermarkets. The current automotive industry spends around $40 billion on chips per year. This includes sourcing and engaging with crisis-communication teams to communicate clearly with employees about infection-risk concerns and options for remote and home working. 1. Modern products often incorporate critical components or sophisticated materials that require specialized technological skills to make. This begins with establishing a supply-chain-risk function tasked with assessing risk, continually updating risk-impact estimates and remediation strategies, and overseeing risk governance. By acting intentionally today and over the next several months, companies and governments can emerge from this crisis better prepared for the next one. Finally, as COVID-19 affects food and agricultural supply in complex ways, the retail sector should also consider the resilience of its supply chain where needed, notably by relying on more diversified sources of goods, by improving inventory management and by leveraging data analytics to improve forecasts on sales and supply chain tensions.