Supply Chain Resilience and the world post- COVID-19

One of the main questions I am getting these days is: What will be the impact of this crisis on the global supply chain landscape? I know people have bigger concerns around health right now, but I am not a healthcare professional and try to avoid giving advice in areas I know very little about. But studying global networks for many years gives me the right to opine and be wrong (and maybe right) on this topic.

Over the weekend Bloomberg published an interesting article that included insights from Sung Yun-mo, Korea’s trade, industry, and energy minister. The article stated:

Korea may not match the kind of price competitiveness that China and other Southeast Asian nations offer, but its largely successful campaign to bring the coronavirus under control without the need to lock down the economy has renewed investors’ confidence in its ability to bounce back and provide key supplies in a crunch, he said. “The global value chain that has formed around efficiency and costs will now reshape around resiliency and reliability,” Sung said. The pandemic may also prompt more nations to accelerate efforts to bring factories home in a so-called re-shoring strategy, but the costs of doing that cannot be ignored, Sung said.

First, the notion that the global supply chain will be formed around resilience is something we have been hearing since … well… forever. We have heard it after the floods in Thailand in 2011 that caused significant disruptions to the hard drive supply chain, an essential component in any consumer electronics, and we have heard it after the earthquake in Fukushima, but firms tend to forget and have a hard time weighing risks, primarily when people believe that the previous risk was so unique. Admittedly, these had a significant impact, but much more local in nature, both in human life and economically.

So, the question is whether Covid-19 will have a different impact. Beyond realizing the importance of resilience, there are other multiple effects at play. First, I do believe that there will be more on-shoring in the next few years. With governments facing 20-30% unemployment and asked to rescue different industries, I foresee a lot of pressure to bring production back to shore, even at the cost of higher prices.

Furthermore, the global supply chain is very complex, and as my work with my colleague Jan Van Mieghem showed, costs have second-order effects on allocating production across a global network. Volatility has a first-order effect and, in a world that is expected to be more volatile over the next few years, both from a demand a supply point of view, reliability and responsiveness are going to win over price.

How should governments act is hard to say, but given that the lead-time to prepare your supply chain to any change (and specifically global realignment) is long, I would encourage managers to use the next quarter to rethink their global supply chain strategy.