Global supply chains in a post-COVID world
21 September 2020
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COVID-19 has caused huge disruptions to global trade and supply chains, both directly and indirectly (as a result of policy responses: lockdowns, social distancing measures etc). While some supply chains have recovered or adapted, others are yet to find ways of overcoming the pandemic.
Many products we consume in our daily lives are the end-product of a global supply chain, involving suppliers, producers and retailers from several countries who contribute at different stages of the production cycle. For instance, Apple produces iPhones using suppliers in 43 counties across six continents. Disruption at any stage can disrupt or even halt the whole supply chain.
Over the last four decades, the world has witnessed an exponential growth in the volume of international trade and foreign direct investment (FDI), leading to the globalisation of production networks and supply chains. The global volume of FDI has risen from about US$50billion in 1979-80 to over $2trillion in 2016-2018, while global exports increased from $2 trillion to over $23 trillion over the same period.
A significant proportion of this is attributable to China. With its location-specific cost (and other) advantages and its market-based economic reforms since the end of the 1970s, China has emerged as the production hub for the world economy (Zheng, 2019) and is considered as the ‘factory of the world’. Multinational enterprises embracing ‘lean production’ methods – cutting waste, reducing inventories, just-in-time deliveries, improved quality and reducing costs – have increasingly become more reliant on Chinese suppliers.
According to the World Bank, China’s share of global GDP has quadrupled from about 4% in 2000 to about 16% today, lifting hundreds of millions of Chinese people out of extreme poverty, and making consumers elsewhere more prosperous. However, this came at the expense of risk diversification, flexibility, and resilience for international firms seeking to manage their global supply chains.
Predictably, protectionists and opponents of globalisation have used this global pandemic as an excuse to peddle their old recipes again. They claim that COVID-19 has exposed the weaknesses of “too much globalisation”, and that production needs to re-shored.
Many companies have also recognised the hazards of overreliance on China-based suppliers and reacted to the new situation, without governments prompting them to do so. For example, before COVID-19, most personal protective equipment was imported from China, but when the crisis began, China imposed export controls. As part of the market discovery process, alternative suppliers were found in other countries, even though in some cases products were more expensive, delayed and even of lower quality.
Peter Buckley’s “Global Factory Framework” (2011) explains how international businesses can build in flexibility and resilience in managing dispersed production, advocating offshore outsourcing with the principle of dispersed production, i.e. using a range of suppliers in different locations at different stages and not being over-reliant on specific suppliers and locations. This not only provides much-needed flexibility, stability and resilience for production but also provides bargaining power to multinational enterprises.
Some analysts have suggested we may see more re-shoring of production, but where production was outsourced due to economic viability or poor industrial relations, firms may look to ‘near-shore’ instead, i.e. move the part of the supply chain from China to a country closer to home. This may well lead to a shift from globalisation to regionalisation of supply chains.
In many cases, the re-shoring or near-shoring is facilitated by technological advances, including robotics, which makes internalisation of production possible. Banalieva and Dhanaraj (2019) argue that technological advances are increasingly paving the way for an internalisation of lots of activities that used to be outsourced by firms. Internalisation of production not only makes firms resilient as it provides greater control over the production process but it can also lower the risk of leakage of knowledge and resources to other firms (Yoshikawa, 2003).
Fanuc Robotics, a Japanese producer of multifunction industrial robots doubled production capacity in 2015 and has even launched a new robot that can self-clone; i.e. a robot that can produce another robot. This can multiply the production of robots exponentially, massively reducing labour costs, especially where labour costs are the main driver of outsourcing. The use of robotics also helps in small batch, low volume production often needed for very specialised industries, such as aerospace. In addition, we are seeing huge advances in 3D printing, or additive manufacturing. ING Bank estimates that 3D printing could account for 50 per cent of all manufactured goods between 2040 and 2060. However, it is not yet clear whether 3D printing will replace trade in manufactured goods or simply replace existing manufacturing processes at current locations.
Some companies may seek to increase stock or storage but will want to avoid the costs of maintaining a larger inventory. This may offer opportunities for entrepreneurs to offer storage space for components, raw materials and unfinished products, delivering them to firms to maintain just-in-time production. While these intermediary storage companies will take on the risk of being left with unwanted inventory if items are suddenly no longer needed due to a drop in demand of the finished product, this could be mitigated to a certain extent by the use of AI, machine learning and data analysis to manage storage flows.
In any case, the use of technological advancements can strengthen sustainability of global trade and supply chains, and at the same time ensure that the desired scale and efficiencies in production are realised (Kamble, Gunasekaran and Arha, 2019). These developments make it easier to disperse productive activities across a number of places, because they reduce reliance on location-specific advantages. They also reduce the need for outsourcing.
In summary, the global economy will face two important changes in the post COVID-19 world. First, many companies will question their reliance on China-based suppliers, leading towards a localisation or regionalisation of supply chains. Second, technological advances may make reshoring or near-shoring more viable. As a result, supply chains in the post COVID-19 world are likely to be much more decentralised in order to ensure that risks associated with geographic diversification and over reliance on China are minimised, while international businesses maintain control over more resilient supply chains.
Dr Surender Munjal is an Associate Professor of International Business, and the Director of the James E. Lynch India and South-Asia Business Centre at Leeds University Business School. He is currently leading the ‘Global Value Chains and the Commonwealth’ project.
References
Banalieva, E. R., & Dhanaraj, C. (2019). Internalization theory for the digital economy. Journal of International Business Studies, 50(8), 1372-1387.
Buckley, P. J. (2011). International integration and coordination in the global factory. Management International Review, 51(2), 269.
Kamble, S., Gunasekaran, A., & Arha, H. (2019). Understanding the Blockchain technology adoption in supply chains-Indian context. International Journal of Production Research, 57(7), 2009-2033.
Yoshikawa, T. (2003). Technology development and acquisition strategy. International Journal of Technology Management, 25(6-7), 666-674.
Zheng, Y. (2019). Foreign direct investment in China. In Handbook on the International Political Economy of China. Edward Elgar Publishing.
Many products we consume in our daily lives are the end-product of a global supply chain, involving suppliers, producers and retailers from several countries who contribute at different stages of the production cycle. For instance, Apple produces iPhones using suppliers in 43 counties across six continents. Disruption at any stage can disrupt or even halt the whole supply chain.
Over the last four decades, the world has witnessed an exponential growth in the volume of international trade and foreign direct investment (FDI), leading to the globalisation of production networks and supply chains. The global volume of FDI has risen from about US$50billion in 1979-80 to over $2trillion in 2016-2018, while global exports increased from $2 trillion to over $23 trillion over the same period.
A significant proportion of this is attributable to China. With its location-specific cost (and other) advantages and its market-based economic reforms since the end of the 1970s, China has emerged as the production hub for the world economy (Zheng, 2019) and is considered as the ‘factory of the world’. Multinational enterprises embracing ‘lean production’ methods – cutting waste, reducing inventories, just-in-time deliveries, improved quality and reducing costs – have increasingly become more reliant on Chinese suppliers.
According to the World Bank, China’s share of global GDP has quadrupled from about 4% in 2000 to about 16% today, lifting hundreds of millions of Chinese people out of extreme poverty, and making consumers elsewhere more prosperous. However, this came at the expense of risk diversification, flexibility, and resilience for international firms seeking to manage their global supply chains.
Predictably, protectionists and opponents of globalisation have used this global pandemic as an excuse to peddle their old recipes again. They claim that COVID-19 has exposed the weaknesses of “too much globalisation”, and that production needs to re-shored.
Many companies have also recognised the hazards of overreliance on China-based suppliers and reacted to the new situation, without governments prompting them to do so. For example, before COVID-19, most personal protective equipment was imported from China, but when the crisis began, China imposed export controls. As part of the market discovery process, alternative suppliers were found in other countries, even though in some cases products were more expensive, delayed and even of lower quality.
Peter Buckley’s “Global Factory Framework” (2011) explains how international businesses can build in flexibility and resilience in managing dispersed production, advocating offshore outsourcing with the principle of dispersed production, i.e. using a range of suppliers in different locations at different stages and not being over-reliant on specific suppliers and locations. This not only provides much-needed flexibility, stability and resilience for production but also provides bargaining power to multinational enterprises.
Some analysts have suggested we may see more re-shoring of production, but where production was outsourced due to economic viability or poor industrial relations, firms may look to ‘near-shore’ instead, i.e. move the part of the supply chain from China to a country closer to home. This may well lead to a shift from globalisation to regionalisation of supply chains.
In many cases, the re-shoring or near-shoring is facilitated by technological advances, including robotics, which makes internalisation of production possible. Banalieva and Dhanaraj (2019) argue that technological advances are increasingly paving the way for an internalisation of lots of activities that used to be outsourced by firms. Internalisation of production not only makes firms resilient as it provides greater control over the production process but it can also lower the risk of leakage of knowledge and resources to other firms (Yoshikawa, 2003).
Fanuc Robotics, a Japanese producer of multifunction industrial robots doubled production capacity in 2015 and has even launched a new robot that can self-clone; i.e. a robot that can produce another robot. This can multiply the production of robots exponentially, massively reducing labour costs, especially where labour costs are the main driver of outsourcing. The use of robotics also helps in small batch, low volume production often needed for very specialised industries, such as aerospace. In addition, we are seeing huge advances in 3D printing, or additive manufacturing. ING Bank estimates that 3D printing could account for 50 per cent of all manufactured goods between 2040 and 2060. However, it is not yet clear whether 3D printing will replace trade in manufactured goods or simply replace existing manufacturing processes at current locations.
Some companies may seek to increase stock or storage but will want to avoid the costs of maintaining a larger inventory. This may offer opportunities for entrepreneurs to offer storage space for components, raw materials and unfinished products, delivering them to firms to maintain just-in-time production. While these intermediary storage companies will take on the risk of being left with unwanted inventory if items are suddenly no longer needed due to a drop in demand of the finished product, this could be mitigated to a certain extent by the use of AI, machine learning and data analysis to manage storage flows.
In any case, the use of technological advancements can strengthen sustainability of global trade and supply chains, and at the same time ensure that the desired scale and efficiencies in production are realised (Kamble, Gunasekaran and Arha, 2019). These developments make it easier to disperse productive activities across a number of places, because they reduce reliance on location-specific advantages. They also reduce the need for outsourcing.
In summary, the global economy will face two important changes in the post COVID-19 world. First, many companies will question their reliance on China-based suppliers, leading towards a localisation or regionalisation of supply chains. Second, technological advances may make reshoring or near-shoring more viable. As a result, supply chains in the post COVID-19 world are likely to be much more decentralised in order to ensure that risks associated with geographic diversification and over reliance on China are minimised, while international businesses maintain control over more resilient supply chains.
Dr Surender Munjal is an Associate Professor of International Business, and the Director of the James E. Lynch India and South-Asia Business Centre at Leeds University Business School. He is currently leading the ‘Global Value Chains and the Commonwealth’ project.
References
Banalieva, E. R., & Dhanaraj, C. (2019). Internalization theory for the digital economy. Journal of International Business Studies, 50(8), 1372-1387.
Buckley, P. J. (2011). International integration and coordination in the global factory. Management International Review, 51(2), 269.
Kamble, S., Gunasekaran, A., & Arha, H. (2019). Understanding the Blockchain technology adoption in supply chains-Indian context. International Journal of Production Research, 57(7), 2009-2033.
Yoshikawa, T. (2003). Technology development and acquisition strategy. International Journal of Technology Management, 25(6-7), 666-674.
Zheng, Y. (2019). Foreign direct investment in China. In Handbook on the International Political Economy of China. Edward Elgar Publishing.
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Interesting analysis of the disruption caused by the coronavirus pandemic on cross-border supply chains of producer interests, especially those making finely engineered products. But it misses out the role of the most important asset in the enterprise – its employees, and the part played by these people within a business model that uses them correctly, and what can happen when they are not.
What is it about engineering businesses trading in the consumer goods market that makes them exceptional performers, compared with equivalents in the defence equipment market?
One of the defining features of a high-performing engineering company is that the composition of its project team changes and grows, as it advances a product development programme from one engineering phase to another – that is to say, from the design phase, to the development phase, to the systems integration phase, to the prototyping phase, to the testing phase and finally, to the manufacturing & in-service support phase. This evolving team expands to accommodate people with the diverse range of skills and capabilities that are required to tackle the vast array of challenges posed by a product comprising a complex technological mix of electronic, electrical, mechanical and software components – which typify MoD equipment procurement programmes in the modern age.
It begins as an embryonic management team on the hunt for business opportunities, which then morphs into a bid team that produces the response to the invitation to tender, then into a project performance team which advances the starting-point for the technical solution from its existing condition, to a point where it satisfies the qualitative and quantitative requirements expressed in the technical specification requirement and finally, evolves into a project delivery team which sees the project through to a finish, by delivering the fully-engineered product to the user and providing on-going support thereafter, for the entire in-service period.
However, the situation within defence engineering companies is very different, in that, the make-up of the project team remains largely the same, as it moves from one engineering phase to another – a thin layer of management types whose only notable talent is doing the talking. The harsh reality is that, in the vast majority of cases, there are virtually no people underneath this management layer possessing the requisite hands-on skills, capabilities and experience to perform the on-the-ground delivery work.
So, in an attempt to get around this shortcoming, the winning contractor of a MoD equipment development programme outsources some (or all) of the work to a subcontractor (which has the effect of introducing yet another layer of management types, adding no value), who in turn ends up doing the same again – because, they too, haven’t got a fully staffed team on their payroll to perform the work. Eventually, the final management layer hires a handful of agency staff on the cheap or disparate individuals operating on a freelance basis – right at the bottom of the pile, with no loyalty, no job security or even relevant job experience for the task in hand.
The results are entirely predictable. The programme quickly falls behind schedule, with the top-level management team reduced to offering limp excuses by outsourcing its obligation to report progress, problems and achievements to MoD to lower level(s), as per the sub-contract – whilst retaining the highly-coveted role of first point-of-contact, chief negotiator and recipient of milestone payments.
This is because the management layer, at every level, is almost always made-up of people who were previously in the pay of the State where their focus was, at the exclusion of all else, on how to go about commissioning and overseeing contracts with no consideration whatsoever given to how the hardware configuration of the technical solution will be built and delivered. So, it comes as no surprise that this short-sighted management style has been replicated and embedded in the private sector, by successive waves of former government officials who migrated via the “revolving door” over the last several decades, after having reached the upper echelons of the civil service & armed forces. In so doing, they have completely ignored the undeniable fact that, it remains the job of the private sector to deliver the required equipment to the user, given that it alone possesses the means of production and distribution. It proves one thing – that nothing in their prior experience of working in the public sector has prepared these people for the challenges they will face in the private sector.
Whereas engineering businesses that manufacture consumer goods routinely build project teams made-up of talented engineers, problem-solvers, innovators and doers from a wide variety of backgrounds (as well as pick them on merit), being “one of us” remains an essential requirement to becoming a member of defence engineering teams.
It would explain why poorly-performing defence manufacturing businesses have failed so miserably, to deliver equipment to the Armed Forces which is fit for purpose, adequately sustained in-service and constitutes value for money through-life, for as long as anyone can remember.
@JagPatel3
the rapid global spread of the virus forced major production companies of business and every plate form of societies effected to virus,the only solution of virus is social distancing rules and wear of mask and follow sops where doubt to effected. we have no other except lockdown,we just can’t think about ,who will.that morale was low,so we tell each other,the country as parts its and efforts to spread awareness ,precaution,prevent to spread virus to every one .we hope that by making it clear that we all have a collective responsibility to save lives and outlining our primary oblgations to protect lives of those around us.