Article: Altering Supply Chain with respect to COVID-19.
Author: Goran Oblakovic, Ph.D. – Associate Professor – Luxembourg School of Business
The major supply chain disruptions have been occurring in recent years at an alarming rate, so much that some practitioners and scholars claim this is our new normal (1). The SARS outbreak, Japanese tsunami, Islandic volcano, and the most recent COVID-19 disruptions exposed vulnerabilities not only for individual companies but for the whole global supply chain. Oxford Economics predicts world economic growth could shrink by as much as 1 trillion dollars (2) due to COVID-19 disruption alone, while the World Economic Forum predicts as high as 2 trillion dollars loss (3). Luxembourg, having the highest proportion of exports contributing to GDP (74%) among OECD countries (4), is highly impacted by this.
Over the last two to three decades, China became a world’s production center, so their temporary shortfall of factory output affected every economy in the world. Among the most affected are European Union and North American countries (5)(6), across all major industries including electronics, auto, consumer goods, etc.
Major focus on supply chain efficiency, that inevitably leads to better financial performance, triggered the creation of less resilient supply chains (7). In the future, our focus needs to shift to disruptive risk reduction and building more resilient supply chains, but now supply chains first need to be restarted. The looming question is what can be done at the moment.
For most of the EU companies, paramount is employee safety and wellbeing, even if it leads to temporary loss of some capacity. Right policies and proper level of support will ensure companies continue to have high performing teams even after the crisis. Companies working during the crisis need to provide autonomy and two-way communication with their employees, to ensure a safe environment for them. Without productive employees, rebuilding the supply chain is impossible.
Stabilization of the supply chain starts with the evaluation of current exposure, including customers, tier 1-,2- and 3- suppliers, inventory levels, transportation modes, etc. Many companies are still optimistic about demand recovery, and this is a real problem. Troubled companies with low working capital or liquidity issues should look for other sources of cash injections. The global crisis is imminent, likely it will cause massive labor shortages, lower spending, declines in the travel and tourism industries, and technical recessions in most advanced European economies, including Luxembourg. Very few sectors (if any) will be unaffected. Staying close to core customers and ensuring transparency, will help companies anticipate future behaviors of those customers. The obvious shift to more online channels might be here to stay, but even if not, customer’s preferences are changing, and they are unlikely to go back to pre-crisis norms. Therefore, increased transparency with the biggest customers (or B2B customers), scenario-based planning communications, and customer protection are essential as they lead to more realistic demand forecasts.
Supplier engagement requires cross-tier transparency. Like in many crises before, some lower-level suppliers will disappear, and replacements will be needed. This presents an opportunity to reconsider localization and build a more resilient supply chain. Toyota learned this lesson and continues to practice localization (8), to a much higher extent than its competitors.
Companies still holding on to efficient and relatively inexpensive logistics and transport should consider possible bottlenecks. With a limited number of ports and routes, companies should immediately start planning critical paths and pre-booking necessary rail/air-freight capacities. Deepening supplier relationships through supporting their restarts help gain priority with those suppliers. Short-term spikes in demand are to be expected due to stockpiling. In midterm companies should strive for network optimization and search for the qualification of new suppliers.
Crises like this one are bound to happen again in the near future, so it is a perfect time to build more resilient supply chains. Even though it is likely to increase costs in the short run, potential disruptions should be minimized. The need for transparency and its benefits are well known (9), and it is the right time to become more widely accepted.
Viable innovative solutions that can lead to more resilient supply chains include localization of suppliers, moving productions and sourcing closer to consumers, mathematical modeling focusing on fragility, network connectivity and evaluation of the disruption (10), digitalization and automating (11), Artificial Intelligence (AI), utilization of Enterprise Risk Management, supply chain resilience assessment and management (SCRAM)(12) approach, just to name a few.
Luxembourg is ideally positioned to capitalize on this, in two ways. Many of the above-mentioned solutions are high value-added services, and Luxembourg has the highest services content in its exports at 86% (4) among OECD countries. The single greatest application of AI is expected to lie in supply chains (13), and it matches the government’s effort to diversify the economy through “Smart Specialization Strategy” (14). Through Luxinnovation, Infrachain, and more importantly companies from the sector this is easily achievable.
Secondly, Luxembourg is already a major logistics hub for European markets. Not only because of VAT deferent logistics and supply chain solutions but because of value-added activities. Dedicated Pharma and Healthcare Center at Luxembourg’s international airport is just one of many such examples. In global efforts to restructure supply chains and make them more resilient, The Luxembourg logistics cluster should only prosper. With these efforts, there is also an opportunity to bring some high-end production capacities back to Luxembourg, as localization is going to become more prevalent.
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