In response to the outbreak of COVID-19, governments around the world instituted a broad range of strict social controls to slow the spread of the pandemic. Although these measures have helped to save lives, they have also imposed a very heavy economic cost in the form of a dramatic decline in global economic output and constrained international trade. Major countries have not escaped the impacts of these disruptions to global value chains. But the consequences of these events will extend far beyond the short-term, and 2020’s unprecedented economic turmoil will likely act as a catalyst accelerating the changes being wrought by megatrends that were already playing out on the world stage, whether that be changing patterns in demand, uncertainty over trade policy and the shifting of production facilities, or the growing impact of technology on economic life. How these factors take shape and evolve will be the key to determining how future value chains become shorter, more diversified and more regionalized.
Given their role as drivers of increased manufacturing capability, investment and employment, through which they support economic growth and improvements in standards of living, these global value chains are extremely important, but when each stage of a supply chain is connected to all the others, the consequences of changes in one part of the production process are rapidly felt throughout the whole, with contagion potentially spreading along the supply chain and into economies in all regions of the world, as has been the case during the COVID-19 crisis.
Nevertheless, the crisis has also helped to raise awareness of the importance of managing risk arising from the shifting of production facilities and the need to unravel some degree of economic interdependence and doing this will go some way towards determining how future value chains are structured. Understanding how these changes will unfold will thus not only enable businesses to better manage risk but will also allow manufacturers to seize global market and investment opportunities.
Although the COVID-19 crisis began as a public health issue, the slump in output and demand that it has precipitated has triggered a major global economic problem, with trade channels acting as the channel that have transmitted these economic woes worldwide. With a sharp contraction in global trade underway and high levels of uncertainty over the outlook for the world economy every country, has naturally struggled against headwinds on both the supply and demand sides of the market. The global economic recovery became staggered, with different countries rebounding at different rates. In fact, an analysis of forecast growth in exports from 2020 to 2025 shows the income-sensitive industries (those that produce goods with a high price elasticity of demand) will be on the leading edge of the recovery,
Over the past three decades, supply chains have become increasingly global. This change has been driven by the dramatic increase in the number of goods and services that are tradable. Tradability is determined by the extent to which items can be produced remotely from the market where they are intended to be consumed. The main factors in tradeability are transportation costs and product perishability. Thus, for goods with high value relative to their size and shipping cost, it often makes sense to manufacture them in a low-cost region and ship them. A steady decline in those costs (coupled with improved efficiency in international transportation) has encouraged many companies to shift to a global sourcing model, allowing them to take advantage of lower costs for labour and materials, land, and other factors. Another factor in the growth of global supply chains has been the increased use of subcontracting. Subcontracting has become more prevalent for a number of reasons, including the increased sophistication of components, manufacturing processes that require specialists, and the desire on the part of producers to have more flexible capacity that can be turned on and off depending on demand.
Transformation of Global Value Chains
Over the long term, the epidemic might leave deep scars on the economy, although it will transform it in the process. This is because labour productivity has fallen and economic growth may drop below its potential, leaving an unrecoverable gap in output, while businesses will need to be more flexible and more agile in responding to future challenges, but beyond this, the protracted slowdown in international trade may push some countries to reconsider their economies’ relative dependence on internal and to control potential losses by spreading the risks that arise from distributed production facilities. These factors will thus have a major role to play in shaping future global value chains.
These profound changes in the world economy, together with COVID-19 consequences, are now determining the changes in global value chains. Corporations are thus now attempting to unpick some of the complexity, while also trying to shorten the distance between production sites and their home country or to disperse production among a larger number of countries and so reduce the risk of losses in the event of another crisis or from trade policy that is becoming steadily more aggressive.
Because of this, countries are now looking for distribution channels for goods that are closer to production sites or that are in the same region as these, and these factors are now influencing the restructuring of value chains, making them shorter, more diversified and more regionalised.
Advantages of Regionalisation Post-Covid
To meet the growing needs of consumers, organizations must ensure their supply chains are efficient and agile. That means working technologies to create efficient, cost-effective solutions. As mentioned above, technology plays an integral role in enabling supply chains to become innovative at their approach to moving product.
When an organization breaks down a complex supply chain into smaller regional locations, they are able to streamline processes with ease. In addition, they achieve the following benefits:
- Create visibility across supply chains
- Increase the velocity and agility of supply chains
- Improve response rates to ‘market changes’
- Deliver consumer expectations and demand
Over the next few years, suppliers and manufacturers will form new relationships to create smart, regional supply chains. Thanks to real-time data analytics, heightened visibility into operations will speed up the flow of products and offer more information to manufacturers than ever before – saving money and minimizing lost time.
Complexities within the supply chain itself will continue to rise in the short-term, due to the dramatic shift from off-shore production. This will place more pressure on experts to make sure supply chains deliver expectations of efficiency, customization and speed. By partnering with contract manufacturers that have operations in many countries, companies can more smoothly sail into the era of regionalisation, hedging against potential change and delivering on their customers’ high expectations.
In conclusion, supply chains must continue to evolve their structure in order to compete and meet the needs of today’s consumers. While the impacts of globalization remain, there is a need to respond to change in a more efficient and agile manner. Regionalisation is a beneficial way for supply chains to utilize their existing networks of manufacturers, by separating them into smaller sites. This will ultimately help organizations bring product home to their customers while differentiating the business and improving performance.
This article is authored by V Raju, Sr VP (3PL and Contract Logistics), Avvashya CCI