COVID-19 exposes major flaw in global supply chains
Posted on: 19 June 2020
By Dr Tanusree Jain and Dr Louis Brennan, Trinity Business School
(This opinion piece was originally published on the site Openaccessgovernment.org)
The onslaught of COVID-19 has exposed many vulnerabilities in the global system and not least in respect of supply chains. The past several decades have witnessed the proliferation of de-centralisation of production lines in a manner that led to the propagation of globalised supply chains. This process of globalisation of supply chains involved the outsourcing and off-shoring of manufacturing activity to low-cost locations typically situated in the emerging and developing economies. Motivated by the pursuit of maximisation of shareholder value, multinational firms embraced the construction of supply chains that often times spanned continents. The calculus justifying this strategy has tended to be mostly if not entirely, cost and efficiency based, with little or no regard to other considerations such as risk and resilience.
The system that emerged as a result, operated as lean a Just In Time (JIT) system with frequent reliance on single sourcing. While efficient, this also made the systems inherently fragile and vulnerable to shocks such as those produced by the COVID-19 pandemic. Designed to operate as efficiently as possible, globalised supply chains were left with no buffers due to their lean design and JIT operation and an absence of redundancy due to the degree of single sourcing that prevailed.
That this should have been the case might appear to defy logic. Supply Management 101 emphasises the risks associated with single sourcing and the critical importance of maintaining multiple sourcing points for essential inputs and supplies. An understanding of systems tells us that incorporating redundancy is a means of ensuring system effectiveness. Yet, firms and their executives eschewed those basic principles in favour of cost reductions and efficiency gains in the unfettered pursuit of maximising shareholder value. And markets lauded them for engaging in such short term and reckless behaviour.
An unintended benefit of the COVID-19 pandemic is bringing to light obvious problems that remained undetected in our myopic pursuit of an efficient, and not an effective, supply chain. We now know through an aggravated healthcare crisis marred by shortages of essential medicines, personal protective equipment such as mask, gowns, gloves and life-saving equipment, that an over emphasis on efficiency is more likely to encompass a degree of risk that is readily amplified when subjected to a sudden, unanticipated shock. Lacking resilience and robustness, JIT systems are highly vulnerable to disruption that adversely impact customers in terms of dis-continuity of supplies.
However, this is only one part of the picture. Globalised supply chains can produce massive negative externalities. Given the extended, complex and often opaque nature of such chains, it can be difficult if not impossible to fully account for those externalities even when there is a willingness to do so. The extra distances travelled by parts and components, and finished products and personnel has generated additional unaccounted carbon miles with severe adverse environmental impacts. That it is cheaper to produce and transport goods 5000 miles away than in our local communities exposes the incompleteness of our pricing models. As supply chains have extended into geographies in which regulation of employment and working conditions were lax or minimal, they also contributed to poor quality of working life.
In other words, the pursuit of globally dispersed supply chains have gradually transformed emerging and developing countries into the rest of the worlds’ sweatshops and dumping sites creating large scale, low skill employment on the one hand, while causing a severe damage to their environmental and skill-based ecosystems on the other. Several of these emerging countries have seen a complete dissipation of local skills and crafts by shifting labour demand and supply into manufacturing, systematically proliferating modern forms of slavery. And the sudden disruption due to COVID-19 has thrown these supply chain migrant workers into a fight for their very survival.
Now is the time and the opportunity for us to create a balance in our supply chains. We do not argue for a complete overhaul of global supply chains, yet there is a real opportunity to rebalance how and where we produce what we need. It is no surprise that many authorities such as the EU Commission President Ursula Von Der Leyen have been calling for less dependency and the restoration of strategic autonomy particularly when it comes to areas of national and public security. This suggests that in those areas at least, we are likely to see the deconstruction and reconstruction of supply chains including the nurturing and fostering of local production and supply networks.