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The epidemic exposes three major manufacturing risks, with global supply chains to be restructured

April 17, 2020

By Yu Qi, 21st Century Business Herald

“In the medium to long term, the Covid-19 epidemic will have a huge impact on global supply chains,” LLamasoft CEO Razat Gaurav explained in an interview with the 21st Century Business Herald. “In the future, there will be an intense debate about the underlying design of the supply chain, and we will find that global manufacturing supply chains are rebalanced.”

LLamasoft is a software company focused on supply chain analysis, and solution optimization and design. Headquartered in the United States, LLamasoft conducts business in many cities and regions around the world, including Shanghai. Using data collected from multiple channels, like manufacturing, retail, and distribution, Razat shared his views on global supply chains.

“For different industries, the answer to rebalancing varies,” says Razat. “Overall, several factors, including overall production costs, impact enterprise services and product quality.”

Manufacturing supply chain is hit

Based on data analysis from different industries, Razat believes that Covid-19 affects several industries and exposes three obvious risks in their supply chains.

The first risk depends on the number of production facilities an enterprise has in the area affected by the epidemic, as well as the supply-demand relationship. The second risk lies in what alternative options the enterprise has, such as using other suppliers or components. The final risk depends on whether the enterprise has enough production materials in stock.

This is why since the Covid-19 outbreak, the most affected industries have been consumer electronics, then automotive, medicine and clothing in order of the degree of impact.

“The consumer electronics industry was hit the hardest,” says Razat. “And the future impact on auto and medicine will be caused, to a large extent, by the global spread of the epidemic; and the clothing industry is currently not particularly affected.”

In the past months, companies of those industries have taken many measures to ensure that the impact of the epidemic is minimized. On the one hand, they are asking carriers to expedite shipments. On the other, they are also looking for alternative sources of supplies to ensure normal operations.

“The good news is that many factories in China have gradually resumed work and are now operating normally. For enterprises that rely on China’s supply chain, this is a very positive and encouraging thing,” says Razat.

However, for Europe and North America, where the spread of the epidemic is accelerating, things are different. National governments are now focusing on providing test kits, medical equipment, and hospitals, as well as food, medical supplies, and other daily necessities.

In this situation, companies need to balance the costs, services provided, and the risks, and make corresponding adjustments, which is also the most fundamental part in the design of their entire supply chains.

In fact, the above-mentioned risks are rooted in companies’ past decisions, which were made based on considerations of minimizing costs and maximizing liquidity. This is why their supplies and production are highly concentrated. However, in an emergency situation, a single problem may affect their entire operations.

There are also companies that try to keep their inventories relatively light. Nevertheless, once a situation like the current pandemic occurs, the supply-demand relationship alters greatly. In terms of logistics, some bottlenecks and obstacles have emerged in truck transport, ports, containers, and air cargo.

“Lastly, the epidemic has also exposed a very serious problem for many consumer products companies,” says Razat. “They often only know their first-tier suppliers but are unfamiliar with second-tier or third-tier suppliers.”

This defect led to a lack of effective control of their supply chains after the Covid-19 outbreak, as the cause of the supply shortage may not lie with their first-tier suppliers, but the second- or third-tier suppliers. This lack of knowledge about these suppliers can cause an overall collapse of their supply chains.

Restructuring the global supply chains

For the future, after the epidemic, there are several answers to restructuring global supply chains.

“China will remain a major manufacturing country in the future, and many companies will continue choosing China as a place to concentrate their production capacity,” says Razat. “At the same time, these companies may also consider other regions and countries, such as India, Eastern Europe, and Mexico, as alternatives. Otherwise, they may move part of their production capacity back to their own countries.”

Within the medical industry, pharmaceutical companies are already making contingency plans by exploring alternate source of supplies for API, and other substances, that go into their products. “They will need to explore sources in consideration of total landed cost and what it costs to serve their customers,” says Razat. “Given that most of the supplies from China are APIs and other raw materials (China supplies APIs for 370 essential drugs), coupled with the longer lead times in pharma, the effects will take weeks to months to percolate through the supply chain.”

The purpose of this is to reduce risks within the supply chain and to ensure that the entire supply chain will not collapse due to the failure of a single link. In response to this, China can still take some measures to integrate itself into future global supply chains.

First, pursuing global expansion strategies for Chinese-made finished products to increase its reach into global supply chains. M&A strategies are a viable option to increase its global footprint.

Second, China has the advantage of a large consumer base given that it is the most populous country in the world. This will be reason enough for many companies to maintain manufacturing capacity in China. Government incentives can play a big role in encouraging firms to secure a manufacturing presence in China.

Third, as technology gets embedded into products, and, accordingly increases cyber risks, trust becomes increasingly critical in trade relationships. China should do its part in affirming its commitment to ensuring safety and address any privacy and intellectual property concerns associated with technology manufactured in China which is then sourced to other countries.

Finally, increasing the ease of doing business within China will certainly help. “As of December 2019, China ranked 31 for ease of doing business per trading economic data. Improving its position will make things easier,” says Razat.

Media Contact
LLamasoft, Inc.
Lisa Hajra
lisa.hajra@llamasoft.com
734-418-3119 ext 1400