Supply chains are disrupted around the world, but what is the full impact?
Coronavirus outbreak has cost global value chains $50 billion in exports by February 2020. Hardest-hit sectors are the energy and basic materials industries (-208% for energy, with the additional shock caused by the recent drop in oil prices), airlines (-116%) and the automotive industry (-47%). Supply value chains cannot be established overnight. It takes time and effort to qualify potential suppliers in areas of manufacturing quality, capacity, delivery, cost and their ability to respond to engineering or demand changes. Thus, supply value chains are designed for longer-term needs. Once they are established, it can be difficult to change them quickly to adapt to unpredictable disruptions.
The pandemic reminds corporate decision-makers that there is a need to develop new business strategies in future supply chain designs. KPIs to be considered for future supply value chain designs will likely contain both traditional metrics such as cost, quality and delivery, as well as new measures including (also known as the 3Rs) resilience, responsiveness, and reconfigurability.
The frequency and severity of supply chain disruptions are steadily increasing. Supply chains are vulnerable to a broad range of threats, including pandemics, extreme weather, cyberattack, and political crises. Their vulnerability has been highlighted by major recent incidents (COVID- 19, the Petya cyberattack in 2017) and the hurricanes that hit the US in 2017 with estimated $200 billion in damage. Ironically, the susceptibility of supply chains has been heightened by business practices, such as single-sourcing of supplies, inventory centralization, just-in-time replenishment, and the concentration of freight traffic at hubs. These improve economic performance, but also create greater risk exposure and lower resilience. As a result of the globalization of supply chains and a tighter coupling of logistical processes, the effects of disruptions now spread much further and faster, and have a broader impact. The human cost of supply chain disruption can also be high, as with the tsunami that hit Indonesia in 2018 or with fracturing of supply chains relied upon to deliver medical and essential supplies.
In the corporate world, the management of supply chain risk is being given greater priority; risk auditing and business continuity planning are now widespread, particularly among larger companies. However, strategic risk is not always adequately addressed at an operational level – and there is little evidence yet that companies are effectively reversing the long-term trends that have made their supply chains more vulnerable.
Insights from McKinsey in March 2020 suggest that firms could try to cope with the consequences of covid-19 by continuously improving material supply stability, designing more resilience into future supply chains and building collaborative relationships with external partners. In the document below, Prof Ojala goes on to look at how various types of major disruptions affect the transport sector and illustrates that the type of disruption affects the type and severity of the impact. He explains that the impact of cover-19 is different for each transport mode and also differs between domestic and international transport/logistics services. The document finishes with indicative policy recommendations.
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Dr. Lauri Ojala
Professor of Logistics
Operations & Supply Chain Management
Turku School of Economics
FIN-20014 University of Turku
+358 50 502 70 31