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Impact of COVID-19 and Climate Change on Supply Chains

When a high-rise building is made, the architects design it to withstand everything from tornadoes and winds to earthquakes and fires. But a very few MNCs have applied the same kind of pre-emptive stress-testing to their supply and value chains. Manufacturers and logistics service providers have built intricate production and delivery networks to deliver efficiency but still have a little margin for error. The COVID-19 pandemic has exposed just how lengthy, fragile, and complex supply chains can be — and their role in the continued smooth functioning of our society.

Over the last few years, global supply chains have evolved, but some aspects still leave them exposed to shocks. Some industries, including technology and communication, have grown two to three times more. About 80 percent of global trade now flows through countries with troubled political-stability, as measured by the World Bank. More global production and trade happens in areas that are vulnerable to climate change. Now as the world increasingly becomes interconnected, when disaster strikes in one region, the flow of goods, people, money, and data quickly become affected across far and wide.

Even before the pandemic struck, companies were faced with losses from frequent supply-chain bottlenecks and shutdowns. Those costs are no longer “unforeseeable”. Manufacturers in some industries can expect unexpected events to wash away the majority of a year’s profits — and that’s just the baseline, accounting for probabilities like major storms and shipping challenges. Major global events, such as the pandemic, can be far more damaging for companies and societies at large.

With the world witnessing a second major disruption in 12 years, a redesign and realignment of supply chains are in order. Building a more resilient supply chain is the need of the hour and will require action by both CEOs and policymakers.

With the growing awareness of risk, some companies are restructuring and regionalizing their supply chains — at least where there’s a solid business case to be made. Governments across the world are taking action to boost the domestic production of goods that are essential to the country’s competitiveness, realigning industries like never before. It is estimated, a quarter of global goods exports, worth about $4.5 trillion annually, are going to shift to different countries over the next five years.

But where does that leave the remaining three-quarters or more of exports? The major part of production and exports are going to stay where they are at present. On the bright side, companies have other strategies available for hedging against future disruptions. Large companies have very little visibility beyond the suppliers they deal with directly, but they need to look at and understand vulnerabilities in the deeper tiers of their networks. Another strategy could be engaging redundant suppliers for critical inputs, simplify product complexity for more flexible manufacturing, and have more inventory and cash, as a starting point.

Most of this is well-established conventional and conservative wisdom. So why hasn’t this translated into action for most companies? Corporate short-term vision is one reason. Most organizations are unwilling to bear the costs of preparing for future hypothetical scenarios. But today, technology offers opportunities to be more resilient and productive. In a world that is becoming increasingly volatile, preparedness against disruptions can pay off quickly and save even more.

CEOs and industry leaders are fast realizing this new reality. Supply-chain operations were rarely a priority; now are at the top of their agenda.

The empty supermarket shelves and shortages of medical supplies during the COVID-19 pandemic have emphasized the fact that supply-chain stability is not just a business issue. It is about securing the interests of society. Policymakers have a critical role to play and need to actively reduce the likelihood and severity of supply chain disruptions. Governments have, at their discretion, the means to manage the risk that individual companies do not and cannot, such as mitigating climate risks like flooding by building infrastructure, investing in warning capabilities, and maintaining modern emergency management capabilities. Countries that aim to become the next trade hubs, need to urgently build robust supply chains and make long-term commitments to incorporating advanced manufacturing technologies, training, and reskilling workforce that aligns with industry needs and building digital and physical infrastructure.

For nearly two decades, global supply chains have diminished the boundaries of distance and efficiency. But this pandemic has been a wake-up call that some aspects of our value chains are stretched too thin — and it’s time to build more resilience into the system.

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