This globalisation of production systems has allowed for better quality products, greater consumer choice, and higher productivity and cost-efficiencies. However, as corporations have further relied on decentralised scouring and just-in-time manufacturing, chasing efficiency gains, GVCs have become increasingly vulnerable to systemic disruptions, including environmental, geopolitical, and economic shocks. Such supply chain disruptions are especially costly, as they create what is known as the “domino effect”, in which the effects of risk spread along the value adding processes along the supply chain, affecting more than one chain link and hindering their performance temporarily. In recent years, we have lived through several instances of the domino effect, with Japan’s Kumamoto earthquake in 2016 being one of the most notable examples, since the resultant shortfall in the supply of parts led to a 16% drop in revenue and a 66% decrease in net income of global electronics manufacturers.
The above example alone demonstrates how disruptions on a local scale affect the wider global economy. However, today we are witnessing a truly global supply chain disruption, whose effects are not just immediate, but will likely continue to linger throughout the remaining months of 2020. As per the data from the global platform for supply chain management, Tradeshift, domestic and international trade transactions in China saw a week-on-week drop of 56% beginning mid-February. When put in perspective, this drop is especially severe, as neither the SARS outbreak nor the 2008/9 financial crisis were associated with such sharp declines in trade . Both the US, and Europe followed suit, with a combined initial drop of 26% in the beginning of April, and a continuing decline of 17% in late April. Overall, trade has flatlined in every region affected by the lockdown.
On a micro level, findings from the most recent survey by the Institute For Supply Chain Management reveal that 75% of the surveyed companies reported supply chain disruptions in one form or the other due to coronavirus-related transportation restrictions, and the figure is expected to rise further over the final weeks of spring.
As we begin to adjust to the new reality, many industry analysts and incumbents point out that return to the lowest-cost supply and minimal inventory level will no longer be an option in the post-COVID era. Although this approach proved to be effective during the prolonged periods of stability, it exposes companies to increased systemic risk. Hence, many organisations will use the lessons learned from this experience to shift their priorities from cost to resilience. Companies that invest in supply chain resilience gain a distinctive competitive edge over their rivals, as their product development cycles are reduced by 40%-60%, output capacity is expended by 15%-25%, and ultimately revenue growth accelerates due to increased supply chain agility.