Supply Chains and the COVID-19 Crisis: Current Problems and Potential Future Trends

Supply chains have constituted one of the main consequences and dimensions of economic globalization. On the one hand, they constitute one of the demonstrations of the globalization of the production process. On the other hand, they constitute one of the mechanisms resorted to by producers and major companies to benefit from globalization through benefiting from the comparative advantages available to every country to produce a specific component/components within the framework of the production process of an end product. This has resulted in the reliance by the end product – at the level of every company – on a group of suppliers to supply a group of primary or intermediate products that contribute to the production of that product. The size of the supplier chain varies from one case to another. While in some cases the chain may depend on only one supplier, in other cases, this may reach tens of suppliers. Besides, those suppliers may be distributed over more than one country.

A number of facts and factors have contributed to the expansion and complexity of supply chains, mainly the transformation of a large proportion of goods and services into tradeable goods due to the development experienced in means of transport and logistical services, or what is known as trade services. China has managed to take over a significant proportion of supply chains due to several factors, mainly low-cost labour force and logistical services associated with the processes of production, supply and transport, etc.
The concentration of the COVID-19 crisis in China, during the period from December 2019 till February 2020, has resulted in the disruption of many of those chains. This has resulted in the disruption of production in a number of major companies, both inside and outside China. This has then resulted in questions being raised about the feasibility of relying on Chinese supply chains. However, with the further spread of the virus and its extension to Europe, the US and most other regions, the supply chain problems have gained a global rather than a Chinese nature. Thus, the question of the feasibility of reliance on Chinese supply chains has shifted to the discussion of the supply chain problem in general.
The COVID-19 crisis is not the first of its kind to affect the operation of supply chains. During the last decade, it was preceded by a group of crises, whether natural such as the Iceland volcano, the 2010 Japan earthquake and the subsequent tsunami and the floods in Thailand, or of an economic nature such as the decision by the Chinese government in 2011 to impose quota on its exports of rare earths (17 elements that contribute to some important industries such as mobile phones, car batteries, turbine blades and wireless guidance devices in weapons). This has led to an increase in the prices of those materials to record levels, particularly in view of China’s control of over 90 percent of the global production of those materials, in addition to the impact of the US-China trade war during 2018 and 2019 on the operation of those chains within China.
However, despite the importance of those crises, two remarks are worth noting: first, the crises did not have a wide geographical coverage since they were mostly limited to specific countries or regions. Thus, their impact was limited to the supply chains operating within those regions. On the other hand, neither of those crises was as severe and deep as the COVID-19 crisis. Those two factors did not drive the supply chains to seek to adapt to those crises. In contrast, the COVID-19 crisis was characterized by such severity and depth that it extended to all economic sectors and most, if not all, countries of the world, especially major economies in Asia, Europe and America, developed, emerging and developing alike. This has affected both demand and supply sides, in addition to the absence of a specific time prospect for the end of the crisis. Both this severity and geographical and sectoral coverage have revealed a number of shortcomings in the current structure of supply chains on the one hand, and have launched a wide discussion on the necessity of adaptation by this important phenomenon to this nontraditional pattern of crises.

Main problems of supply chains in light of the COVID-19 crisis

The COVID-19 crisis has revealed a number of shortcomings in supply chains. While some of those problems have been known before the current crisis, most companies have not attempted to solve them for different reasons. However, the severity of the current epidemic has rendered countering those problems extremely important.

1- Absence of adequate maps of the supply chain of every product

Due to the absence of severe crises of the type of the COVID-19 crisis, producers and major companies have not paid adequate attention to developing detailed maps of the supply chains that feed their production processes. Developing those maps seeks to provide three types of essential information: the first relates to building databases on the entire rings of the chain of suppliers associated with the product. Most companies and producers were satisfied with knowing the first ring of suppliers or the immediate frontline, while they have neglected the other successive rear rings. In other words, while producers were aware that they rely on a successive and interlinked chain of suppliers and that the said last immediate ring is only the penultimate ring in a successive process of supply chains , they overlooked the necessity of building complete databases of those suppliers, starting with the immediate ring and ending with the ring of special resource supply.

The second type of information lies in building databases of parallel or alternative suppliers who could be relied upon in case some problem is faced by any of the supply chain rings, including information on the comparative advantages of every supplier, prices, technical specifications of the product and the duration of supply. The third type relates to building a database on the geographical distribution of supply chains. Given the reliance on electronic communication, producers have not paid adequate attention to building a database on this pattern of distribution.
Thus, the exposure by one of the rings of the supply chain to a problem, or its disruption of supply for some reason, has led to the disruption of the operation of the rest of the chain rings and the inability of the subsequent rings to provide timely alternatives to those suppliers because of the absence of adequate databases on alternative suppliers and the pattern of their geographical distribution. A survey conducted by the company Resilinc in late January and early February 2020 on a sample of 300 companies affected by the disruption of supply chains due to the COVID-19 crisis has revealed that 70 percent of those companies are still in data collection and assessment mode, trying to identify which of their suppliers operate in the crisis-stricken regions and the locked-down regions of China until the time of carrying out the survey.
Several factors have contributed to the failure of building those maps during the pre-crisis stage. Some of those factors relate to the absence of severe crises of the type of COVID-19. This has led to the non-exposure by supply chains to crises that reveal the gravity and costs of the absence of such maps. Other factors relate to the high cost of developing such detailed maps since the process requires substantial financial and human resources. A third group relates to the concentration of a portion of this information in the hands of staff in procurement departments who were either unaware of the importance of this information and of developing those maps, or are unstable because of their mobility among different companies. Some companies have also referred to another important factor, namely the non-cooperation by immediate suppliers in providing sufficient information regarding their preceding supply rings for fear of disclosing the real costs of the product which might affect their real competitiveness. Lastly, an important factor could be referred to relating to the centrality of the cost variable in the decisions of producers while specifying supply chains. This has led to their reliance on relatively fixed suppliers and overlooking the development of a list of alternative suppliers in cases of crises due to the high cost of those suppliers. Focus on the cost factor has produced another problem, namely overreliance on Chinese supply chains. This has led to the development of the problem of geographical concentration of supply chains, as will be discussed below.

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