COVID-19 and Supply Chains: Where Are We Today?
The global economy has faced a series of extreme shocks over recent years, ranging from the COVID-19 pandemic to the U.S.-China trade war and Russia’s invasion of Ukraine. These dramatic changes have had far-reaching effects on globalisation, leading to a fundamental reversal of multilateral trade openness and the disruption of the status quo in global supply chains. Traditionally, the tradeoff in global supply chains is cost efficiency (such as in China) and risk concentration. Increasingly, companies and governments are calling into question the sourcing strategies that have dominated supply-chain management for decades.
After the trade war and COVID, global supply chain risk, especially geopolitical risk, has become a recognized issue. New trends such as geo-economic regionalisation of supply chains, sourcing consolidation back home or among close trading partners, and facility establishments clustered around the final end-user market, have begun to emerge, as globalised manufacturing comes under intense pressure and supply chain risk – especially tail risk from unforeseen events – becomes increasingly recognised as an issue.
Traditionally, supply chain globalisation has offered firms the advantage of cost savings, and access to materials or production capabilities that may not be available domestically. However, the COVID-19 pandemic and U.S.-China Trade War have highlighted the vulnerability of global supply chains and how they expose firms to operational risk and potentially unfavourable economic or political developments in countries where their partner firms are located. As a result, the restructuring of global supply chains has been taking place across industries and geographies, with firms considering multiple trade-offs, incentives, and constraints.
So how should firms adapt their supply chains to maximise returns, minimise risk and improve resilience in the face of sudden or long-term interruptions? What trends do they need to be aware of as they build their networks in the new global economic order that is emerging? Moreover, what will the supply chains of the future look like? In this CUHK Business School Research Whitepaper, there includes a comprehensive review on a raft of studies that provide some early answers to these questions and may help to guide businesses through the turmoil and unpredictability that have characterised global markets following the pandemic.
An initial hint is provided by a recent study, The Bullwhip Effect in Supply Networks, which challenges the traditional wisdom that supply chains are linear in nature and demand shocks are amplified upstream along the chain. The study demonstrated that today’s companies operate as part of a complex supply network, with each player having multiple customers and suppliers. Firms at the higher levels of the supply chain network (where raw materials are typically procured) do not tend to feel the “bullwhip”, or an amplification of the fluctuation in demand, from their individual downstream customers as they essentially serve a portfolio of networked firms.
It is also found that suppliers who actively manage their customer base go on to enjoy a notable reduction in demand variability, suggesting that firms could mitigate the bullwhip effect through their choice of customers. Global supply networks involve complex webs of links between different sectors, industries, and countries, in which a company may have multiple supply relationships and simultaneously operate at higher and lower levels of the network.
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INTRODUCTION – Managing Supply Chains in the Post-pandemic New Normal