The pandemic has exposed the fragile nature of global supply chains after it triggered a widespread supply and demand shock, which caused a wave of economic decline in various countries. Products are scarce as people clamor, if not hoard, for resources. Companies struggle to work their way around the disruption by opting instead for feasible productions and attainable demands. As basic goods and services become harder to procure, the need for stable, crisis-proof solutions to address the frail state of supply chains is more imminent than ever.
Data from global supply chain management platform Tradeshift shows that the initial shock incurred from the pandemic will persist for a few months. China’s domestic and international trade saw a weekly drop of 56 percent beginning mid-February while a combined initial drop of 26 percent at the start of April, slowly dwindling to a 17-percent decline at the end of the month, was experienced by the United States, United Kingdom and Europe.
The World Economic Forum discusses two side effects of the global contraction on trade:
- Longer time to settle an invoice: Businesses took an average of 36.7 days to settle an invoice in 2019, compared to 36.8 days in 2018. In the first quarter of 2020, average payment terms have risen to 37.4 days.
- Lack of orders going through the supply chain: New orders are decreasing and invoices are dropping off—businesses are still receiving money from order prior to the lockdown but those resources are depleting. Average global weekly order volumes have dropped by 15.9 percent since March while invoices were cut back by 16.7 percent at the same time.
China’s reputation as the “factory of the world” permitted its trade activity to surge momentarily as factories reopened and lockdown restrictions eased. The problem, despite the resumption of production and rising return-to-work rate, is that consumers aren’t purchasing the products—which shows how much the domestic landscape has changed.
The vulnerability of global supply chains shows that inventory and single-sourcing models driven exclusively by cost control are inflexible and therefore pose more risk.
Some supply chains experience the bullwhip effect where a small increase in demand results in a massive movement in production. Most struggle to get a clear picture of the actual nature of the demand—failing to identify the root cause of sudden increases, and thus resort to major production schemes. Such a replenishment system only inflates the supply chain artificially in order to get a greater share of a scarce resource, which only causes inefficiencies and temporary sustenance. There are also those that calculate consumer needs based on store-level requirements, which don’t prepare the supply chain for a surge of demand.
Exports account for a fifth of China’s gross domestic product but now that many of its key trading partners (such as the US, whose own internal orders are close to flatlining) remain on lockdown, a standalone recovery would exhaust the majority of their resources.
The vulnerability of global supply chains shows that inventory and single-sourcing models driven exclusively by cost control are inflexible and therefore pose more risk. A possible solution would be for countries to diversify supply chains (instead of only relying on China) or establishing localized manufacturing systems. Trends such as automation and small batch production cost considerably less, urging some countries, such as Japan and Netherlands, to shift the supply chain to their region.
The likely transition to modernized supply chains, which rests on digitizing the buyer-supplier relationship after being-predominantly paper-based, will speed up the process of global trade. Modifying the obsolete blueprint of supply chains will construct resilient and adaptable trading systems. Artificial intelligence and other technologies will rapidly identify and recruit new suppliers, especially in cases such as a global pandemic, to provide swift alternatives and broaden more networks.
Can local supply chains thrive?
The sudden supply impediment caught most local businesses off-guard, relying heavily on pre-lockdown inventories and “safety stock.” Quarantine restrictions also made the movement of goods difficult, which impacted the cost of businesses that bank on perishable items. Lack of raw materials (whether local or overseas), travel constraints, and workforce shortages caused obstructions in product development, conversion, transportation, consumption and even product returns.
The Philippines rarely focuses on the study of supply chain management compared to developed countries that constructed their own curriculums that delve into the complexities of production.
Since supply chains are interdependent in nature, any segment disruption will affect its integrity as a whole. Each segment, such as producers, distributors and consumers, has different rates of recovery, especially that the current crisis limited capacity to adhere to their role in the supply chain. Demands have obviously (and inevitably) exceeded the country’s supply network, taking its toll on small and large businesses alike.
Data from the Philippine Statistics Authority showed that sales of Philippine-made products abroad dropped by 24.9 percent year-on-year to $4.53 billion, while imported goods slid by 26.2 percent to $6.91 billion last March. Since the shrink in imports outpaced the exports decline, the trade-in-goods steeped by 28.6 percent to $2.38 billion in the same period.
“The sharp contraction in March trade data reflects the early onset of COVID-19, primarily in its effect on the country’s major trade partner—China. The Philippines, being a part of the global supply chain, saw an abrupt pullback in export demand orders as China, Japan and South Korea were battling the virus. Imports for March dropped, mirroring the negative performance of government construction efforts as raw materials were unable to arrive on time as supply chains were disrupted,” says ING Bank Philippines senior economist Nicholas Antonio T. Mapa.
What the pandemic has revealed is that supply chains aren’t only supporting services to a business but are also key strategic facilitators of economies.
According to the National Economic and Development Authority, the total external trade in March contracted by 25.7 percent year-on-year to $11.44 billion, which is the lowest monthly value of exports and imports combined in two years. With this, the Development Budget Coordination Committee reduced the growth projections for merchandise exports to 0.5 percent, and for goods imports to three percent from four percent and eight percent, respectively. Budget Undersecretary Laura B. Pascua said that the revised but preliminary exports growth target for this year “was due to both the reduction of global growth as well as the high dependence of our exports on China.”
The Philippines rarely focuses on the study of supply chain management compared to developed countries that constructed their own curriculums that delve into the complexities of production. What the pandemic has revealed is that supply chains aren’t only supporting services to a business but are also key strategic facilitators of economies. The unprecedented interruption in the flow of goods disclosed how countries are almost paralyzed without the conventional supply chain.
Increased production and inventory capacity as well as the repositioning of facilities into various regions are ways to better modify supply chains. This wake-up call to improve supply chain resiliency and flexibility permits the revisiting of present business processes to adapt to the new standards of the economy. Mapping out inventories to gain visibility and secure new markets will solidify the trade network’s responsiveness to change, especially in terms of consumer spending, and hopefully lessen, if not eliminate, the dependence on foreign entities when it comes to operating local supply chains.