How the Pandemic Shaped the Future of Supply Chains

In Citrin Cooperman’s 2021 Manufacturing and Distribution Pulse Survey, 66% of companies reported having to change how their products were sourced due to the pandemic. With the shortages seen throughout the pandemic, starting with the supply shock in China as the global economy shut down, company supply chains everywhere were exposed to the dangers of focusing their production processes in a single country. For years, the drive to lower manufacturing costs caused companies to outsource production to China; however, after the pandemic caused shutdowns and continued rising political tensions, manufacturers are seeing the weaknesses caused by this strategy. Going forward, companies should consider working towards diversifying their supply chains to prevent production interruptions as seen during the pandemic.

Diversification of supply chains could help manufacturers in a variety of different ways. Whereas in the past, the supply chain and manufacturing were focused solely on the lowest cost for production, the future will be driven by optimization. With the large increases seen in shipping costs, moving to more regionalized supply chains will help companies become independent from single source overseas suppliers. This transition will help make supply chains more flexible and eliminate the issues that became prevalent during the pandemic.

Companies will have to evaluate how to make their supply chains more adaptable while also avoiding reducing their competitiveness. To start, companies need to determine the biggest risks to their supply chain process by looking at the number of vendors utilized for any aspect of the manufacturing process and the vendor locations. Companies will have to evaluate which vendors have the highest risk associated with them based on how many responsibilities the vendor has along the company’s supply chain, where the vendor is located, and what would happen if another natural disaster happened which hinders access to the vendor. Company management should keep in mind that there may seem to be diversification in the vendors; however, if they are all tied to one region, such as China, another natural disaster could cause the supply chain to come to a screeching halt.

Once the risk to the supply chains are identified, the next step is to determine the best geographical region and vendors within that to allow for the supply chain diversification while keeping costs low to enable competitive advantages. Factors that should be considered are: the lead time needed for supplies to be received from the vendor, the rising shipping costs if the vendor is not local, suppliers whose labor costs may be more advantageous, and if the vendor has capacity to make up for shortfalls from other vendors. On final consideration when dealing with international vendors is the political climate which is impacted by trade wars with China and the legislative push to bring manufacturing back to North America as seen in the United States-Mexico-Canada Agreement effective July 2020.

The pandemic showed that the current style of globalization, with supply chains relying on overseas supply, is no longer reliable and needs to evolve. By diversifying supply chains across regions, companies will be better suited to endure unforeseen dangers in the future and will be prepared to respond with minimal delay to their supply chains.