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Reconfiguring to meet new circumstances in global supply chains

Companies are looking at lengthy supply chains with a critical eye, and nearshoring and reshoring are increasingly under discussion

A Chinese factory. In China the minimum wage is 85 cent an hour, whereas it is $15 in Australia.

A Chinese factory. In China the minimum wage is 85 cent an hour, whereas it is $15 in Australia.

 

The Covid-19 pandemic has put a severe strain on global supply chains. “The biggest thing really has been the workforce,” says Prof Donna Marshall of the UCD school of business. “If industries have had large numbers of employees affected by the virus or are completely shut down by governments that has naturally created problems. China is the factory of the world, for example, and 70 per cent of manufactured goods in the world are dependent on China to one extent or another.”

The impact has not been evenly spread, however. “Modern supply chains are global and complex,” says Marshall. “They are dependent on people, companies and countries thousands of miles away.

“Governments have not been as stringent with essential industries. Food, pharma and medical devices have kept going, and what they have been doing is amazing. Other industries have been finding it really difficult. The fashion industry’s supply chains came to an end as we know them. They have been completely changed inside and out.”

According to Trevor Cadden, companies were beginning to look at lengthy supply chains with a critical eye in any event, and nearshoring and reshoring are increasingly under discussion. Nearshoring, as the term suggests, means bringing supplies nearer to their end point of use, while reshoring is the practice much beloved of the Trump administration and sees suppliers being brought back to the purchasing companies’ home market.

“Companies have been looking at supply chains with increased interest,” says Cadden. “They have fears in relation to things like sweat shops in China, global trade uncertainty and Brexit. Supply chains are being reconfigured, and companies are looking at moving them to nearer the point of need. There is an opportunity for Irish SMEs to feed off that.”

Market needs

He says there are two types of supply chain. One which is highly reactive and responsive to market needs and can flex supply up and down at extremely short notice. The other is designed to cater for stable demand and delivering large quantities or product at speed but is not so flexible.

“The pharma sector has been changing a lot recently,” says Cadden. “There used to be a manufacture-to-stock focus. This has now moved to lean production systems and a just-in-time focus.

“I used to work for a company in the telecommunications industry which had a policy of stockpiling half a billion pounds worth of stock close to where its customers were located. This was fine until customer needs changed, and they were left with the stock.”

As a consequence, companies want to make-to-order in as much as they can.

“If you go to a sandwich bar you get hundreds of different sandwiches made to order instead of just three of four pre-made products,” he says. “The problem with that is that it can take longer to get product to the customer. There is a move to what is known as Le-agile. What they are doing is building stock to a certain standard level with a lean and agile supply chain. Dell Computer is a good example. It has a standard basic product which you can customise before purchase.”

Minimum wage

Marshall believes we will see more reshoring and nearshoring.

“We will definitely see some of this but it’s very difficult to change in a lot of cases. Just look at the numbers. In China the minimum wage is 85 cent an hour whereas it is $15 in Australia. In Bangladesh the minimum wage for garment workers is 36 cent an hour. Those numbers place them in a different league from the developed world. If labour is not a big part of the cost structure they can look at nearshoring and reshoring.”

“I am quite positive about the future,” she adds. “In a way we have been lucky in Ireland because of Brexit. Companies were already looking at diversifying their supply chains. The people and companies following the advice on Brexit will be able to withstand the Covid-19 crisis much better.”