How are companies managing supply chains through Covid?

Next time you pick up your smartphone you should pause to consider how it was put together. The materials for its battery were likely sourced in Africa and South America, the microchips were probably manufactured in a few different factories in Asia, the screen somewhere else and the box in Europe. Getting all these different pieces to the right place at the right time is the stock in trade of the modern supply chain manager but the job has been made a lot more difficult of late by geopolitical trade tensions and the Covid-19 pandemic.

Responding to these challenges is easier said than done. In a study carried out last year by a team led by Dr Trevor Cadden, senior lecturer in operations management at Ulster University, 90 per cent of companies knew the identity of their immediate suppliers but did not know details beyond that. “They knew A but not B,” says Cadden. “They didn’t know if the downstream supplier had a very high carbon footprint or was a sweatshop in China. They might think they are sourcing from a supplier in Donegal but don’t know if that supplier is sourcing the products from the UK. They don’t know how to map their supply chain.”

For those companies that do know where their supplies are coming from the response is varied. “Some companies are saying let’s change suppliers to other countries where practical,” says Cadden. “Others are vertically integrating by buying other companies to secure their supply chains. Others still are looking at different sourcing strategies but lots of them are tied into two or three year contracts so that makes things difficult.”

He sees some irony in the pursuit of diversification and integration strategies: “That is going against all the thinking about best-in-class strategies which put the emphasis on longer-term relationships, collaboration, trust and information sharing. This is moving away from that and it might be a big risk. It might come at higher cost as well.”

Even the best prepared companies have had their supply chains hit by Covid-19, according to associate professor at University College Dublin’s school of business, Eamonn Ambrose. “Covid-19 has exposed an awful lot of people, including those who had realised their supply chains were a bit too lean and had put contingencies in place,” he says. “It was such an extreme event, if you weren’t exposed you were just lucky.”

Mitigation strategies

He says companies have two broad options when it comes to response: “Contingency planning is what you are going to do if something happens. Mitigation strategies, such as shortening supply lines or bringing work back in-house, all cost money, however. Do I spend more or plan ahead to respond quickly? That’s the question. You don’t have to be the fastest runner in the world, just faster than the other guy.”

The problem is that companies have to be aware of what the other guy is doing. He points out that companies are under pressure from shareholders and others to perform in the near term. “Someone else in the market will stick with the cheapest and leanest supply chains,” he says. “They will outperform you in the short term.”

That cost issue will ultimately dictate the response and the shape of supply chains, says chief executive of Chartered Institute of Logistics and Transport Ireland, Mick Curran. “There is no way around the supply chains we have now unless you want to go back to an agrarian economy. It’s what they mean when they talk about going back and exploding the bill of materials. If I bring it nearer, how much will it cost? If I build lots of warehouses for extra stock, how much will that cost? You have to look at all those things first.”

PerformanSC chief executive Lorcan Sheehan believes the global nature of supply chains is here to stay. “The phrase we use is that we are in an anywhere world,” he says. “You can design a product anywhere, you can produce it anywhere, you can ship it anywhere, you can get it to customers anywhere. Supply chains are moving all the time. Companies are always looking at production costs, shipping costs and so on. They are in a constant state of re-evaluation in any case. The trade tensions in 2018 and 2019 were a bit artificial anyway. If costs went up in one location because there was a new 15 per cent duty on a product, they might look at another location. That may have moved some activity from China but it didn’t move it to [the] US. They usually went to other low-cost countries like Vietnam or Mexico.”

People are thinking about how to make supply chains more capable of withstanding disruption in the wake of Covid-19, however. “There has been talk of increased production in certain regions but we are not going to see a huge influx of manufacturing to Ireland. It’s in the nature of supply chains to continue to shift. If you put a rock in a stream the water will find its way around it, supply chains are the same.”