Covid-19: the end of global sourcing?

Covid-19: the end of global sourcing?

Akis Bimpizas, Management School, University of Sheffield, UK ([email protected])
Prof. Andrea Genovese, Management School, University of Sheffield, UK ([email protected])

Disrupting supply chains, Covid-19 has pointed out the obvious: the supposed capitalist rationality produces short-term profits, but decreases transparency and visibility, while increasing risk and vulnerability.

The coronavirus pandemic has created an unprecedented global crisis which has revealed several weaknesses in the prevalent economic system. Severely affecting both supply and demand, the current crisis uncovered the incoherent foundations of the contemporary capitalist prescriptions for economic growth, global sourcing. Oriented towards globalisation of the markets and maximalist free-trade policy, it structured world’s production around the concept of offshoring, triggering the geographic dispersion of business processes around the globe.

Merely geared towards efficiency, cost-reduction and economies of scale, this development strategy gave rise to increasingly multi-tier global supply chain structures of high complexity and dependence among partners. The latter, along with the fast-changing and time-based competitive environment in which organisations are operating, contributed to a higher level of supply chain vulnerability and exposure to unanticipated disruptions.

Myopic visibility

Supply chain visibility pertains to the extent to which actors within a supply chain have access to or share with each other timely information critical and useful to their operations. Examples of such information include financial records, inventory levels, production forecasts, shortages, confidential information regarding new products and agreements with other companies. The level of visibility is determined by the information’s degree of accuracy, credibility, promptness, relevance, and format. Embedded in the notion of visibility is also the knowledge regarding the topology of the supply network; its structure, the number of nodes, tiers, members within each tier, their inter-firm relationship and relative distance.

Enhanced structural visibility is critical towards timely identifying and successively mitigating the propagation effect of a sub-tier disruption throughout the supply chain. Nonetheless, the vast majority of companies have limited or no visibility over their extended supply network. Focus is commonly placed only on what firms typically designate as strategic suppliers; first-tier visible suppliers that are considered critical due to their high direct interdependence and profit impact products or technologies they supply. In contrast, the importance of nexus suppliers is often overlooked; they have no direct relationship to the focal buying firm and could be located in any tier of the network. Despite not being visible, such suppliers have an indirect, yet critical impact on the supply chain performance due to their locus in networks. For instance, they can be part of the extended industrial network of a supplier or have a monopolistic significance as many suppliers depend on them for their products. Consequently, disruptions that occur at the nexus supplier level can cascade throughout the network, paralysing partially, if not completely, the operations of the entire supply chain.

This became apparent at the beginning of the pandemic, when many Western companies were forced to cut their production due to the shortage of components coming from Asia. For instance, the British excavator manufacturer JCB had to cut production output of its Staffordshire-based plant as the company sources hundreds of components from China (including electronic parts and castings). In turn, JCB suppliers had problems with their own nexus suppliers; this crippled the entire production network. Apple’s supply chain was badly disrupted too, as many of the companies supplying Foxconn (the Chinese manufacturer which actually produces the iPhone) were badly impacted. In the food supply chain, enormous quantities of stock (mainly coming from global supply chains) held by wholesalers were at risk, due to the closure of the hospitality sector following the lockdown, with charities and food banks stepping in to avoid huge amount of products being wasted.

Blurred traceability

In the era of global supply chains, a buyer-supplier relationship does not represent just a dyad of two individual entities, but a progressively growing structure of each one’s extended supplier and customer network. Successively, interfirm relationships constitute an interdependent part of a wider network of relationships where changes at any level can have a propagation effect across the entire supply chain.

The complexity of supply networks stems from the different tiers of participants, which in turn expands the variety of exchange relationships. This complexity is further increased by the difference within tiers with respect to size, location, financial and technological status, as well as by the level of bargaining power. Traceability refers to the ability to trace and verify the path of materials as well as the chronology of occurred events upstream the supply chain. Complete information over these aspects is vital not only to verify compliance with current legislation framework and product specifications but also to trace the causes of failures, hence leading to the development of resilience to future disruptions. However, the long, multi-tier structure of contemporary supply chains often leads to opaque exchange relationships, thus increasing shared information’s susceptibility to distortion, loss and ambiguity. In addition, the daedalic supplier network lays the ground for opportunistic behaviours, such as counterfeiting, labour misconduct, sub-standardisation or even diversion of goods and financial resources to unintended beneficiaries.

What happens next?

Since the severe supply chain disruption in the aftermath of the Covid-19 pandemic, the risks of production offshoring are brought at the forefront of corporate debate. Organisations are increasingly oriented towards the full or partly relocation of their manufacturing processes back to their home locations. The prime last decades profit argument for relocating manufacturing activities to low-wage countries, is countered by the increased offshore cost of labour, logistics and higher coordination efforts. Inadequate quality and flexibility in terms of shorter lead times, effective response to demand volatility and supply chain resilience are driving backshoring from Asian countries. At the same time, while near-shore locations in Europe seem to provide the required flexibility, the unemployed production capacity at the home base, has created a motive for backshoring within Europe.

The progress that technology has experienced in the last decade is more than sufficient to enhance both supply chain visibility and transparency. Software and information companies offer specialised software for supply chain mapping. In addition, track-and-trace technology, such as RFID and IoT applications are being used to flawlessly monitor shipments all around the world ensuring effective risk management in logistics networks. At the same time, despite the debate surrounding blockchain technology, it has the potential to achieve real transparency across supply chains; provided all partners are comfortable with open access to the public.

It is evident that the inherent long, geographical fragmented multi-tier network structure of contemporary supply chains, makes both visibility and transparency difficult to obtain. Covid-19 pandemic crisis exposed not only the low level of visibility which increases supply chains susceptibility to disruptions but also the imperialist standpoint upon which these were designed. The concept of global sourcing was built on the principle of maximising profits through exploiting cheap labour and resources. Even if the organisation has full visibility over its supply chain the question that will always follow is how transparent they want to be. This pandemic crisis could pose a great opportunity to redesign global supply chains using visibility as a boundary and redefining transparency on the basis of a relationship with wider society.