Good supply chain needed for economic recovery from Covid-19 impact
08 Apr 2020
Sectors hit hardest by the COVID-19 pandemic are likely to see the strongest recovery as pent-up demand is released and production ramps up, but this is provided the supply chain is fixed, according to a report by Baker McKenzie and Oxford Economics.
These sectors include motor vehicles and parts, electronics, textiles, headline manufacturing, and aerospace and other transport equipment.
“After a dramatic decline in the first half (H1) of 2020, all five sectors will experience a recovery in the second half of the year,” said the report titled “COVID-19: Supply Chain Resilience Holds Key to Recovery”.
It said that while electronics may take more time to rebound, automotive and textiles are expected to see a positive percentage point difference from fourth quarter 2019 by H1 2021.
“The key factor governing how quickly these manufacturing sectors recover will be ability of it to re-mobilise complex multi-country supply chains, which is turn depends on their supply chain mapping and risk management,” the report said.
Before this pandemic, supply-chain risk management principles often only applied to top-tier suppliers, leaving firms blindsided and vulnerable to shocks affecting their “invisible” lower-tier supplier, it said.
The lower-tier suppliers are, however, critically important to the overall supply-chain hierarchy. The report said disruptions at these levels can quickly cause disturbances throughout the chain.
Some inputs may necessarily be more critical to the production process than others, in which case delays to certain components could lead to much larger overall losses in production than an initial assessment of vulnerability suggests, it explained.
“This is particularly important for higher-value manufacturing process with longer supply chains. In a worst- case scenario, the absence of a key part may force the shutdown of a whole production line, magnifying the global impacts,” it said.
As an example, it cited the absence of a key Chinese- produced part, which has led to temporary automotive plant closures in Japan and South Korea.
“Where possible, diversified supply chains across companies and geographies greatly reduce exposure and if firms are tied to single suppliers, risks from supply-chain disruptions should be carefully measured and contingency plans considered,” the report said.
It noted that some companies, which had already built diversity and flexibility into their supply chains, quickly shifted some sourcing out of China in January and early February but returned there in recent weeks – a trend which is ongoing.
Debra A. Dandeneau, Baker McKenzie global chair of restructuring and insolvency, emphasised that “the key gating question is whether a particular company wants to help its supplier resolve the supplier’s short- or long-term problems or whether it wants to look for alternative sources of supply.”
She shared that some companies may have to support their supplier at least for the short term, but it is critical to understand the source of the distress faced by the supplier.
Other suppliers may begin, or be placed into, some kind of formal restructuring or insolvency proceeding, which is likely to add delay to operations. Knowing how the law will work in each possible jurisdiction will help companies develop an advance strategy for dealing with that situation.
“In general, companies should closely examine their credit facilities, understand the conditions of making any draws, and determine whether to build a cash reserve. These internal evaluations are as important as understanding how their suppliers are being affected,” she added.
Companies also should consider how any potential supply chain disruption may affect their operations and financial results, the report suggested.
“Ultimately, when distress hits, it is good to remember that cash is king. Businesses should determine if they have sufficient sources of liquidity to execute various supply chain strategies and to weather the effects of potential disruption to their business,” said the report.
Going forward, digitalisation of supply chain is a way that companies can begin to strategise and achieve business resilience against supply chain disruption.
In this context, it said, big data analytics can assist firms in streamlining their supplier selection process, cloud-computing is increasingly being used to facilitate and manage supplier relationships, and logistics and shipping processes can be greatly enhanced through automation and the Internet of things (IoT).
The report said COVID-19 has also put a renewed urgency behind automation and the use of robotics to mitigate against the disruptive impact on supply chains through the restrictions of the movement of people.
Some Chinese production already has a head start — operations in Cadillac’s Shanghai plant has around 400 robots and two fully automated production lines that do welding and painting.
Baker McKenzie technology, communications and commercial partner (Sydney) Anne Petterd noted that prior to COVID-19 developing, many regulators were reviewing how they permitted the rollout of 5G technology.
Regulatory developments were perhaps not proceeding as quickly as businesses keen on using 5G technology might like, she said. Delay factors included evaluation of anticipated use, competition and radio communications regulatory issues.
“The experience of COVID-19 may accelerate providing regulatory certainty on 5G — for example, so that IoT-enabled devices for remote monitoring can be more quickly deployed.
“Enhance supply-chain management and adoption of digitalisation has never been more important. Companies with well-considered supply-chain risk management processes will be better-placed to identify the impact of disruptive events on their supply-chain and product-offering, providing them with an opportunity to assess how to best respond in tough circumstances,” she added.