The ongoing impact of COVID-19 on global supply chains

The COVID-19 epidemic has altered the business climate for many businesses throughout the world, emphasizing the necessity of being able to respond, adapt, and establish crisis management procedures in order to weather unpredictable conditions. Because the severe restrictions and lockdowns generated numerous critical issues that required immediate response in the early days of the epidemic, many businesses have now begun to shift into “recovery mode” and have begun to plan for the long term. As businesses strive to improve their operations and company resilience, the necessity of supply chain resilience and risk management is becoming clearer than ever.

What have we seen happen?

Many businesses throughout the world rely heavily on manufacturing and supplies from China, Southeast Asia, and other low-cost countries. In recent years, wide global trends have compelled major firms to reconsider their supply chains, as well as their stability and dependability in the face of an uncertain future. This is not only in connection to COVID-19, but also to many other externalities and government activities throughout the globe that have begun to influence supply chains, such as the increasing danger of trade wars, nationalism and protectionist tendencies, concerns of sustainability, and human rights considerations.

The total impact of the COVID-19 epidemic and the subsequent emergency measures on worldwide trade are yet to be seen. However, it is clear that businesses have faced significant business and operational disruptions, which have included everything from mitigating the effects of reduced supply to managing disruptions to logistics suppliers, as well as challenges in meeting their own contractual obligations to customers. Baker McKenzie just released a webcast on shock-proofing supply chains that go over several of these challenges in depth.

While many organizations have been agile and ready to react to change, those that have not yet done so should prioritize examining their supply chains to identify where they may need to make adjustments or take steps to guard against future disruptions. Considerations should include reviewing contractual obligations, assessing force majeure clauses, tax and employment implications of changes, relocation costs, entry and visa issues for staff, exit options, and the option of quickly reversing changes if the situation stabilizes or if new developments necessitate rapid adaptation of the supply chain.

COVID-19 provided a one-of-a-kind opportunity to examine how these diverse systems and processes respond to acute severe stress and change. It has also highlighted the significance of investing in supply chain resilience in order to develop better long-term operations. As we move forward, it is critical to apply what we have learned from previous events to prepare for the future.

What can we expect to see?

Over the last few decades, the debate over improving supply chains has centered on cost efficiency and commercial best practices. However, as recent history has shown, future supply networks will need to start accounting for resilience and adaptation. Some firms began expecting this next development before the COVID-19 epidemic, but the crisis has revealed those flaws in the current supply chain, and many are considering what to do next. Such judgments must, of course, take into account not only supply-side trends but also the possibility that demand patterns will change in the future.– the key here is to have a holistic approach and ensure that many different perspectives are considered.

Trade wars, global politics, and national policies will influence the future of supply chain structures

The global supply chain has already begun to respond to US-China tensions, and we may anticipate the disruption created by COVID-19 to hasten this response. According to trade data, China lost worldwide export market share at a rapid pace in 2019, as firms relocated to other nations. Low-cost production has shifted mostly to Mexico and Vietnam. Together, the two nations have increased their market share in the consumer goods and technology, media, and telecommunications (TMT) sectors to 12 percent and 9 percent, respectively, by 2019, primarily at the cost of China. Vietnam’s apparel and smartphone exports increased, as did Mexico’s car components and computer exports.

There is no clear replacement for China. The country is responsible for 60% of world consumer goods exports and 41% of global TMT exports. However, we anticipate that firms will increasingly consider China +1 initiatives. Where other nations will gain from supply chain investments will be mainly determined by their own efforts to increase industrial capabilities as well as give appealing options for land, labor, and logistics. Simultaneously, continuing efforts to reach free trade agreements (FTAs) may have an influence on where and how firms seek to restructure their supply chains.

Investment in technology and considerations on sustainability in the supply chain will be key

When reviewing supply chains, technological advancements and sustainability should be taken into account. The COVID-19 epidemic has demonstrated the several methods in which businesses may continue to effectively interact and operate in a distant working environment, which many firms are expected to utilize in the future. Indeed, businesses with greater digital infrastructure performed better than those without during the COVID-19 epidemic.

Meanwhile, developments in artificial intelligence and other technologies, such as blockchain, may open up new avenues for supply chain innovation. Furthermore, because supply chains are arguably a mechanism through which businesses can have a positive impact on the world, those looking to change their supply chains should consider how to integrate human rights elements and practices such as labor rights, environmental protection, product sustainability, inclusive economic growth, and ethical business practices.