The Pandemic Has Led to a Rethinking of Supply Chain Strategy
When COVID-19 began to spread from country to country it brought lockdowns that disrupted manufacturing and transportation, causing global supply chain problems on an unprecedented scale. This caused companies to take a serious look at their supply chain risks, but it hasn’t been entirely clear whether the pandemic actually led to significant supply chain changes.
A new study co-authored by Vinayak Deshpande, Mann Family Distinguished Professor of Operations at UNC Kenan-Flagler Business School, took a data-driven approach to find out. For the analysis, the authors used U.S. customs import data captured by the Panjiva dataset, which contains the bills of lading for all shipments received by U.S. ports between 2019 and 2021. To get at the larger trends, they controlled for confounding factors including firm size.
“This study is one of the first to aggregate data across all companies and all imports coming into the United States at the level of individual shipments,” said Deshpande. “This allowed us to see trends at the firm level.”
Supplier location became an important risk factor
It was thought that COVID-19 might reverse the globalization that had been the trend prior to the pandemic. However, the data showed that this wasn’t the case. Instead, the study found that the total volume of imports to the U.S. remained about the same.
Another surprise was that the total number of suppliers actually remained the same or dropped in some cases. Since a typical response to supply chain risk is to diversify the supply base, the researchers had expected to see an increase in the number of suppliers.
“The diversification didn’t actually happen at the supplier level,” said Deshpande. “But, we did see that companies moved away from risky countries or risky regions into what they perceive as less risky regions or less risky countries.”
In particular, there was a significant decrease in dependence on China. Although the shift away from China led to some increase in domestic production and in imports from Mexico and Canada, it turns out that Vietnam and India were big winners.
“Importing from Vietnam and India helps companies maintain the cost advantage of importing from Asia but with a lower risk than what China might represent,” said Deshpande. “Overall, our findings showed that the policies of the country in which the supplier is located is becoming an important driving force in how companies think about their supplier base.”
Companies leaned away from lean operations
The analysis also revealed another notable change – a move away from lean operations. Companies following this just-in-time philosophy don’t hold a lot of inventory and thus tend to receive small shipments more frequently. The study showed that this shipping pattern reversed during the pandemic, with companies receiving larger shipments with lower frequency.
Although some important big-picture trends emerged, the study also revealed key differences in how various industries view and respond to supply chain risks. For capital intensive industries such as semiconductors, change occurred at a slower pace than less capital-intensive industries like the apparel industry. Industries involving critical materials or items related to health and personal protective equipment also made supply chain changes more rapidly because risk is more important for these industries.
Practical ways to assess supply chain risk
Based on the study’s findings and previous research on how companies respond to supply chain risks and disruptions, the authors developed a four-step approach that managers can use when considering restructuring their supply chain. The steps include assessing risks, identifying options, evaluating options and developing a plan of action.
Deshpande says that risk assessment is the most important step in this process. “Our study shows that managers shouldn’t focus on supplier-level risk but should look at risk in a broader sense,” he said. “This includes examining the geopolitical conditions, which might be bigger drivers of risks than individual supplier level risk.”
He adds that once the risks have been examined, managers in certain industries may decide to rethink philosophies like lean operations, which may have benefits in terms of efficiency but may not be the best choice from a resilience perspective.
Deshpande says that the trends his team uncovered are likely just the tip of the iceberg. The study focused on the period during which companies were actively responding to the pandemic itself, and it’s too early to tell what longer term changes may emerge from the pandemic experience. “Global supply chain changes are hard to make, so what we are seeing is probably only the initial set of things that companies have set into motion,” he said. “If we were to look at supply chains 10 years from now, I believe that they will look very different than the way they look today.”
This article is part of our Grand Challenge series on business resilience.
