Over the past decade, supply chains have evolved to meet the needs of customers who are increasingly expecting cheaper goods, on-demand. This has led companies to pursue strategies like offshoring, outsourcing, and lean supply chains with minimal inventory to keep costs low and supply agile. However, with COVID-19, we’re seeing these strategies being tested like never before.
According to research by Dun & Bradstreet, at least five million companies around the world have Tier 1 or 2 suppliers in China. The measures that were first put into place to halt the spread of COVID-19 in China thus cascaded into unprecedented disruptions in the global supply chain. Businesses found themselves grappling with shortages of key inputs into their production lines, and ocean and air freight providers have cut services due to decreased demand. However, as the pandemic worsens outside of China, new supply challenges have emerged. And in this current crisis, supply chain interruptions can have deadly consequences as manufacturers like Drägerwerk race to produce enough ventilators for critically ill patients.
“Production has largely resumed in China while the situation is constantly evolving in other countries. The main disruption right now is managing challenges in the global supply chain where many countries are changing regulations to access frequently and quickly, while having regard to the health and safety of the workers involved. The uncertainty that is now looming over the global economy makes the approach to inventory and movement of goods between markets a cautious one,” says Ying Shin Lee, Managing Director of Knight Frank Shanghai. What can businesses do to manage the supply chain challenges brought by COVID-19? I spoke with David Irvine, Managing Director of Siecap Advisory, and we looked at some ways in which companies can redesign their supply chains to be resilient.
“In the short-term, companies are working toward supply chain recovery. But in the long run, organisations need to work toward resilience. A resilient supply chain is about having alternate strategies in place that not only allow you to fight battles now, but which give strategic advantage when things go wrong, that competitors don’t have.”
Create supply chain visibility
COVID-19 underscores the need for manufacturers to have visibility on how all parts of their supply chain function and to identify which parts are most at-risk. To do this, companies need to map out their supply chains. For example, if one of your inputs has no alternate supplier, you can work out a mitigation plan to address the risk through back-up suppliers and logistics solutions.
Build a risk-based view of your inventory
Some companies may increase inventory of raw materials or finished products as a strategic buffer to protect against prolonged production disruptions. “People often talk about inventory just as a cost on the balance sheet, but operational costs of holding and handling that inventory are probably far more challenging than the strategic capital costs,” according to Irvine. If companies cannot sell inventory due to global softening of demand, it will tie up working capital. Thus, companies need to consider risks—not just costs– in adopting an inventory strategy.
Minimise risk through diversification
The trade war had already seen manufacturers decoupling from Chinese suppliers in order to diversify their production base. Certain sectors, like pharmaceuticals, which rely heavily on raw material inputs from China, especially felt the strain when COVID-19 first hit China. However, now that other countries enter into a lock-down as China emerges from one, the question for companies is no longer, “do we diversify out of China?” but more about diversifying distribution out of any country as a supply base. But aside from diversifying production facilities into low-cost countries, companies may also choose to bring part of their production back to their home countries. In the BPO sector, there has been talk of on-shoring corporate critical functions, amidst growing protectionist rhetoric in the West, and with the current situation, the industrial sector may follow suit as another way to diversify production and to shorten supply chains for resilience.
Increased demand for automation
Increased demand for automation Chinese e-commerce giant, JD.com, successfully deployed autonomous vehicles to facilitate the delivery of medical and commercial cargo in quarantine zones in Hubei. In addition, the company’s investment in smart warehouses allowed it to resume operations fairly quickly after Chinese New Year when COVID-19 first accelerated in China, even fulfilling an uptick in orders since customers increased online shopping as a means to minimise human contact in stores. “One of the general demands for automation came from the benefits of health and safety requirements,” says Irvine. “Automation doesn’t take sick leave and won’t get the coronavirus, so in the long run, automation will come into play in the re-engineering of supply chains.”
Implications for industrial real estate
Until a black swan event happens, people don’t usually understand what the magnitude of certain risks can look like. Only in a post-COVID world will people be able to have a palpable understanding of what the full effects of a global pandemic on a hyper-connected global supply chain can be. Instead of only looking at the costs of industrial real estate, businesses will have a broader view of the risks involved with the location of their production facilities and their take-up of warehousing space in order to have more resilient supply chains. Likewise, we believe that investors of industrial real estate will become more cognizant about supply chain resilience as one of the key indicators of a tenant’s operational viability and underlying risk in the face of the next unpredictable global shock.
With a presence of 154 offices across 15 markets in Asia-Pacific, Knight Frank Asia-Pacific is well-positioned to advise companies on real estate strategy in the region during these uncertain times. If you’d like to have a confidential chat, e-mail email@example.com.