Resilient Value Chains in the Post-COVID-19 Era

Companies should rethink their strategies in order to avoid disasters produced by events such as the shortage of semiconductors and containers

The global crisis caused by the Covid-19 pandemic, together with other high-impact events such as those resulting from climate change, have prompted companies to rethink their strategies for global sourcing and risk mitigation. The semiconductor supply shortage at the start of 2021 is just one example of how industry disruptions can affect global value chains.

Over the past few decades, many companies with global operations have sought greater efficiencies by increasing their supply or outsourcing levels considerably. This has led to more fragmented and complex value chains that are highly dependent on  few suppliers, mainly located in Asia.

Moreover, lean and just-in-time manufacturing strategies, driven mainly by companies in the automotive sector but adopted in diverse industries, have resulted in a significant reduction in inventory levels of essential parts and components for manufacturing processes.

These strategies, while successful in reducing manufacturing and inventory holding costs, have left many companies in a zone of vulnerability to adverse events, such as the global semiconductor and microchip shortage crisis. This situation has harmed several industries: automotive, electronics and telecommunications, which currently face supply times for these vital components of more than 20 weeks. The resulting cascade effect has significantly impaired companies’ capacity to meet market demands.

Similarly, but perhaps with an even more extensive impact, the lack of containers since the middle of last year, mainly from Asia, has caused widespread disruption in many supply chains on a global scale. Even though supply companies have sufficient production capacity to meet their customers’ demand, the transportation system is simply unable to maintain the constant flow of goods required by production processes. Although this crisis has revealed the weakness of many supply chains, this is not necessarily due to structural problems in their design, but rather to their difficulty in coping with atypical situations that generate changes in operations, such as, in this case, the lack of drivers and haulers derived from the pandemic, making it difficult to move and return containers to their points of origin.

With this as a backdrop, many companies from different sectors are fighting a battle to gain greater visibility across their supply chain, using diversification strategies and reducing complexity through local sourcing, instead of being centralized in China and other countries in Asia. The pressure to have less extended chains also comes from the trends to decarbonize and reduce the environmental impact of companies’ operations, which also decrease dependence on global transport networks and their possible effects.

As a result of  shortages of many products and components, or extended sourcing times, companies are also beginning to take a long, hard look at just-in-time strategies, increasing their critical component inventory levels in different supply chain nodes. We have also seen in some industries, such as microchip production companies, a process of diversification through the relocation of manufacturing plants, although this requires more time and large-scale investments.

In addition, many companies are strongly inclined towards the use of technologies that provide greater flexibility and agility to respond to abrupt changes in demand or supply. In this way, they are striving to achieve more resilient operations that will allow them to navigate the complex and dynamic environment in which we currently live. Some of these technologies, such as automation by means of robots, augmented reality or 3D printing, together with supply chain segmentation and differentiation strategies, increase companies’ capacity to anticipate and react to contingencies. Organizations that succeed in joining this wave will have a greater chance of success if they maintain sustainable operations in the post-COVID-19 era.

The author is National Director of MBA Programs at EGADE Business School.

Article originally published in Forbes.

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