Supply chain resilience to remain critical beyond Covid-19
Everyone wants resilient supply chains. The idea that supply chains can withstand shocks and recover quickly is a key focus for both governments and corporations alike. With benefits also felt by households and consumers, few would argue against increasing supply chain resilience, especially in areas such as healthcare and national security. However, while the goal may be agreeable to all sides, the means to get there may not. When we consider the strategic approach of governments alongside that of corporate strategy, we mainly find competing rather than complementary objectives.
Complementary objectives do exist between public and private stakeholders
There are some areas where the objectives of governments and corporations align in relation to supply chain resilience. The most important of these is the issue of diversification. A long-held risk management strategy in financial markets, diversifying suppliers reduces the impact of singular events in any one market. Companies are already looking to diversify their suppliers; some are looking at ending single sourcing for their most critical inputs, for example. Similarly, efforts are being made to share best practices in lower tiers of supply chains which will particularly help small and medium enterprises increase their resilience. More generally, government efforts to invest in infrastructure and economy-wide productivity will naturally support the supply chain resilience experienced by the private sector.
Onshoring will not improve resilience; friendshoring will complicate matters further
With industrial policies now back in favour, governments are looking at onshoring as a way to manage supply chain risks. The Biden administration is developing a range of initiatives to support US production, such as tightening the rules around public procurement and incentivising the onshoring of manufacturing. As the Biden administration makes progress towards these goals, it has the potential to harm foreign producers in the US, which will likely lead to growing concern among US allies and trading partners. If the grievance is strong enough, retaliatory actions may be taken by these countries that will ultimately produce a more challenging business environment for US companies doing business overseas.
Onshoring does not align with company strategies. Rather than onshoring productions, many companies are looking at varying strategies of regionalising and diversifying their supply chains and finding a balance between resilience and efficiency. Onshoring production faces challenges in both respects; home markets are subject to similar risks as markets overseas and the costs of domestic production will harm efficiency.
Next is the issue of friendshoring. In an era of strategic competition - where the world’s major powers jostle over power and influence - supply chains may shift according to geopolitical structures. This is colloquially referred to as friendshoring, where supply chains move to friendly countries where there is less chance of being caught in a geopolitical dispute.
Geopolitics and potential friendshoring points to a growing issue for companies - too many objectives. Multinational companies have traditionally focused on developing supply chains based on the cost efficiencies of production and the opportunity to tap into new markets. Currently, they are trying to navigate the difficulties of managing supply chains in a global pandemic in a cost-effective manner, and they are also looking to the future and considering issues around the sustainability agenda. Having to then think about geopolitical realities in their potential trading markets adds a major headache to an already complicated outlook. It is little wonder that some are worried about the future of foreign direct investment with so many deterrents facing companies.
A new agenda is required to restore trust in global trade
Trust in global trade is vital if we want to maximise the resilience of supply chains. Supply chains that are increasingly onshored or shifted along geopolitical boundaries are neither efficient nor resilient. Rather than incentivising these shifts, either directly or indirectly, governments should work to rebuild trust in global trade and define a new agenda for progress towards this end.
A new agenda will have to grapple with many difficult questions. How does the international community allow sufficient policy space for governments to address domestic priorities in a way that minimises the potential for trade wars and retaliatory actions? How does the international community align the sustainability agenda with the goal of cost efficiency in supply chains? What global measures would help to avoid the geopolitical impact on supply chains? The answers to these questions, or at least an agreed approach to these issues, would be conducive to creating a more certain operating environment for companies. It would also go a long way towards enhancing the resilience of global supply chains.
Everyone wants resilient supply chains. They should also be sustainable and efficient. Not an easy task but one that needs to be tackled as soon as possible.