But the extent of pandemic-related shortages across vast ranges of goods now challenges whether these benefits are worth the tradeoff if the result is a significant lack of preparation for future disruption. The goal of the mapping process should be to categorize suppliers as low-, medium-, or high-risk. Start by mapping the full extent of your supply network to identify both direct and indirect sources. The only sector in which the race to adopt advanced analytics techniques shows signs of slowing down is in advanced electronics and high tech, where their adoption is already very high. In a time of crisis, understanding current and future logistics capacity by modeand their associated trade-offswill be even more essential than usual, as will prioritizing logistics needs in required capacity and time sensitivity of product delivery. Instead, manufacturers wrung a bit more out of their existing processes. The U.S.-China trade war and the supply and demand shocks brought on by the Covid-19 crisis are forcing manufacturers everywhere to reassess their supply chains. How coronavirus will affect the global supply chain. Box 1. Supply-chain leaders should analyze the root causes of suppliers nonessential purchases, mitigating them through adherence to consumption-based stock and manufacturing models and through negotiations of supplier contracts to seek more favorable terms. These ratios measure how many days of current sales that businesses and retailers could support out of existing inventories. Talent gaps are wider than ever, end-to-end transparency remains elusive, and progress toward more localized, flexible supply-chain structures has been slower than anticipated. Several years ago I spent a week at a new Chinese factory of a major American industrial-equipment company. Finally, as COVID-19 affects food and agricultural supply in complex ways, the retail sector should also consider the resilience of its supply chain where needed, notably by relying on more diversified sources of goods, by improving inventory management and by leveraging data analytics to improve forecasts on sales and supply chain tensions. 900 University Ave. Ensure dynamic monitoring of forecasts in order to react quickly to inaccuracies. So far, the supply chain in which Americans get most of their goods is holding up well, he said, with consumers able to get most products. Businesses should question whether demand signals they are receiving from their immediate customers, both short and medium term, are realistic and reflect underlying uncertainties in the forecast. First, the supply shocks. The coronavirus (COVID-19) pandemic and its associated economic impacts have implications for agriculture, food, and rural America. Nor did many sell commercial toilet paper to households. They cant and shouldnt totally back away from globalization; doing so will leave a void that otherscompanies that dont abandon globalizationwill gladly and quickly fill. To plan on how to use available capacity, the S&OP process should determine which products offer the highest strategic value, considering the importance to health and human safety and the earnings potential, both today and during the future recovery. Chemicals and commodity players made the smallest overall changes to their supply-chain footprints during the past year. Amazon has increased investments in Amazon Logistics, expanding its distribution warehouse center footprint and growing its fleet of airplanes, trucks and last-mile carrier vans to deliver on the surge in e-commerce sales and reduce reliance on third-party carriers like UPS, FedEx and USPS. To make their supply chains more manageable, many retailers have been reducing product variety. Lockdowns, shelter-in-place orders, and travel restrictions were disrupting activity in every part of the economy. While these problems are most acute in semiconductors, they are found in other parts of the auto supply chain as well. Thoroughly map your supply chain to uncover risks. Domestic Supply Chains. The typical focus is naturally short term. Estimating a medtech companys degree of connectiveness helped it expand its supplier base by 600 percent, while an industrial-tools maker identified request-for-qualifications-ready suppliers for highly complex parts that it had been previously unable to source. In the face of new challenges, finishing the job is even more urgent. Shortages, e.g., lack of hand sanitizer and paper products, which comes down to manufacturing constraints. Such changes take time. .chakra .wef-facbof{display:inline;}@media screen and (min-width:56.5rem){.chakra .wef-facbof{display:block;}}You can unsubscribe at any time using the link in our emails. In the past, many industries have been surprised by strong demand and caught with too little inventory of specific goods. The COVID-19 pandemic has caused considerable damage to various industries worldwide. These are essential for all companies developing DNA- or mRNA-based Covid-19 vaccines and DNA-based drug therapies, but many of the key precursor materials come from South Korea and China. Some of these differences among sectors can be attributed to the structural characteristics of the industries involved: for example, chemicals and metals are asset-intensive sectors with large, expensive production sites. We study the impact of such shocks on scenarios where preparedness investments have been made. How durable is this system, how long a period of time can it continue to operate without a major disruption? Toilet paper is bulky to store, and demand is ordinarily very stable, which led retailers to keep only two to three weeks of sales in inventory and manufacturers to operate their plants at 92-percent capacity. While automotive and commodity players were reluctant to commit to additional investments amid the uncertainty of early 2020, for example, 100 percent of the respondents in those sectors eventually did so (Exhibit 4). COVID-19 has had a major impact on the beverage industry, seeing everything from products flying off shelves, supply chain complications and changes in consumer behavior. Broadly, respondents to our survey believe they managed that transition well, with 58 percent reporting good supply-chain-planning performance over the past year. For example, Exhibit 3 shows how a digitally enabled clustering of potential suppliers shows the capabilities they have in common. Yet despite that progress, other recent events have shown that supply chains remain vulnerable to shocks and disruptions, with many sectors currently wrestling to overcome supply-side shortages and logistics-capacity constraints. These resilient responses from manufacturers helped to shorten the stressful period of empty store shelves. Almost 90 percent of respondents told us that they expect to pursue some degree of regionalization during the next three years. Trade wars, global politics and national policies will influence the future of supply chain structures. One of the big challenges is to keep the workforce healthy. Assessment of the COVID-19 Supply Chain System - NOW AVAILABLE. What is the World Economic Forum doing to manage emerging risks from COVID-19? As Prof. Sheffi explains, this is not just a an issue of disruption in supply. Construction is the only sector in which respondents say they are less likely to invest in digital supply chain technologies in the coming years. Companies need to make their networks more resilient. Integrate market intelligence into product-specific demand-forecasting models. The majority of the LMI metrics were in the range of 40s, 50s and 60s, Rogers said, noting it's the first time since the onset of the pandemic that the indices haven't been in the 70s or 80s . Between May 2020 and May 2021, prices of commodities tracked within the Producer Price Index rose by 19 percent, the largest year-over-year increase since 1974, in part reflecting base effects. In the latest U.S. Census Small Business Pulse survey, held from May 31 to June 6, 36 percent of small businesses reported delays with domestic suppliers, with delays concentrated in manufacturing, construction, and trade sectors, as shown in Figure 2. Even with the support of government incentives, it took 20 years for the country to build a local base capable of supplying the vast majority of electronic components, auto parts, chemicals, and drug ingredients needed for domestic manufacturing. Each time, the weather normalized, harvests improved, and prices fell back towards their previous levels. When the Covid-19 pandemic subsides, the world is going to look markedly different. Others have been hit with a supply shock due to a crop failure or a natural disaster which took key factories temporarily offline, such as after the 2011 earthquake in Japan. Restarting the economy after a pandemic and a recession has not been and will not be simple. Rationing, e.g., many retailers respond to shortages by rationing certain items. North America might be served by shifting labor-intensive work from China to Mexico and Central America. Next CEA Post: The Employment Situation in May, https://www.whitehouse.gov/cea/written-materials/2021/06/17/why-the-pandemic-has-disrupted-supply-chains/?utm_source=link, Office of the United States Trade Representative, new home sales to their highest level in 14 years, auto sales to their highest level in 15 years, Between May 2020 and May 2021, prices of commodities tracked within the Producer Price Index rose by. The current automotive industry spends around $40 billion on chips per year. Others invested in their distribution systems, so that they could anticipate and respond more quickly to local shortages. Create a free account and access your personalized content collection with our latest publications and analyses. And revisit your product strategies: Offering consumers more choices isnt always better. It runs counter to the popular practice of just-in-time replenishment and lean inventories. Figure 1 shows that both the economy-wide and retail-sector inventory-to-sales ratios hit record lows in March. MIT Professor Yossi Sheffi on some of the pending supply chain impacts to be expected resulting from the COVID-19 coronavirus outbreak. Investments in new capacity can take years to complete. As more independents . Automakers arent equipped to create the touchscreen displays in the entertainment and navigation systems or the countless microprocessors that control the engine, steering, and functions such as power windows and lighting. In part, that is because they cant easily shift products bound for restaurants into the appropriate sizes, packages and labels necessary for sale at supermarkets. Knut Alicke is a partner in McKinseys Stuttgart office, Ed Barriball is a partner in the Washington, DC, office, and Vera Trautwein is an expert in the Zurich office. The Administration proposes to reverse this damage by investing in research, production, workers, and communities that will rebuild sustainable manufacturing capacity across the country. This problem is compounded by the fragmentation in recent decades of the auto supply chain across many countries and many firms. where GHS is the overall global health security of country j; D is doctors per 1000 persons, N is nurses per 1000 persons, B is beds per 1000 persons, S is supply chain capacity, G is governance effectiveness, F is public health financing, C is communications infrastructure, SDG is social development goals, HDI is human development index, Y is World Bank's development income level, implying . The White House COVID-19 has imposed shocks on all segments of food supply chains, simultaneously affecting farm production, food processing, transport and logistics, and final demand. Determine how quickly those that are most vital for you could either recover from a disruption or be replaced by an alternative. The Covid-19 coronavirus pandemic has exposed gaps in the ability of retailers to mitigate supply chain imbalances and offer an omnichannel customer experience, among other challenges in. The demand-planning team, using its industry experience and available analytical tools, should be able to find a reliable demand signal to determine necessary supplythe result of which should be discussed and agreed upon in the integrated sales- and operations-planning (S&OP) process. Recent crises such as the Ebola outbreak in West Africa and the COVID-19 pandemic severely reduced supply chain capacities on international and local levels. Businesses are also experiencing a greater need in areas such as data centers, renewable energy systems and the increasingly automated processes of Industry 4.0 factories and warehouses. 1600 Pennsylvania Ave NW The first alliance to accelerate digital inclusion, Why refugees need a better chance at professional development, 5 reasons why the G20 needs a sustainable blue economy. During peak COVID-19 fears, supply chain touchpoints all over the globe were affected in different ways. Going forward you will see some differences between different companies. Abstract. A further 59 percent of companies say they have adopted new supply-chain risk management-practices over the past 12 months. Organizations should build financial models that size the impact of various shock scenarios and decide how much insurance to buy through the mitigation of specific gaps, such as by establishing dual supply sources or relocating production. Supply chains are complicated, typically consisting of a number of complex factors and a large network of players.