WEF: COVID-19 prompts new supply chain thinking

China seems to be seeing the light at the end of the tunnel of fighting the COVID-19 outbreak domestically, according to the World Economic Forum (WEF). Last week the country reported no new cases of coronavirus for the first time since the outbreak began.

Yet there is much more work to be done for companies to resume their normal productions and respond to the economic effects of the crisis.

The COVID-19 pandemic has hit the business world in an unprecedented scale and speed, according to WEF. It has caused the closures of business, the stoppage of factory outputs, and the disruption to global manufacturing industries and their supply networks.

Major industries including automotive, electronics, pharmaceuticals, medical equipment and supplies, consumer goods and more have been significantly affected. This is a result of China having become a world production centre over the past two to three decades.

China provides the bulk of the components, raw or processed materials, as well as major subsystems to manufacturers globally. Not only have China’s original equipment manufacturers (OEMs) faced the challenges of resuming their production capacity but also global manufacturers have felt the impact of part shortages in their supply networks.

Companies inside China are slow to resume their normal productions due to various factors. These include:

• · The shortage of parts from lower-tier suppliers;
• · The shortage of labour workers who might still be trapped due to the shutdown of their villages and other infected regions;
• · The stringent requirements for companies to establish adequate protective measures and provide an adequate supply of protective gears for employees, and
• · The slow recovery of transportation network capacity due to road closures and other emergency regulations and priorities.

But companies are fighting back and finding alternative solutions, explains Jun Ni, a member of WEF’s Global Future Council on the Future of Advanced Manufacturing and Production at WEF.

This includes shifting orders to secondary or tertiary suppliers to make up the missed delivery from their primary suppliers and moving some core business priorities back to their own factories.

Some OEMs have even ventured to re-tool their production systems to make totally different products.

For instance, when automotive business was down by more than 90% in China in February, automobile manufacturer Shanghai-GM-Wuling (SGMW) quickly retooled its production system to produce medical face masks, which positively contributed to mitigating the COVID-19 spread and at the same time generated rewarding revenues and positive reputation for the company.

As the COVID-19 crisis has intensified the competition for valuable supply sources, in certain industrial sectors, including electric vehicle (EV) production, the bargaining power has shifted from OEMs to suppliers.

For instance, Tesla and CATL recently announced their strategic partnership for CATL to supply EV batteries to Tesla’s Model-3 production in China, shifting away from the sole supply by Panasonic alone. Toyota and Panasonic also announced their agreement to launch a joint venture to produce EV batteries. And BMW signed a major agreement to purchase EV batteries from CATL worth of €7.3 billion.

“Supply value chains cannot be established overnight,” explained Ni. “The COVID-19 pandemic has reminded corporate decision-makers that there is a need to develop new business strategies in their future supply chain designs.”

“The KPIs to be considered for future supply value chain designs will likely contain both traditional metrics such as cost, quality and delivery, and new performance measures including resilience, responsiveness, and reconfigurability (otherwise known as the 3Rs).”