Blindsided on the Supply Side

Blindsided on the Supply Side

Blindsided on the Supply Side

News Courtesy: foreignpolicy.com
The coronavirus outbreak has shown that supply-chain disruptions could wreak far greater havoc on the global economy—and national security—than most CEOs and governments realize.

In Feb. 27, Apple CEO Tim Cook announced that the tech giant would be reopening its factories in China, which had been an early victim of the coronavirus. Like Apple, companies around the world are discovering that their China-linked supply chains bring not only financial advantages but risks, too. And COVID-19 won’t be the last such risk. While everyone should spare a thought for COVID-19’s victims, they also ought to learn lessons from the bug’s disruption of the unsexy but vital supply chain.

At the end of January, when COVID-19’s destruction in China was becoming apparent, U.S. Commerce Secretary Wilbur Ross told Fox Business that “I think it will help to accelerate the return of jobs to North America.” Coming at a moment when some 8,100 Chinese had been infected with the virus, it was an extraordinarily callous comment, but the line was consistent with the so-called decoupling from China the administration of U.S. President Donald Trump advocates.

It was also incorrect. In the short term, the virus won’t help bring jobs back to the United States. On the contrary, it’s likely to cause reduced manufacturing in North America and other Western countries as failing arrivals of Chinese-made components cause production delays.

That’s exactly what happened in 2011, when a devastating tsunami and earthquake hit Japan’s Fukushima region. Japanese high-tech firms are part of many companies’ global supply chains—and executives soon discovered just how vital that Japanese cog was.

Before the earthquake, the Fukushima region produced, among other things, some 22 percent of the world’s 300-millimeter silicon wafers, which are used in semiconductors; 60 percent of critical auto parts; and a large share of lithium battery chemicals and the conductive film used in flat-panel liquid-crystal displays. Indeed, the Japanese suppliers did such a good job that countless global manufacturers had gone single-source—that is, they were only using the Japanese firms. That’s fine most of the time, but not when an earthquake strikes and renders factories unusable.

COVID-19’s brutal world tour is not over yet, nor are the resulting supply-chain disruptions. The trouble is no CEO actually knows his or her companies’ complete supply chain. As I pointed out in an article last year, suppliers are just the first tier of the supply chain. The suppliers have suppliers of their own, who may, in turn, even have a third layer of suppliers. Michael Essig, a professor of supply management at the Bundeswehr University in Munich, calculated that a multinational company such as Volkswagen has 5,000 suppliers (the so-called tier-one suppliers), each with an average of some 250 tier-two suppliers. That means that the company actually has 1.25 million suppliers—the vast majority of whom it doesn’t know.

Even if a company tried to keep track of all of its tier-two suppliers, it would struggle to do so. “COVID-19 can become a wakeup call for both businesses and government authorities,” Daniel Jonsson, deputy head of the Department of Social Security and Safety at the Swedish Defence Research Agency, told me. “Here’s a very real opportunity to study which operations fare reasonably well during disruptions and which ones succumb. The latter may need government contingency incentives.”

In fact, supply-chain vulnerabilities may only become apparent when there’s a crisis. A new report by corporate data analytics firm Dun & Bradstreet calculates that some 51,000 companies around the world have one or more direct suppliers in Wuhan and at least 5 million companies around the world have one or more tier-two suppliers in the Wuhan region, COVID-19’s epicenter. Fully 938 of the Fortune 1000 companies have tier-one or tier-two suppliers in the Wuhan region, Dun & Bradsteet reports. When a crisis strikes it is, of course, extremely difficult to fix the problem because companies are all looking for substitutes at the same time—and the market doesn’t simply have lots of specialized companies able to spring into action if there’s trouble elsewhere.