The reinvention of supply chains

The COVID-19 pandemic has drawn a lot of attention to supply chain vulnerabilities, with the Chinese lockdown in early 2020 a catalyst for many industry sectors to reconsider their supply chain models, according to Pascal Matthey, marine consulting manager at AXA XL.

Whereas once the cost efficiencies of sourcing components and goods from suppliers in the Far East had been an obvious choice, many organisations are questioning whether a concentration of suppliers in one geography is a case of putting too many eggs in one basket.

“Before COVID, it was clear in discussions with clients they knew they had suppliers all over the world but there was not much preparation for what could happen in the event these suppliers defaulted,” he told StrategicRISK. “They didn’t realise how dependent sometimes they were on these suppliers.”

”These dependencies on single suppliers and global freight movements are among the big recognitions that have come out of this crisis.”

While the costs involved in stockpiling goods for a rainy day is not necessarily an option that makes long-term economic sense, the approach of Just in Time has been left wanting by disruptive events.

Beyond the pandemic, this year’s blockage in the Suez and geopolitical developments, including Brexit, violence in South Africa and the ongoing trade war between the US and China, have demonstrated the true cost of lean manufacturing. 

Bigger ships, greater disruption

The increasing size of vessels adds to the potential scale of disruption when such incidents occur, explains Matthey.

“You get concentrations of larger vessels and concentrations on the canal, because the new Silk Road [BRI] is not yet operating as it should so they are not many alternatives to these canals.”

”Obviously it brings to light the fact that everyone is concerned: if you have hundreds of ships that are blocked it causes lots of problems.”

The scrabble for personal protective equipment (PPE) and medical equipment, such as respirators, during the pandemic has also been highly-charged politically.

“Practices such as Just in Time improve industrial efficiency, but it makes the supply chain the weak point. And if this weak point breaks, then obviously the whole thing comes crumbling down.”

“We are telling people to reconsider their whole sourcing strategy,” he continues. “Not necessarily moving away from Asia but certainly looking at where their providers are sitting or where they are locating their products from.”

He thinks the near shoring discussion will continue into the future, even after the immediate challenges created by the pandemic have passed. In part, it is a fundamental rethink of how global trade operates.

“In the longer run I’m convinced it should be a much broader diversification on the geographical area where final manufacturing plants are sourcing from,” says Matthey.

“Given the rise in freight costs it is also clear that a new balance must be struck between cost and efficiency. The price to ship a container from Asia to the US has increased up to 7-fold, so in the longer run it may be quite useful financially to consider sourcing from regions that are closer.

Supply chain digitisation

One silver lining is that the global pandemic has accelerated the adoption of technology within supply chains.

AXA XL is one of the insurers involved in providing cover for the transportation of the COVAX vaccine to developing countries. Matthey thinks the pressures to roll out the vaccine and protect cargo shipments has encouraged innovation and new partnerships.

“Vaccines and COVID in general will enhance the use of technology on a wider basis because more people will see the added value. A challenge for the industry is how we use all this data we are now collecting from smart containers and sensors.”

“The role of the insurance company is not just to be a payer, but to be a partner, supporting risk managers as they redesign their supply chains,” he concludes.