COVID-19: How will supply chains adapt in a post-pandemic phase?

January 23, 2021 marked the one-year anniversary of the day Chinese authorities imposed a strict lockdown in Hubei province – of which, Wuhan is the capital – to stem the outbreak of the novel coronavirus. The news in itself was sobering. Up until that point, not many had considered the implications of the novel coronavirus. Understanding its contagiousness was slow initially, and the profound impact it would go on to have on life in general and supply chains in particular could not have been imagined.

One year on, those of us that work in supply chain management and regularly speak to clients about their risk management strategies are trying to make sense of the year. What has changed? How will supply chains evolve? What has to work better for supply chains to recover quickly from similarly disruptive events?

In order to understand what the future holds, we needed to understand how customers have been and are continuing to respond to the unprecedent disruptions brought on by COVID-19. At the end of 2020, the Intelligence Solutions team at Resilience360, a supply chain risk management software solution incubated at Deutsche Post DHL, decided to conduct a survey with our clients to hear from supply chain professionals how they’ve been faring and what decisions they were taking to mitigate the effects of the pandemic. We wanted to move beyond getting anecdotal stories and create real insights that others could use to benchmark their own decisions. 

Nearly 200 supply chain professionals across industries as diverse as automotive, life sciences & healthcare, technology, energy, consumer, retail, chemicals, and energy & manufacturing took part in the study. This, I believe, gives us the clearest picture to date of the supply chain ramifications of the global pandemic, and what companies are doing, or even plan to do, to mitigate their effects.

As anticipated, almost everyone (98 percent) indicated that the pandemic has affected their supply chains to some degree, illustrating the all-pervasive nature of this crisis. Also perhaps unsurprising is that two-thirds (63.1 percent) of all respondents struggled with air freight capacity shortages, triggered by the travel bans and associated cancellation in passenger flights. Many of those affected (37.4 percent) responded through paying premium air cargo rates in an effort to keep production lines running where possible and moving critical goods to end-customers. Nearly half (48.7 percent) indicated that beyond air freight capacity shortages, other major challenges were ground transportation restrictions and trucking shortages, most likely triggered by the cross-border restrictions that affected truckers in the earlier phase of the pandemic.

With the lack of air cargo capacity, many turned to ocean cargo services. Nearly a quarter (24.1 percent) of all respondents indicated that they would continue to use ocean freight in the future, demonstrating a trend towards moving away from using expensive, but reliable, services like air cargo and reducing cost pressures on logistics & transportation operations. According to IATA, air travels are not expected to return to 2019 levels until 2024, and together with continuous cost pressures, this is a trend that is likely to gain further momentum in the mid- to long-term.

The market has suitably responded to this trend. Expedited ocean services have been introduced by a number of carriers, whilst new multimodal solutions that promise to cut previous transit times between China and Europe by up to 5 days have gained popularity. As these services become a standard offering, more organizations are likely to make use of them.

A key point of discussion during the pandemic has been the world’s overreliance on China. Much of this was already triggered by the U.S.-China trade war, and production shutdowns in the earlier part of 2020 exposed how deeply connected global supply chains are to China’s manufacturing facilities. While a decoupling from China may seem like an attractive prospect to some, it is easier said than done.

Our data indicates that a majority of respondents have a significant reliance on China for their sourcing and manufacturing activities. When asked if they would consider moving such activities away from China, over one-third of respondents (34.7 percent) stated that they had no plans to move away. Those that indicated that they were considering moving away (26.5 percent) are in various stages of making that transition, from assessing feasibility to actively planning to shift supply chains out of China, meaning that any permanent change may be slow to materialize.

Hesitancy in completely restructuring supply chains is understandable. This can be difficult to do while many countries worldwide grapple with the restrictive measures currently in place and will likely continue in the coming months. At the same time, factories in China have largely resumed operations and its domestic manufacturing marked its 10^th consecutive month of expansion in December 2020, making its rebound more robust than initially anticipated.

But we’re not in the clear yet.

Many countries still have lockdown measures in place and supply chains will continue to be challenged, at least until the first half of 2021. Over half (51.3 percent) of the respondents believe that their company will be facing declining revenues as a direct result of the pandemic. While we all certainly hope that the new year will be the beginning of the recovery period, it remains to be seen how the pandemic will continue to evolve and what businesses must to do keep up. 

What is promising is that 56.9 percent of all respondents stated that they intend to apply more active supply chain risk management processes going forward. In the next 6-12 months, over half (51.3 percent) of all respondents will be exploring alternative logistics and delivery routes, while over 40 percent intend to invest in technology that can help monitor supply chain risks.

While we can’t prevent pandemics from occurring, we can certainly shape the way we respond to them. Using supply chain visibility and risk management tools, firms can speed up their responses during a crisis and use a data-driven approach to take decisions. And the current crisis is as good a time as any to embark on the journey towards supply chain resiliency.

You can download the full report here.

Published: January 2021

Images: iStock