How Covid-19 exposed vulnerability in supply chains | Economic Times

Several years from now, as the impact of the Covid-19 pandemic is deconstructed and documented, one phenomenon that dominated headlines in the early days may or may not make the textbooks: supermarket aisles stripped bare of toilet paper, hand sanitizers, and other everyday items across the globe.One year on, the world is learning to co-exist with the virus, panic-buying is history, shelves are once again abundant with toilet paper and protective equipment – and yet, there is a shortage of everything. According to research by Accenture, 94% of Fortune 1000 companies witnessed supply chain disruptions from Covid-19, 75% of companies had a negative or strongly negative impact on business, and 55% plan to downgrade their growth outlooks. Not only do these disruptions impact the economy, businesses, and workers, they also have direct implications for financial markets. Prolonged supply chain disruptions can severely impact market sentiment by instigating fear about persistent inflation and apprehension about supply chain resilience and sustainability. What is likely to be immortalised in history, then, is this: Covid-19 exposed a structural vulnerability in modern global supply chains that threatened to dismantle the very architecture that has sustained them over the previous half-century.This architecture relies on what is known as Just-in-Time manufacturing pioneered by Japanese automaker Toyota in a post-war attempt to compete with the batch manufacturing model that characterized American car companies’ success. Most industries across the world have since embraced lean manufacturing as the standard, and not without reason. Eliminating excess inventory has allowed companies to maximise production efficiency, greatly reduce warehousing and other costs, incentivize product innovation and diversification, adapt to ever-evolving demand, and enhance shareholder gain through buybacks.All that glitters is not goldHowever, experts have been sounding alarms for decades about a critical fragility in the system – the inevitability of supply chain disruptions. Where they have transpired, the impact has largely been local and temporary. Until now. The Just-in-Time model hinges on a harmonious dance between production, shipping, and stable average demand, but when the music stops, a cascading domino-effect of supply chain chaos takes its place. This is what happened when Covid-19 grinded manufacturing to a halt in key export markets, and lockdown-induced impacts doubled shipping times and caused acute labour shortages – add to the mix a skyrocketing of demand for consumer products as economies began to recover.Ironically, the car industry is shouldering the fiercest impacts of global shortages, estimated to lose $60 billion in sales this year as shutdowns plague many of the world’s largest auto factories, forced by an acute scarcity of a critical manufacturing component: computer chips. The only company that’s escaped the wrath of lean inventories? Toyota itself.That’s because in the aftermath of the devastating 2011 earthquake in Japan, Toyota realised that the supply chains of each of the 1,800 parts and 30,000 components that make up a car had unique vulnerabilities, and while some were quick to recover, others – like computer chips – took months to catch up. It tweaked its own model to incorporate long-term strategic planning for building resilience into vulnerable supply chains, and its policy to stockpile two to six months’ worth of semiconductors has allowed it to remain largely unscathed in a crisis where its competitors are now flailing.What companies have chosen to ignore, and what experts have consistently warned about, is that the root cause of such shortages is a ruthless pursuit of short-term profit over longer-term sustainability, and natural disasters or pandemics are merely triggers that set off the bomb. Somewhere along the way, companies have normalised sacrificing resilience at the altar of efficiency, but Toyota has demonstrated that it does not have to be such a drastic trade-off. It has demonstrated that the most efficient manifestation of its own model exists at the intersection of lean manufacturing and a diversified, resilient supply chain that is able to overcome disruptions till markets recover.Looking EastThe shockwaves have rippled globally, and India is no exception. Before the pandemic hit, an aggressive US-China trade war and other concerns were facilitating a global supply chain shift away from China and towards other Asian countries. Vietnam emerged as the top contender, but favourable investor sentiment and shored-up domestic manufacturing placed India in the running as well, with nearly one-third of respondents in a global survey of 700 firms naming India as a leading sourcing destination across multiple sectors. This is now in jeopardy. Covid-19 threatens to undo large swathes of progress that India has made over the last few decades across sectors, including its manufacturing capabilities and MSMEs. A prolonged disruption, weakened economy, and waning trust in India’s capabilities can well arrest any progress it has made in capitalising on supply chain shifts from China, where the impact has not been so drastic, and which continues to be the world’s most trusted sourcing partner.There are several domestic concerns too. India’s logistics and supply chain costs add up to a whopping $400 billion, or 14% of GDP, far less competitive than the global average – and, consequently, with far more potential for damage in the face of supply chain disruptions. In the immediate aftermath of the pandemic in 2020, financial markets remained extremely volatile and bearish, leading to crashes and massive wealth erosion. While markets have been fairly resilient through the second wave, uncertainty surrounding recovery and inflation fears stemming from prolonged disruptions could lead them into further bouts of volatility. One pre-pandemic study on supply chain disruptions found that on average, Indian companies lose 2.88% of shareholder wealth over an 11-day period covering a disruptive event, significantly higher than US companies.All in all – while a lot is contingent on how further Covid-19 outbreaks are tamed – it would bode well for India’s private sector to learn from the first two waves to build resilient supply chains. If it is to emerge as a key manufacturing and sourcing hub, it has to cultivate relationships of trust with international companies as well as domestic markets and demonstrate that it is capable of withstanding even prolonged crisis-induced disruptions – or recovering quickly from them – like the one Covid-19 is currently fuelling.The buck doesn’t stop here – the virus may only be a precursor for what’s to come. In a world increasingly threatened by hostile trade wars, retreating globalisation and aggressive protectionism, and unprecedented disruptions from climate change, building supply chain resilience is arguably the most potent survival strategy for any industry, business or country.(The writer is a policy consultant and advisor to India’s former minister for IT and Shipping)