by Hussain Rajab
On 11 March, the World Health Organisation (WHO) declared the coronavirus outbreak sweeping the world to be a pandemic. The virus is affecting more than 180 countries and territories around the world and claimed thousands of lives.
As countries around the globe step up their containment efforts, travel restrictions are being implemented while cities – indeed, whole countries – are being shut down. Some cautious optimism is driven by Beijing’s ability to curb the virus in the province of Hubei – the pandemic’s epicentre.
However, the outbreak casts light on an issue that stands to disrupt global business for months to come: the impact of a shock on global supply chains – especially for the alarming number of businesses still reliant on a single, centralised supply chain.
A decentralised logistics network is far more agile than its counterpart. And in times of global crisis, agility is essential
Overexposure means risk
Research from Resilinc, a company that maps out global supply chains, found that the world’s largest 1,000 companies or their suppliers own more than 12,000 factories, warehouses and other facilities in currently quarantined areas. This is particularly true for US companies, which are significantly more exposed than others.
But businesses all over the world are affected, from medical and electronic device makers to auto parts suppliers. Writing in the Harvard Business Review, Resilinc CEO Bindiya Vakil and Resilinc Senior Adviser Tom Linton note that manufacturers from more than a dozen industries are now facing a supply crisis that stems from a challenge in their sourcing strategies. Many businesses are evaluating their supply chain model in a new light.
Centralised vs decentralised logistics
Spreading supply chains and logistics across multiple markets allows a business to respond flexibly to global or systemic shocks, rather than buckling under the pressure. Moreover, production at each link of the supply chain can be ramped up or down dependent on that specific area's demand to best serve the customer base. In this way, a decentralised logistics network is far more agile than its counterpart. And in times of global crisis, agility is essential.
According to a survey by the Institute for Supply Management (ISM) of 628 individuals conducted between 22 February and 5 March, almost 75 per cent of US businesses have experienced supply chain disruption as a result of the Covid-19 outbreak.
In order to mitigate the risks of similar disruptions in the future, companies will need to undoubtedly face challenging questions that may not have any easy answers
Multiple hubs in multiple markets
Single sourcing can be tempting when it comes to securing supply or meeting a cost target. However, when crisis strikes, it is those companies that have multiple hubs based in different markets around the world that can remain competitive. Of course, this means that a business has to evaluate several different markets rather than just one, and assess for political and economic stability, location, access, and regulatory frameworks across all of them.
It is worth the investment, as many companies have shown. Global manufacturers, such as Mondelez, Arla Foods, BASF, Yokogawa, Rickett Benckiser, Kimberly Clark, and many more have set up their regional hubs in Bahrain. The fast-growing $1.5tn Gulf opportunity suggests these investments will rapidly pay for themselves and hedge against further supply chain risk.
In order to mitigate the risks of similar disruptions in the future, companies will need to undoubtedly face challenging questions that may not have any easy answers, including whether they should broaden their supplier choices, or focus more on local or near-shore sourcing, as well as questions around the inventory of raw materials, sub-assemblies and finished products required to tide over the crisis.
Hussain Rajab is co chief investment officer – manufacturing, transport & logistics, Bahrain Economic Development Board
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