Shortening Supply Chains Also Means Better Inventory Management

Although globalization had already lost much of its former charm before the coronavirus, especially in the US and Europe, where it has not been serving interests for some time, with the outbreak of the pandemic, it has become practically a simple word for many. The symmetrical shutdown of almost the entire global economy revealed the fragility of supply chains, as well as some very tangible limitations of the (over)connected world.

The lesson, however, is not at all new, as the world has been functioning ‘globalized’ in the modern sense since the end of the 19th and beginning of the 20th century, and with every disaster, such as world wars or economic crises, it learns that the system is actually extremely fragile and dependent on favorable general forecasts. What functions relatively smoothly and efficiently on a good day in global economic flows can turn into a negative domino effect of a nightmare on a bad day. Thus, a factory in Germany can have five different suppliers scattered around the world for each component today, only to be left without any tomorrow.

Difficult to Implement Idea

Deglobalization has therefore become one of the most mentioned words in recent months, and in its more radical variant, it implies the revival of the old concept better known as self-sufficiency. The idea is as simple as it is difficult to implement, as few countries in the world, large or small, have adequate resources, knowledge, and capital to cover all their basic economic needs on their own. There are also issues of competitiveness, as well as the complex global system of trade agreements and arrangements that complicate or prevent the open promotion of domestic products and services compared to imports. That said, it is possible to identify some fundamental economic sectors of crucial importance for the functioning of society and try to maximize their self-sufficiency, but it is not as simple as it sounds. You may lack adequate knowledge or technology, you may not have the necessary workforce, you may lack key resources, raw materials, or components, or perhaps the product simply is not profitable enough when compared to imported substitutes. Many have, in fact, tried self-sufficiency in some form throughout history, and no one has overly benefited from it in the end.

Exception Proves the Rule

A somewhat more realistic variant that the private sector is considering most after the experience with the pandemic is the so-called shortening and simplifying of supply chains, which would allow the manufacturing sector to more easily overcome such disruptions in trade flows. If suppliers are closer or the value chain is simpler, the logic goes, then production does not necessarily have to suffer because someone is sniffling in China or Brazil. How feasible this is, of course, depends on the case; some manufacturers have room to restructure their supply chains, while others do not because the product is too complex or requires some input that is not easily sourced elsewhere or replicated at home. To be fair, necessity has shown that even some seemingly difficult problems can be solved, for example, in the case of Huawei, which had to quickly adapt part of its supply chain due to American sanctions, but this is more in the realm of exceptions than rules.

Other Directions

And if you are a proud exporter, the past few months have been particularly instructive. Besides having to halt production, many have lost suppliers and inventory, and then clients, not only because all economies simultaneously ceased to function, but also because traffic between countries was interrupted. As desirable as it is to be an exporter and treat the whole world as your playground, it is extremely ungrateful in such situations of the so-called double whammy, when both production and demand dry up simultaneously, especially if the problem is of a global nature, making the quick finding of another market seem unfeasible. In such conditions, exporters do not have many tools at their disposal. They cannot do anything against the halting of production by state order, except perhaps lobby for the quickest lifting of the ban, and against closed borders, they can fight by redirecting to the domestic market to the extent that it is possible. Likewise, they can, if feasible, reorient their production to those products for which there is high demand at that moment in order to try to compensate for losses in their standard offerings.

Geographically Closer

As for complications in supply chains, the solutions are equally obvious, and many will consider the possibility of physically shortening them (geographically closer, ideally at home or in immediate proximity) after the pandemic, trying to develop their own capabilities in some segments of production and maximally diversify the range of suppliers of those inputs that must simply be imported (again, geographically, but in this case, as widely as possible). Perhaps the biggest change could be felt in the approach to inventory management, which is a lesson that companies in this crisis have learned just as much as entire states. Instead of the long-standing concept of maintaining minimal stocks, which was particularly highlighted after the last crisis when demand evaporated and manufacturers were stuck with overflowing warehouses, the coronavirus could have the opposite effect, meaning that manufacturers will likely maintain larger quantities of key materials and components in stock than before.

A second wave, if we can even talk about the end of the first, seems increasingly likely, thus necessitating preparation for new problems in global trade flows, although the enormous cost of the first wave has significantly influenced the change in thinking about ways to combat the coronavirus. General quarantines for most countries are no longer an option, so it can be assumed that disruptions in the global economy will not be as pronounced as in the first half of the year. Nevertheless, the year has shown so far that there are no guarantees, especially for exporting companies that are highly dependent on the fluidity of borders, both in terms of necessary inputs and the sale of final products, so those who can intervene in their supply chain will think about production lines with which they can complement their offerings and strengthen their presence in domestic markets. Then again, if people are locked in their homes, the domestic market no longer figures as an option.

Radical Change

It would be naive to believe that with the eventual passing of the danger from the coronavirus, globalization processes will continue at full speed. Distrust among states and protectionist tendencies have existed for some time, and the pandemic will only accelerate and strengthen them, which will require exporters to make special adjustments precisely because they depend on the unobstructed and continuous flow of goods and services. In addition to having to implement interventions in the supply chain, many will be forced to revise their clientele and presence in some markets (because divisions are increasingly block-like), but also their thinking about domestic demand, which has gained importance in recent months.

The question is how states will behave, as examples from Europe and the US suggest a radical change in thinking towards reliance on domestic resources and ensuring strategically important products and services on their territory or at least within a broader block (say, the European Union). This will, increasingly likely, translate into additional pressures on some companies to keep production at home or to prioritize the domestic market in certain situations. The world is definitely shifting, but it is difficult to assess which way it will tilt. As many proponents of deglobalization exist, there are just as many warning of its unsustainability and the necessity of an integrated global economic system, as only in this way can real market efficiency be achieved. Which variant suits exporters more is quite clear.