Supply chains refined

Supply chains refined

Pandemic experience leads Asia Pacific economies to explore ways to build long-lasting resilience in the global supply chain.

The significant disruptions to supply chains worldwide caused by the ongoing Covid-19 pandemic have highlighted the need for Asia Pacific countries to consider policies and strategies that will improve resilience.

The region has been producing nearly 60% of global manufacturing value added over the past two decades, but lockdowns during the pandemic last year exposed vulnerability to disruptions in several key markets.

A combination of weak demand, border closures, supply and transport problems resulted in a 6.3% year-on-year decrease in exports and a 5.5% drop in imports during the first four months of 2020 in the 21 economies that make up the Asia Pacific Economic Cooperation (Apec) group, according to the Regional Trends Analysis report published by Apec in May this year.

All over the world, businesses and policymakers have spent the last year learning on the fly about what works and what doesn't when it comes to sorting out supply chain problems.

"Businesses' attempts to reduce supply chain costs by focusing on lean manufacturing, offshoring and supplier consolidation seem to have increased overall global supply chain risk and reduced flexibility," said Satvinderjit Kaur Singh, a researcher with the Apec Policy Support Unit.

Global supply chains have evolved based on the business links that provide the most cost-efficient outcome, so that businesses can position themselves competitively in global markets.

Improving manufacturing processes by using technology, while pursuing innovative strategy together with contingency plans, is seen as the way to enhance business and supply chain resiliency.

Improving resilience, however, is not an easy, cost-free exercise. The recent disruptions have left many businesses facing a difficult choice of priorities: between efficiency and greater resiliency.

Relocation of production and "reshoring" -- moving some production back to a company's home market -- were widely considered in the early stages of the pandemic. However, these come with higher production costs and the results could hurt the long-term global outlook.

"There is no easy fix for supply chain disruptions," said Dr Rebecca Sta Maria, the executive director of the Apec Secretariat. "The focus for economies today is to build long-lasting resilience by looking at their supply chains more holistically, harmonising regulations, digitising processes and creating some level of redundancy to allow flexibility.

"The important thing moving forward is to ensure that stronger trust in trading partners and deeper regional integration, by involving micro, small and medium enterprises, form an integral part of Apec's strategy for a resilient and inclusive economic recovery," she added.

Governments, meanwhile, are advised to avoid policy interventions that may disrupt the efficient configuration of global value chains. Rather than looking at trade as the root cause of supply chain vulnerability, the Apec report suggests policymakers look at global trade as part of the solution to achieving resiliency.

"Most of the concerns raised about supply chain resilience have been echoed by the business community, but more can be done to manage resilience at the policy level," said Dr Akhmad Bayhaqi, a senior analyst with the Apec Policy Support Unit.

"Governments can focus on promoting digitisation and supply chain visibility, and by enhancing regional cooperation on trade, connectivity and economic openness," he said. "Customs operations and cooperation can be improved by applying automation and digitisation through platforms such as the single-window system."

Governments should take advantage of knowledge transfers and productivity spillovers that local firms gain from global value chains, and then support them in maintaining the skills and know-how that they have acquired from their supply chain networks, said Dr Bayhaqi.

Structural reforms could also play a crucial role in developing a stable and predictable regulatory environment that allows global value chains to recalibrate their structures as needed during the recovery from a pandemic.

"Our employees have been able to do the impossible in very short time-windows (during the pandemic) ... even setting up completely new operations within weeks," says Terry Ryan, CEO of DHL Supply Chain, Asia Pacific. Gilbert Chua

REGIONAL EFFORT

Structural reform took centre stage when ministers and economic officials from the 21 Apec member economies met recently. They believe it will play a key role in boosting the recovery as well as advancing policy development to improve the institutional and legal environment. This will enable member economies to respond to urgent issues and prepare the region for future economic shocks.

However, costly disruptions to global supply chains in recent years due to external shocks have exposed interconnected risks in the system. For example, the Tohoku earthquake in Japan in 2011 and the floods in Thailand later that same year severely disrupted production in the automotive and electronics industries in economies reliant on the two countries' exports.

Disruptions caused by the Tohoku earthquake sent the global semiconductor industry on a long nine-month path to recovery and set Japanese gross domestic product (GDP) back about 0.4% in 2011. Similar significant impacts were felt on hard disk drive production due to the flooding in Thailand.

The global scale of the Covid pandemic and the more interconnected nature of current global value chains means recovery post-pandemic will be longer and more complicated compared to the post-2011 period.

For now, macroeconomic responses from economies have provided critical buffers during the pandemic for people and businesses, while microeconomic policies will improve the efficiency and productivity of markets.

Apec's priority is to increase inclusion and sustainability as part of the recovery. Sustainability is critical as members agree that climate change will only exacerbate future economic, social and environmental costs across the region.

But even as governments worldwide continue to battle the pandemic, it is crucial that they maintain openness when it comes to trade to facilitate foreign investment, say executives of DHL Supply Chain, a division of Germany-based Deutsche Post DHL Group.

Transparency and communication with the public and the business world are essential for governments to help their countries navigate their way out of the pandemic, according to Terry Ryan, CEO of DHL Supply Chain in Asia Pacific.

"The pandemic will shift trade patterns, and it is important that global supply chains are ready to leverage new opportunities in a post-pandemic world," he told Asia Focus.

"For example, we are seeing the emergence of some Asian markets such as Thailand as plausible production and distribution main points for automotive and electronics sectors respectively, largely due to their low-cost arbitrage, and most importantly conscious efforts by their governments to attract foreign investment," he noted.

"This is definitely a move in the right direction by the authorities to harness long-term economic potential for the Asean nations."

"Customs operations and cooperation can be improved by applying automation and digitisation," says Dr Akhmad Bayhaqi, senior analyst with the Apec policy support unit. Apec photo

BUILDING BACK BETTER

DHL Supply Chain, one of the world's largest third-party logistics specialists, agrees that resilience is crucial for businesses as many of them were caught off-guard by the magnitude of the pandemic and the extent of the economic impact, with national lockdowns curtailing the movement of goods and people.

While it is still too early to fully grasp the full impacts of Covid on the global economy, the pandemic has highlighted the interdependence of supply chains worldwide, and the need for resilience to be given more weight in business models, Mr Ryan said.

With a diversified customer portfolio, economies of scale and a global footprint, DHL had the kind of business resilience needed to ensure that clients' supply chains remained operational, he said. The robust business model paid off as the group reported a profit in 2020 and achieved the strongest first quarter ever in 2021, he added.

At the onset of the pandemic, the company had to take swift and decisive actions to ensure that employees were protected. Remote working was encouraged so that clients' customer supply chains were intact. A safe and clean environment is non-negotiable for supply chains to remain operational. Temperature-taking, Covid tests and vaccinations are also encouraged to be administered appropriately.

As for DHL, Mr Ryan has remained optimistic that the company is in a positive and relatively resilient position to move forward.

"Investing in our people has been very crucial for us to enhance our resilience: We have seen the importance of engagement, training, standard tools, communications and data for our people to run our operations efficiently," he said.

"Our employees have been able to do the impossible in very short time-windows, such as adjusting entire global supply chains, fulfilling orders in record time, even setting up completely new operations within weeks."

"The focus for economies today is to build long-lasting resilience by looking at their supply chains more holistically," says Dr Rebecca Sta Maria, executive director of the Apec Secretariat. Supplied/Apec

Operational standardsation is key to improving quality and safety, and the pandemic has proven that the best practices are the most necessary ones, in his view.

An investment in 1,000 new robots introduced and a partnership with Locus Robotics to deploy up to 2,000 more units worldwide emphasised the company's focus on digitisation and automation to help improve productivity throughout the supply chain.

Deutsche Post DHL Group has committed to set aside €2 billion on digital transformation projects over the next five years, and it is expected that this investment will generate a run rate -- an extrapolation of future performance based on current figures -- of €1.5 billion per year by 2025.

Keeping constant communication with clients and getting their buy-in on some of the processes that DHL introduced has also been part of managing customers' expectations during a challenging period.

Mr Ryan said changes to global supply chains are not threats to the business. They are part and parcel of daily operations, as long as staff are well trained and prepared to support and advise customers of any potential changes that might occur.

"The pandemic has single-handedly fast-forwarded this agenda for many businesses, who are now pressed to relook at their supply chain for possible vulnerabilities and high-risk segments, and are instilling more transparency and agility in the entire value chain," he said.

"It is essential that companies analyse and evaluate the segments or markets in which they are operating, against new economic and geopolitical realities. Working with a logistics provider with the needed expertise and international footprint to assess risk management and supply chain responsiveness will be equally crucial," he added.

Customers or businesses that have successfully navigated through the crisis, he said, share the following characteristics: they reacted quickly and showed a very agile approach to the challenges; they have set the right priorities; they never leave employees behind as they are the blood that keeps the heart of the business pumping.

Looking ahead, he said DHL Supply Chain expects to organise different sources of supply further to reduce dependency on one country or one production site, to inject more flexibility in business models. The need for greater flexibility in tomorrow's supply chains drives outsourcing, and this presents opportunities for global contract logistics companies.

In his view, the formula to overcome and improve supply chain resilience should include managing borders to facilitate movement of essential supplies and investments; opening channels of communication with businesses and the public; and active consultation with major business representatives on the viability of their essential operations to balance the economic opportunity costs of any future lockdowns.

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