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22 May 2020

Economy

supply chains

The coronavirus crisis has raised concerns about the perceived weaknesses of UK supply chains. Global value chains and just-in-time manufacturing are being accused of prioritising costs at the expense of security.

Countries are helping their firms to reshore. Analysts are anticipating the great unwinding of supply chains.

To be sure, the impact of Covid-19 on UK manufacturing has been particularly severe. The Office for Budget Responsibility (OBR) estimates that 55% of manufacturing output would be lost due to the lockdown in the second quarter of 2020, compared with a 35% reduction for the whole economy.

But to have a productive debate about how manufacturing supply chains can emerge stronger from the crisis, a number of myths need to be addressed.

Myth 1: “Shortages of critical items have exposed weaknesses of all supply chains.”

As the virus rapidly spread, it became clear that global capacity was not sufficient to address a spike in demand for Covid-19 critical items. This led to shortages of medical equipment, testing kits, and personal protective equipment (PPE). Manufactures rushed to repurpose facilities to increase supply.

Yet these items are a fraction of the goods traded globally. According to the WTO, trade in medical products described as critical and in severe shortage during the Covid-19 crisis accounted for 1.7% of world merchandise trade last year.

In fact, according to the Confederation of British Industry (CBI), nine out of the 17 manufacturing subsectors in the UK reported output volumes expanding by mid-March.

What the spike in demand put to the test is not supply chains but countries’ preparedness to address emergencies. Globally disruptive events are bound to keep happening – whether driven by climate change, other natural disasters, or unrealised trade deals.

These will test our ability to tackle emergencies in different ways – and could require very different types of goods.

Myth 2: “Just-in-time needs to be replaced in order to minimise vulnerabilities.”

Approaches such as lean manufacturing and just-in-time help manufacturers eliminate all forms of waste. This includes minimising work-in-progress, waiting, and inventories across the supply chain.

Whilst this can create highly efficient and profitable production, it also means that disruptions in the flow of materials and components are quickly felt along the chain.

It is critical that countries keep adequate stocks and domestic production capacity of life-saving products. However, inventories represent ‘money sleeping’ (that is, money not being put to good use), and it is simply not feasible to ask companies to stockpile regardless of demand fluctuations.

A global, circular economy is only possible through an optimised management of inventory – extending its life, reusing it, repurposing it, or eliminating the need for it altogether.

A more proactive response would be to improve understanding and end-to-end visibility of UK supply chains to inform firm, sector and national strategies. As supply chains have become increasingly complex, achieving visibility is ever more crucial to identifying key vulnerabilities and taking mitigating actions.

Myth 3: “Reshoring supply chains is the key to improving resilience in the long term.”

While most developed countries have seen their share of global manufacturing output decline over the last two decades, the drop has been particularly severe in the UK.

While it remains among the top 10 manufacturing countries in the world in term of output, the UK has lost around 40% of its share in the world’s manufacturing value added over the last 15 years.

Even in sectors where the UK remains highly competitive like automotive, aerospace and pharmaceuticals, domestic supply chains have weakened.

The ‘hollowing out’ of supply chains across manufacturing sectors means that technologies developed in the UK might be taken abroad for industrialisation.

There is a clear need to rebuild the UK ‘industrial commons’ to provide a foundation for innovation and competitiveness.

As recognised in the government’s Industrial Strategy, ‘a vigorous ecology of suppliers’ represents a common resource that facilitates the operation of larger firms and enables the long-term competitiveness of Britain’s industrial sectors.

However, there is no evidence the UK can simply reshore and become competitive across all industrial subsectors.

Instead, long-term competitive advantage could be achieved by supporting the adoption of new more efficient technologies along existing supply chains, developing domestic supply chains that exploit the benefits of proximity and co-location, and ensuring future supply chains of emergent technologies and sectors where the UK has a leading edge.

Finally, if resilience is to be enhanced, the financialisation of corporations that pushes for buybacks and debt-fuelled expansion while overlooking innovation investment and ‘rainy-day’ preparations needs to be seriously rethought.

Emerging stronger

Work in three areas is required to ensure UK supply chains emerge stronger after the crisis. 

The first is the establishment of mechanisms, like a national supply task force, that work to speed up deliveries of critical items when a disruption occurs, repurpose production lines, and expand domestic production in the long-term.

Lessons learned by the US Federal Emergency Management Agency (FEMA) Covid-19 Supply Chain Task Force, Team Taiwan, the real-time production information systems established in Korea, and the UN Covid-19 Supply Chain System (CSCS) would be valuable here.

The second is firm, sector and national efforts to better ‘map’ supply chains. While many discussions have focused on tackling single source and dependency on China, vulnerabilities go way beyond these.

The ‘ten risk archetypes’ identified by the White House Office of Trade & Manufacturing Policy provide an example of what such analyses could include.

The third is long-term investment in manufacturing engineering capabilities to enable the transition to higher value-added industries.

Building on the Industrial Strategy, future industry roadmaps with supply chains and skills at their core can help identify specific gaps that need to be addressed.

Continued investment is required in technology development along with sustained investment in institutions (such as the High Value Manufacturing Catapult) and initiatives (such as the Made Smarter initiative) that support the transfer of new technologies to industry across regions.

This crisis has highlighted the strategic role of manufacturing capabilities – whether repurposing production lines to make protective equipment, responding to the UK Ventilator Challenge, or ensuring our food supply. But it will also test the ability of supply chains to recover and reinvent themselves.

By Dr Carlos López-Gómez, head of Policy Links, IfM Education and Consultancy Services, University of Cambridge

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