How will coronavirus transform supply chains?

In an interconnected global economy, supply chains have become ever more intricate and dispersed around the world. The move from in-house production to sourcing, generally at the lowest cost, has resulted in a myriad of suppliers and sub-suppliers connected together to enable complex products to be assembled. Even products with relatively few components have evolved to require multi-layered supply chains of one kind or another.

Aim for full visibility

During the coronavirus crisis, the sudden halt in manufacturing and decreased availability of raw materials plus restrictions to international trade left companies supply chains suddenly vulnerable in all sorts of unexpected areas. In order to ensure they are more resilient to a sudden change in business conditions in the future, companies will need to fully map their supply chains to ensure extensive visibility.

Richard Hayes, Global Head of Working Capital Advisory at Nordea, says: “Buyers might have good visibility of what their primary suppliers are doing but they don’t necessarily have visibility further along the supply chain into their secondary and tertiary suppliers. It’s only really once a company understands what their full set of supplier’s suppliers are doing and how they’re performing that they can gain the necessary insight. This will enable them to understand where the pressure points are that could disrupt manufacturing again in the future. Vehicle production provides a good illustration of the challenges faced in controlling supply chains. It might be possible to manufacture 90% of a car but if you can’t source the steering wheel assembly then you haven’t got a finished product to sell. The manufacturer of the key steering wheel components might actually not be a primary supplier but a secondary or even tertiary supplier where your visibility is limited.”

Methods for ensuring improved visibility of the supply chain include better use of data analytics to fully map interconnectivity and reliance between suppliers in the production network. Also, a more focused approach to understanding supplier relationships is recommended, even if buyers and sellers do not directly interact as the next primary step on the supply chain.

Patrik Zekkar, Global Head of Trade Finance & Working Capital Management at Nordea, says: “When we look at visibility along the full supply chain, this also includes visibility in demand development, for example, the buyer’s buyer.  Increasing knowledge of the downstream supply chain means using data not only to predict your own sales, but to predict your customer’s customers sales as this will of course have an effect on you with regards to ordering volumes and sales forecasts. As companies move further from offline to online sales as a resilience measure, more enhanced and relevant data becomes available to assist planning, meaning companies need to be increasingly mature in their thinking and approach.”

Sourcing both near and far

Following the crisis, the majority of companies are expected to carefully be examining their sourcing processes to establish whether there is the possibility of increasing the diversity of their suppliers. With China unlikely to change as the major global hub for sourcing any time soon, for Nordic companies this may mean adding extra suppliers in Asia or looking closer to home in Europe.

Richard says: “There’s of course a lot of dependency on China and we expect that to continue but we may begin to see buyers looking at a China plus one or China plus two strategy. We often find, particularly around the more complex technology types of manufacturing, companies already operate a China plus Vietnam, China plus Indonesia or China plus Thailand type of supply chain. These countries are already established as large hubs for the more sophisticated sorts of manufacturing and we expect to see a broadening out of the China plus one or plus two strategy to diversify future supply chain risk.”

“Nearshoring is also something that will probably increase in the coming years. This might not mean production comes all the way back to the Nordics but it could potentially move closer to home in destinations such as Southern and Eastern Europe or Turkey. Transferring production closer to destination markets in theory offers added protection against supply chain risks. European national governments have deployed extensive support packages for their economies in collaboration with the EU and other regional bodies which means they will be looking to encourage more value adding manufacturing to be transferred to Europe. With increased government support for national industry sectors, there may be added incentives for producers to manufacture finished goods and components nearer to home,” adds Richard.

Patrik says: “Rescue packages have built up both corporate and government debt so we will very likely see measures put in place to enable national economies to grow themselves out of their debt burdens. There will of course be a strong incentive to create growth within the European Union which supports the argumentation for bringing employment and growth to Europe as a natural consequence of dealing with the problem. A good example is in France where the government has given grants and support packages to Renault with the requirement of moving some of their production back to the country.”

Whether factories do move closer to home, this will only really be seen in the long term as moving production facilities is not something that happens overnight.

Patrik adds: “We have seen a couple of high profile examples that have already been talked about but it will take time before they are realised and begin to have a real effect at the micro level. Moving suppliers for any sort of company is of course never easy. In a number of industries it can take at least 12 months to add a supplier due to all of the quality assurance measures they need to take. Moving a whole factory itself is estimated to take two years at a minimum to achieve full productivity.”

Costs and more costs in focus

The coronavirus has already seen increases in the international trade costs of imports and exports across borders due to factors such as additional inspections, reduced hours of operations, border closures and lack of transport capacity, etc. As well as visibility and alternative sourcing arrangements, costs are also expected to come even more into focus in the post corona trading environment.

Richard says: “From a supply chain perspective, the likelihood is that companies will see their costs increase as they adapt to changes and alter the structure and location of their suppliers. These costs can include the investment that’s required to bring in other countries and sites into their supply chain equation alongside or instead of China. Companies considering near shoring will also experience cost increases as a result.”

Patrik says:  “In recent years, many companies have pursued a form of cost arbitrage as they try to find the countries with the lowest salaries for hosting their production sites. As they now consider alternative production locations, the obvious route to offset increases in costs is of course to look at productivity. Something that we have realised in the Nordics and that has proved to be key in the growth of the Nordic economy is that if you need to move your supply chain, you need to increase productivity. There’s been a natural development as salaries pick up in traditionally lower cost locations, competition increases and we start to automate and roboticise wherever we can in order to increase productivity. It’s kind of an evolutionary move. Costs will initially increase but the demand that they come down will prove to be a catalyst that energises productivity.”

Digitalisation no longer optional

One noticeable aspect of the coronavirus crisis has been limitations caused by international trade processes that are still heavily reliant on paper. Difficulties encountered in the physical delivery of trade documents has further spurred the switch to fully digital trade tools such as the blockchain based platform we.trade. The emergency measures taken during extraordinary times, where authorities and third parties in the supply chain have accepted electronic documents in the form of  PDFs and copies rather than originals, has also shown that the switch to digital has worked and can be scaled up. This may lead to a more rapid change of culture and behaviour within trade practices.

The adoption of new digital trade technologies is expected to continue at a rapid pace, making it possible to automate the actual trade process with digitised data entry points for companies, banks and logistics providers. Advanced systems are expected to use AI (Artificial Intelligence) to robotise the necessary steps for buying and selling goods, thereby simplifying and speeding up the global trading system.

The move to fully digital and decentralised platforms like we.trade in order to exchange digitised trade instruments such as guarantees, electronic bills of lading or letters of credit, will continue to replace paper trade methods that have stayed the same for many years.

Richard says: “One thing that we knew before and that has really been confirmed by this crisis is that digitalisation is no longer optional. Everyone has seen working from home become even more pronounced but from a purely treasury perspective the crisis really does highlight the fact that trade and supply chains specifically have got to go as digital as possible. The uncertainties and potential risks caused by an over reliance on traditional paper trade documents are all too clear for everyone to see. We already have the tools and platforms such as we.trade in place and it would be surprising not to see digitalised trading becoming the norm in the coming years.”

Supply chains are a changing

Despite the many unknowns related to how the international trade picture will look once the global economy becomes fully operational again, the expectation is that supply chains will change post corona.

Patrik adds: “It will be a balancing act. We can’t expect that things will go back to the way they were before but at the same time changes in most areas will happen incrementally.”

Richard continues: “The financial crisis of 2008 led to widespread changes and there is a saying that says ‘nobody wants to waste a good crisis’. There is now a real opportunity for certain things within supply chain to change. Whether this will be a massive pronounced fundamental change or not, time will tell, but there certainly will be an iterative change as a result of this.”

“With regards to China maintaining a role as the world’s supplier of choice, there will certainly still be things that you will not be able to do without China’s involvement. Many elements of the manufacturing process involve such a level of complexity and integration of the components required that if you want to continue with a particular type of product and process, China will need to be involved. That does not necessarily mean that you can’t diversify some of the processes away from China and have some element of redundancy in there where you bring in other countries into the supply chain. However, at this stage it appears unlikely for particular industries that they can completely shift their entire supply chains away from China,” adds Richard.

Patrik concludes: “We should remember that China is also a massive consumer market and will become even more of an important economy in the future. In certain instances, in order for companies to sell there, they need to be present there. As China continues to climb the value ladder and increases its sophistication in the industry, it will also become another kind of counterparty to companies in the Nordics.”

Richard concludes: “We are hopeful that the Nordic economies will be able to start trading their way out of this downturn already this year. At Nordea, we are focused on working with our customers to ensure that they are well positioned to take advantage of the upswing and the recovery as it takes hold. The Nordics are one of the better positioned regions globally due to the early measures that were put in place by the national governments to protect the economies and their citizens. We expect that the potential rebound may be quicker to emerge than in other countries due to a less pronounced downturn and we are ready to help customers ramp up their businesses again and ensure they have robust supply chains in place in the future.”

To hear more about robust supply chains at Nordea write to Richard at Richard.Hayes@nordea.com.

Contact your Nordea Trade Finance advisor for further assistance or find out more about we.trade here.

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