Covid Spurs 57% of Companies to Look Beyond Asia for Sourcing
Date: Monday, July 20, 2020
Source: Sourcing Journal
The success of a supply chain hinges almost entirely on timeliness, but disruptions from the COVID-19 pandemic that caused frequent shipment delays are making businesses rethink the length of their supply chain. With raw materials suppliers largely based in Asian countries such as China, Vietnam and Bangladesh, companies now have a decision on their hands: should they source elsewhere?
More than half of the organizations (57.2 percent) surveyed for The BCI Supply Chain Resilience Report 2020 think so, indicating that their business will seek to diversify its supplier base elsewhere post-COVID-19.
In a recent webinar outlining the results of the report, Rachael Elliott, head of thought leadership at BCI, said many companies were looking to shorten the supply chain prior to the pandemic, but were still very much in favor of concepts like just-in-time manufacturing, while all too many companies are still reliant on Asia for sourcing.
But if intended diversification efforts ever do play out, Asia appears to be the biggest casualty. Of those who already source goods from Asia, nearly one-third (29.9 percent) intend to source less from the region, while another 13.2 percent expect to reduce their sourcing reliance on China.
“It’s not currently hitting China in a big way,” Elliott said. “There were a few manufacturing figures for China released recently and they were better than expected. That was largely due to domestic demand. What we’re hearing now is once the international demand begins to wane, China is likely to get into some difficulty. This isn’t helped by other countries setting up funds to help organizations within their own countries to reduce the dependency on China.”
Elliott’s point referred to Japan’s plan to allocate 243.5 billion yen ($2.3 billion) of its economic support package to help manufacturers shift production out of China. The total included 220 billion yen ($2 billion) for companies shifting production back to Japan and 23.5 billion yen ($220 million) for those seeking to reroute production to other countries.
In a March BCI Coronavirus Preparedness report, the institute revealed that in the month, 16.3 percent of organizations had moved to source goods more locally. Within two months, that number jumped to 36.4 percent. In the most recent report carried out at the end of June, at least 66.2 percent of the 353 respondents said they were moving at least one supplier locally.
The “tier 2” imperative
The importance of performing supplier due diligence, regardless of their location, has come to the surface during the COVID-19 pandemic. With widespread global shutdowns, knowing the geographical location of suppliers is crucial, more than half of the Fortune 500 manufacturing in Wuhan, China, where the coronavirus outbreak erupted.
But while most organizations have a strong grasp of their top suppliers, with 63.4 percent knowledgeable of the location of their critical “tier 1” suppliers, it is evident they exude lower levels of due diligence for lesser-important suppliers, the report said. Only 36 percent know the location of all of their “tier 2” suppliers.
It appears the pandemic has increased corporate awareness of the problems that can arise from failing to know the location of suppliers, with 60 percent intending to do deeper analysis of their supply chains as a business-as-usual practice post-COVID. Furthermore, nearly half (45.3 percent) of organizations intend to determine the location of all their “tier 2” suppliers.
“Some of the interviewees were very quick to point out that knowing the location of suppliers is not enough,” Elliott said. “They said that they’re now going to be actively seeking to determine just how successful the plans or suppliers are, and they’ll be trying to scrutinize documentation if they can get ahold of it.”
Demand forecasting: a COVID essential
Despite the widespread disruption encountered during the COVID-19 outbreak, 46.1 percent of respondents reported that they would keep the same inventory level as usual across their supply chain, whereas 19.6 percent said they have plans to increase inventory. Of those who are looking to hold steady, 58.1 percent plan to change their supplier base to allow for more effective on-time product delivery.
In the case of apparel retailers, they may have to change their supplier base anyway especially if a relationship has gone sour after cancelations or delayed payments. They definitely wouldn’t want to increase stock if they had problems selling off their merchandise anyway and were forced to stockpile it in stores or in distribution centers, with some making the decision to pack away the inventory until later seasons.
In the COVID-19 era and beyond, organizations are going to have to leverage predictive capabilities even more frequently to get a sense of where consumer trends are headed in real time. As many as 43.7 percent of organizations already use demand forecasting, while 26.8 percent of organizations are either committed to adopting it the future or are considering adopting it, the survey said.
“There are an awful lot of data streams available such as disease forecasting, pandemic flow, weather and demand forecasting [that] can become very powerful if it’s used in combination with the right tools to be able to mine that data,” said Elliott.
Furthermore, 38.2 percent of organizations will be looking to add different inputs such as AI into their demand forecasting going forward. New techniques such as AI can help organizations to mine data from multiple inputs more effectively. This is something the retail sector largely agrees with: research from Llamasoft shows that 73 percent of retailers believe that AI and machine learning can add significant value to their demand forecasting processes.
Up to 21.2 percent of organizations do not use any dedicated logistics services, with the majority of these coming from either small organizations or those from the services sectors. When considering the type of solutions businesses use, the answers are split almost evenly three ways: 31.9 percent have their own in-house logistics, 30.8 percent use a third-party logistics (3PL) company and 30.2 percent use a combination of in-house and 3PL.
In a post-COVID-19 environment, nearly four out of five organizations (79.7 percent) intend to retain the same use of 3PL. However, a significant minority (12.4 percent) intend to increase their use of 3PL, while 7.8 percent intend to bring more in-house and reduce their level of 3PL usage.