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Sourcing strategies for global supply chains

The pandemic highlights the brittleness of our global supply chains and trading systems. How companies create resilience for changing structures could mark their success.

In the wake of the Covid-19 pandemic, a rethink of economic and trade policies is happening in capitals around the world. With the world economy in turmoil, now is the time to remake our economy and repatriate economic activity so that there is less reliance on other countries, so the narrative goes. Covid is certainly spurring change, but will it be durable?

It is projected that Canada will run a federal deficit in excess of $250 billion this year, coupled with a dramatic decrease in government revenues. These figures do not include provincial expenditures, where at least an additional $65 billion in deficits are expected. While Ottawa has enormous borrowing capacity, provinces with big debts and poor growth prospects do not. And it is the provinces that are responsible for delivering many of the services that citizens depend on and in the wake of Covid, are calling out for reform and investment, particularly healthcare, longterm care and childcare.

Add to this a weakening currency, which will make foreign goods and inputs more expensive, and shifting global alliances, including with the US and China and the appetite for a re-engineering of the economy may be limited.

While there will be some exceptions; notably, in the field of occupational health and safety, after more than a generation of liberalized trade and developing global supply chains, industry may simply be unwilling, or unable, to repatriate these activities. Recall that Donald Trump vowed to tear up NAFTA. Yet what transpired was more of a rework of the treaty. The realities of economic integration ‘trumped’ narrow domestic nationalism.

Tapped out citizens will not welcome the cost increases that disrupting established economic flows and repatriating supply chains entails. Furthermore, these cost increases could trigger inflation. How will governments feel about raising interest rates on a highly-indebted public in efforts to tame it?

The critical question

The Covid-19 pandemic has raised a critical question: Why does Canada not have the capacity to manufacture many products for which there is a sudden urgent need — everything from critical care ventilators, N95 face masks, and personal protective equipment to everyday items like over-the-counter pain relievers? The current pandemic-related shortages have fueled calls from political leaders for Canadian manufacturers to start producing critical supplies domestically.

The issue is complex and defies easy solutions. The challenge lies in a combination of how modern supply networks are structured and the operational metrics applied to manufacturers. Taken together, Canada and other advanced industrial economies have evolved a highly efficient and productive product manufacturing-and-delivery system that provides them with a cornucopia of products at relatively low costs. But inherent in that system are dependencies and expectations that the pandemic has called into question.

The local situation

The long-term trend for manufacturers has been towards specialization to exploit scale economies both in production and design. The result is suppliers scattered around the world upon whom manufacturers depend for critical components. The job of taking a product into manufacturing has increasingly turned into one of sourcing from offshore producers. In an emergency, when a Canadian company suddenly needs to scale up, the skills are hard to find.

Efficient transport logistics have lulled major companies into building globally distributed, lean production systems. Pronouncements by industry leaders like Apple’s Tim Cook that inventory is fundamentally evil reflect the prevailing view that inventory along the supply chain not only risks obsolescence, it represents cash that is tied up that could be used for better purposes. When we experience a supply shock or sudden disruption in raw materials, components, or whole product supply, there is little buffer inventory around to absorb that shock.

Will politics trump economics?

While being caught flatfooted, many jurisdictions now argue they must produce their own essential products for national (state) security reasons; most notably, PPE (personal protective equipment).  In the US, this push is as much a geopolitical manoeuvre as a supply chain issue.

The US Administration has called Covid-19 the “China virus”, calling out the Chinese administration on the poor handling of the outbreak and management of the disease and suggesting a lack of transparency.  These statements will ultimately have implications for the US supply chain and will force Canada,  to again walk the triangular tightrope of Canada-US-China relations, as it has with the arrest of the Huawei CFO in Vancouver.

Further complicating matters is the fact that various state and provincial jurisdictions are setting their own timetables for “reopening” their economies. This creates an additional level of complexity for manufacturers who are looking to re-instate their operations in an environment where some parts of the supply chain are better ready to go than others or when different jurisdictions impose different restrictions as they open.

Moving forward, Canadian manufacturers will need to consider the growing call for the introduction of export controls on medical equipment and food or agricultural products to safeguard supplies. Confusion will be the order of the day as one looks at the list various jurisdictions have developed of “essential services” to see the vast assortment that qualifies.

As we move into a “new normal” with a neighbour to our south whose leadership’s rhetoric is increasingly protectionist, it remains to be seen whether national boundaries will prevail for supply chains of “essential” goods and services or whether we will see the development of the “localization” of supply chains as the chains become shorter.

The Government of Canada recognized the imperative of safeguarding trade with the United States, particularly for goods and services deemed essential, and has worked hard to ensure the Canada-U.S. trade border remains open. The US Chamber of Commerce continues to promote the maintenance of the trade flow. Given the protectionist rhetoric south of the border, will the recent ratification of the USMCA provide a framework for the resilience and reliability of our supply chains? If we move towards “local supply chains” with a Canadian or North American boundary for some supply chains, how will China, given their growing tension with the US, react?

At some point in the future, our political leaders will answer to their constituents on government spending. While we are currently witnessing a push for in-country production based on the emotion, over time, if purchasing products internationally is cheaper, it is unlikely that future tax dollars will be spent on expensive-made-in-province products.

A final word

The pandemic has been and will continue to be a major shock to global supply chains and sourcing strategies. Emotional nationalism is a natural reaction to a threat, although acting on that emotion could impact trade for years to come. The pandemic and trade wars together highlight the brittleness of our global supply chains and trading system. Managers should use the unfolding disruptions to assess their supply strategies and initiate actions that will improve their resilience in the future.

About the authors: Monique Smith is a Senior Associate and Ontario’s first Representative to Washington. Jason Langrish is a Senior Associate with a background in international trade agreements.


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