Supply chain and COVID-19

How COVID-19 is Transforming the Supply Chain

Dec. 29, 2021
A new report from McKinsey explores companies’ strategies for combatting pandemic-driven supply chain disruption.

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The world’s supply chains are under a lot of stress right now. Raw material shortages, labor constraints and port congestion are among the larger issues that organizations are dealing with, but there are also many other forces hampering the smooth, predictable production and distribution of goods worldwide.

According to McKinsey, these forces could completely reshape supply chains for the foreseeable future. The research firm’s assertions make sense in a world where any massive, ongoing disruption will typically force an organization to think, react and act differently.

This could create opportunities for companies that invested in future-proofing their operations against new threats and shocks. It will also present new barriers for those that keep doing things the way they always have.

 “The challenge for companies will be to make their supply chains more resilient without weakening their competitiveness,” Harvard Business Review points out. “To meet that challenge, managers should first understand their vulnerabilities and then consider a number of steps—some of which they should have taken long before the pandemic struck.”

Responding to Disruption

In “How COVID-19 is reshaping supply chains,” McKinsey analysts discuss how companies now need to put more time and effort into shoring up their supply chains, versus just reacting to problems that have surfaced during the pandemic. When it surveyed supply chain executives in 2020, McKinsey says 93% were working to make these networks more flexible, agile and resilient.

During the second quarter of 2021—one year later—McKinsey asked those executives what steps they’d taken to shore up their supply chains over the prior year. It also asked how those changes compared with the plans they drew up earlier in the crisis and how they expect their supply chains to further evolve in the future.

Here are some of the key findings that McKinsey learned from its follow-up survey:

  • Different industries have responded to the resilience challenge in different ways. McKinsey says healthcare players stand out as resilience leaders because they applied the broadest range of measures. For example, 60% of healthcare respondents regionalized their supply chains and 33% moved production closer to end markets. “By contrast, only 22% of automotive, aerospace and defense players had regionalized production,” McKinsey points out, “even though more than three-quarters of them prioritized this approach in their answers to the 2020 survey.”
  • Chemical and commodity firms made the smallest overall changes to their supply chain footprints during the past year. This could be because chemicals and metals are asset-intensive sectors with large, expensive production sites. “Investments in new capacity can take years to complete,” McKinsey adds.
  • Regionalization remains a priority for most companies. Nearly 90% of respondents told McKinsey that they expect to pursue some degree of regionalization during the next three years, and 100% from the healthcare, engineering, construction and infrastructure sectors said the approach was relevant to their sector. 
  • Risk management is top of mind for everyone. McKinsey’s 2021 survey found that 59% of companies have adopted new supply chain risk management practices over the past 12 months. About 4% set up a new risk management function from scratch, it adds, but most respondents say they have strengthened existing capabilities. “The actions taken by companies varied according to the pre-crisis maturity of their supply-chain risk-management capabilities,” the firm states. “Companies with little or no risk-management experience tended to invest in new software tools, while higher-maturity organizations mainly focused on the implementation of new practices.”
  • Modern digital tools are helping organizations overcome current obstacles and prepare for the future. Compared with organizations that reported problems, McKinsey says successful companies were 2.5 times more likely to report they had preexisting advanced-analytics capabilities. Of the companies that had difficulties managing their supply chains during the crisis, 71% say they are ramping up their use of advanced analytics. It says the advanced electronics and high tech sectors are the only two where adoption of advanced analytics has slowed, and likely because adoption was already high for both sectors. “Almost every company also plans for further digital investment in the future,” it adds.

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About the Author

Bridget McCrea | Contributing Writer | Supply Chain Connect

Bridget McCrea is a freelance writer who covers business and technology for various publications.