What to do with our fragile supply chains
If we think back to the early shock of the coronavirus pandemic, we will likely have different stories of shortages experienced depending on where we were. No supply chain was spared from the disruption of the initial lockdowns and border closures and even now, more than two years later, the public and private sectors are still struggling to restore severed supply lines.
There is now another crisis to face: Russia’s war against Ukraine. It’s a stark reminder of the unstable world we operate in and the global interdependencies we rely on. In this environment, governments and organizations have a lot to consider when working to rebuild and strengthen supply chains.
Before the pandemic, organizations designed their supply chains around cost savings and efficiency. While this allowed companies to reduce costs and meet tight deadlines, it also carried a high degree of risk: a broken link could cripple the entire system. Having learned this difficult lesson from the pandemic, businesses and entire nations are now focusing on supply chain resilience, even as growing geopolitical tensions add to the enormity of the challenge.
Some governments have chosen to “relocate” essential supply chains in order to better control stocks of essential goods. However, not all nations can adopt this strategy, especially for critical resources that may only exist in a handful of territories. Lithium, for example, is an essential component of the batteries that power electric vehicles and is therefore in high demand as the world shifts to renewable energy. It is, however, part of a fragile supply chain that can easily break under the weight of natural disasters or global tensions.
Where they cannot relocate, some decision makers have tried ‘friendshoring’, ie establishing a network of trusted suppliers from friendly countries as reliable supply routes. In addition to strengthening supply chains, this approach can also strengthen international relationships. At a recent meeting of ASEAN Finance Ministers and Central Bank Governors, Finance Secretary Carlos Dominguez III stressed the importance of maintaining a healthy cross-border flow of people, goods and services in the region. , especially as Southeast Asia is still recovering from the pandemic and preparing for the longer-term impact of the war between Russia and Ukraine. Enhanced regional cooperation is a way to manage the still significant supply chain issues we face.
As part of friendly prospecting, policymakers can also consider diversifying away from countries where political tensions are already high. This may be the best time to look for new stable allies who share strategic and supply concerns.
In addition to these strategies, it is also important for the government to encourage and incentivize the private sector to invest in R&D. Although self-sufficiency may be too ambitious a goal, especially for an emerging market like the Philippines, we must nevertheless strive to foster an environment of innovation and knowledge sharing, especially in terms of technical manufacturing capabilities, to make the country better prepared to deal with external uncertainties and risks beyond its control.
Going forward, governments can take these steps to continue building the resilience of critical supply chains:
– Know your supply chain. Nowadays, it is no longer enough to know your suppliers and who supplies them. To build truly resilient supply chains, it is important to know where the main risks lie. If this means assessing the chain at more than five levels, governments must be prepared to do so in order to better plan and execute mitigation actions. Government agencies with regulatory power over critical industries can consider policies that push companies to do the same.
– Decide which supply chains are essential. Once a government has a complete picture of its supply chains, it can explore which products, services or resources are most critical to the nation. Those responsible for assessments of these elements should understand that assessments will evolve as the situation changes. At the start of the pandemic, for example, we were unfortunately unprepared to provide healthcare workers with the basic protective equipment they needed to properly perform their life-saving tasks. By the time the Omicron variant arrived, shortages came in the form of over-the-counter drugs such as paracetamol. How can the government now work with the health care sector to ensure this does not happen again?
– Participate in the orchestration of the supply chain. Governments have a strong influence on the design of supply chains since they have the power to sign trade agreements and treaties with other nations. They should do this in the belief that it is easier for business enterprises to find diversified and reliable suppliers in relatively stable regions.
As the world grapples with one crisis after another, it becomes increasingly difficult to ensure a continuous and steady supply of goods across borders. But it is also becoming one of the most critical responsibilities of governments as they realize that commercial supply chains are important national security considerations. Therefore, building the resilience of these networks is not just about ensuring that stores are well stocked, it is also about ensuring that entire nations continue to function.
The author is the Head of Tax and Corporate Services at Deloitte Philippines (Navarro Amper & Co.), a member of the Deloitte Asia Pacific Network. For comments or questions, email [email protected] Deloitte Asia Pacific Ltd. is a company limited by guarantee and a member firm of Deloitte Touche Tohmatsu Ltd. Members of Deloitte Asia Pacific Ltd. and their related entities, each separate and independent legal entities, provide services from more than 100 cities across the region, including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.