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Covid -19: lessons to be learnt from production line relocations

Michel Philippart ,

The impact of the coronavirus on the supply chain has not been felt very much, because the delay in supply from China creates a buffer.

Reading time :
19 Mar 2020

The impact of the coronavirus on the supply chain was not felt very much, because the delay in supplies from China creates a buffer. Factories that shut down to coincide with the Chinese New Year had stocks and finished products in the process of being shipped. It is from mid-March onwards that this impact is felt by European companies.

The race to the bottom has pushed all companies, sometimes under pressure from their principals as in the automotive industry, to relocate. Very often this relocation has taken place to China. China's size and resources, compared with other low-cost production countries such as Vietnam, make it the biggest source of offshoring.

For years now, in my introduction to the multiple roles of the purchasing function, I have been talking about the risk associated with a pandemic. Very often, offshoring decisions are taken based on an accounting approach at the time of the decision, but do not take into account the hidden costs associated with incidents during the life cycle of the product - be it maintenance and support needs or the creation of the next generation. Sources in low labour cost countries are generally commodities, accessible to all players in an industry. So they bring no competitive advantage. They offer an immediate, visible benefit, but hide, as we have seen in this pandemic episode, many costs incurred by the length and complexity of the chain. The word "chain" implies, moreover, that it breaks down when its weakest link is defective, even if all the others are robust.

Today, we need to return the word "value creation" to its fundamental meaning: doing better than the competitor, rather than its transactional interpretation "doing better than last year". Suppliers who can contribute to the company's competitive agenda, who are prepared to favour one customer over others, are part of the extended enterprise, share its risks and benefits, and are therefore keen to favour the customer who drives this extended enterprise.

We can only recommend that decision-makers ensure that their purchasing departments are properly equipped and motivated to strike a balance between immediate purchasing gains and strengthening the robustness of the supply chain. All too often, risk management is a theoretical subject for which buyers, who are on the front line, are not sufficiently equipped or trained. It's time to better understand the value of short supply chains, which are obviously easier to manage from a risk perspective, and which offer benefits in terms of cultural proximity, collaboration to eliminate inefficiencies at interfaces, and so on. This is the thrust of the work I'm currently doing on corporate mediation and responsible purchasing-supplier relations. The changes I am suggesting can only come about if there is a much clearer focus on the long term, on taking account of overall cost and risk, over the whole life cycle, in a world made up of 3 antagonistic blocs.

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