The past three decades have seen the world economy grow on the back of large pools of cheap labour, particularly in China and India. Globally, consumers have benefitted from cheap prices for everything from textiles to mobile phones.
Things became so cheap that people buy fashion items and throw them away after one use. The fix and make-do philosophy of the post-war years is long dead. Is that about to change? Well, maybe.
We have seen supply shocks in recent years that were not great enough for us to change our habits in a significant way. One was the tsunami that hit northern Japan in 2011. Apart from taking the Fukushima nuclear plant out of action, manufacturing at several car-part plants halted. As a consequence, car-assembly plants in North America stalled for several weeks.
This is not the only example of disruption. But with global supply chains that have become highly integrated, it becomes extremely difficult to change that supply flow without significant cost. What is more, the economies of scale that locations like China and India can offer in terms of their labour pools are very difficult to rival.
As a result of the recent trade war with China, some US companies have tried to diversify their supply chains. Favoured alternatives have been Thailand and Vietnam.
The problem with these moves was that these much smaller economies cannot match China for scale or the significant trade infrastructure that now exists in the Middle Kingdom. So many companies found that, although they liked what they dealt with in Southeast Asia, they still had a significant supply chain exposure to the Chinese mainland. The only good news was that costs remained low, so the trade-off between increased supply chain risk and continuing profits was a good one.
That balance has now changed significantly. It was already clear by January and February of this year that the world was going to suffer a huge supply chain shock as a result of the sudden closure of Chinese manufacturing capacity. At the time it was seen to be a temporary problem. Once the virus was contained, everything would get back to normal.
This would have been another reason to diversify away from China, but supply chain planners never got the chance to react. Then the virus spread all over the planet, shutting down the entire developed world at slightly different stages. For instance, in April we learned that we could not deploy testing kits because there was a shortage of the re-agent chemicals required to make those tests work. These come largely from India and China as a result of the huge shift of chemical manufacturing to those countries in the past 20 years. Europe and Western economies lacked personal protective equipment, since the vast majority of masks, gowns, disposable gloves and the like were made in China.
When the demand for these products grew exponentially over a short period of weeks, even the vastness of the capacity of the Chinese market could not fulfil our needs. Supply chain planners collectively scratched their heads about what to do next.
There is an old saying in supply chain that we tend to plan for the last crisis. If that is the case, then expect three major shifts in the way supply chains work in the future.
1. Alternative manufacturing centres
Firstly, there will be greater efforts to move production out of China and India to other low-cost countries. Markets that were already attracting companies were places like Myanmar, Ethiopia and others that have large, cheap labour pools.
The disadvantage of going to such countries is that they lack a large industrial base, lack many of the skills required for manufacturing and do not have the political stability that China and India can offer.
We will not stop supply from China and India, but the dramatic economic growth that they have seen will moderate as other developing countries pick up the slack.
2. Automation
The other way that supply chain planners will try to mitigate against the risk of another pandemic will be automation. We have seen limited automation in industry since the 1970s, not because the technology was not available, but because the advent of low-cost labour in developing countries meant that it was uneconomic in most cases.
Add in the risk of another supply chain shock, and the fact that the robots are now cheaper than in previous decades, and that trade-off runs more favourably toward automation.
That will also mean that there is less need to have factories in low-cost countries.
This will have the positive effect of shortening supply chains and making them more responsive to changes in short-term demand.
The bad news will be that the need for low-skilled labour will diminish, particularly in the richest countries.
As in previous industrial revolutions, people will find different things to do that will quickly become the new norm.
3. Online retail wins out
The third big thing that is about to change is retail. Many of us have become used to shopping online during the lockdown we have experienced. While many will have been shopping online for years, most have only used online retailing up to now in a limited way.
Many of us are getting used to our new habits and will not miss going to the bricks-and-mortar shop. Shopfronts will become more of a marketing window for products rather than the point of sale.
So that ‘last mile’ of the supply chain is becoming a lot more important. While change in the supply chain is happening right now, these changes are merely accelerating trends that were already in evidence. Are you ready for these new norms?
Brian Shanahan is founder of working capital consultancy Informita, Termscheck.com and Bonavido.com, and a commentator on working capital, procurement and supply chain issues