Talking Trade blog
Building supply chain resilience starts at the border
Published 13 August 2020
I have been asked to speak at multiple online events this week alone on the topic of “supply chain resilience.” It’s not just supply chain professionals and business leaders worried about how to ensure that chains can bend, but not break, and handle the current and future crises with ease. Increasingly, government officials are also raising the topic.
Government officials are understandably concerned that global and regional supply chains are under threat. In some circumstances, particularly in sectors critical for fighting and managing the COVID 19 pandemic, chains have not always delivered as intended.
Companies have had to scramble to compensate for parts, components and raw materials getting stuck in one or another market under lockdown orders. Getting staff into manufacturing facilities has created another set of headaches for firms. Finally, the disruption in travel across the board has had significant consequences for the delivery of inventory and staff.
The net result of this unprecedented supply and demand shock to the economic system has led to many calls to build or rebuild supply chains with more “resilience.”
Resilience is a word, however, a bit like motherhood and apple pie. After all, who doesn’t want a mother or pie? Who wouldn’t want resilience in the face of disruption?
Resilience, perhaps like motherhood and apple pie, means slightly different things to different people.
For some, it implies a new-found enthusiasm for relocating chains closer to home. If foreign markets are part of the problem, with uncertain responses to unfamiliar challenges likely to arise in the future, getting critical parts or entire chains to move home seems like a logical solution.
For others, resilience means building up multiple supply chains, including an extreme version that calls for double chains for every item. The slightly less pronounced version looks to have multiple suppliers available for every item, or every critical item, in the chain. To really minimize disruptive impact, these two chains or multiple suppliers should be located in entirely different countries or regions.
Resilience can also mean holding increased inventory, to reduce the shock of chain disruptions. Over the past decade and beyond, firms have been following the “just in time” mantra and eliminating or reducing inventory. Parts, components and raw materials arrive at precise timings and get slotted directly into assembly. The reduction in inventory provided important cost savings for companies, as holding stock is expensive.
Governments tend to be less certain about what, exactly, they mean when they ask for resilience in supply chains and are unclear about what sort of actions, if any, they ought to take to ensure it happens.
Government policy can be critically important. As John Denton of the ICC noted in a session for APEC yesterday, critical medical supplies can be stockpiled. But it is not the responsibility of firms to hold inventory for managing public health emergencies. Firms can create stock, but governments need to be responsible for public health stockpiles.
Building resiliency in supply chains for governments may therefore mean more stockpiling of critical goods by governments. It could mean that governments need to improve coordination of ordering and inventory management, particularly in times of crisis.
This may mean an improved understanding of the resilience across a network of supply chains. The pandemic exposed how many firms believed they had sufficient capacity to respond to crisis, but since multiple firms were unknowingly counting on the same capacity delivery from the same small pool of vendors or suppliers, some sectors overall had less resilience than anticipated.
In the end, however, perhaps the most supportive government policy actions to build resilient supply chains may be for governments to get on with creating the best policy environment for movement of goods and services.
Many of the important steps have been on government agendas for a long time. These overlooked policies are not seen as “sexy” and certainly won’t appear as responsive as talking about resilient supply chains. But they are critical underpinnings for helping to ensure that needed goods and services arrive when and where needed after a crisis erupts.
Border measures are especially important. Yet government policies in some markets are headed in the opposite direction. With customs revenue crashing as a result of lowered trade flows under the pandemic, many agencies are responding with increasingly aggressive actions at the border. This includes tighter scrutiny of paperwork, more physical investigations of cargo, and more inspections at every level.
These tactics are creating more revenue, perhaps, for some agencies as they find various real or perceived faults with a wider range of cargo and accompanying paperwork. The result, however, may decrease resilience in supply chains. If firms find it harder to get supplies in from different markets, they may opt to concentrate purchases from locations that facilitate cargo movements rather than dispersing suppliers to multiple locations.
The stronger efforts to control movement of goods at borders also disproportionately affects smaller firms. Ironically, while most governments have been passionate supporters of including local smaller companies into resilient supply chains, more challenges in border crossings hits smaller firms harder as they have fewer resources to understand and solve new problems. Impediments to the movement of goods from smaller vendors make them less likely to land contracts within bigger chains.
Getting border processes in place online is also a long-standing objective for many governments. Yet progress has often been excruciatingly slow. In times of crisis, firms do not need to manage multiple stacks of paperwork with differing requirements for different markets.
The lockdowns highlighted particular problems with these systems, as paperwork tends to be delivered by air, while much cargo is routed by sea. With air traffic restrictions in place at the start of the pandemic, firms were unable to get cargo cleared before ships arrived as critical paperwork was missing in action.
Trade facilitation and customs procedures have been on government agendas for a long time. Despite multiple commitments in various settings, many governments seem to put these promises on the back shelf. The pandemic has exposed challenges with managing movement of goods and people across borders that impede efforts to create resiliency for the future.
It is long past time for many governments to deliver on policy at the border. Without action, building resilient supply chains may just remain a topic of repeated conversations.
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