Tuesday, 3 August, 2021

Pandemic’s Impact on Global Supply Chain

Hira Bahadur Thapa

There is no denying that pandemic has left its adverse impact creating extraordinary upheaval in the global economy. With pandemic fallout under consideration, policy makers are prompted to review Just-In-Time manufacturing approach pioneered decades ago to curtail production costs and maximise profits by the companies. Regarded as a monumental advance in raising industrial efficiency, this is a system of production in which parts are delivered to factories at the time they are required. Such approach avoids the need for stockpiling parts by the factories. Warehouses for storing inventories are deemed unnecessary under this approach.
Japan has been the leading country in introducing the above system. Its car manufacturers pioneered the cost-cutting and efficiency enhancing approach. For years it has worked well for boosting the economy as the Japanese cars dominated the world market in view of lowered costs and fuel efficiency. For more than a half century this management system proved a boon not only for auto industries but also for other sectors. Many businesses stretching from fashion to food industries to pharmaceuticals found it profitable. As a result, Just-In-Time has captivated them.

But of late as the world begins to experience the fallout of COVID-19, a pandemic that started almost a year and a half ago, it has been revealed that Just-In-Time manufacturing approach is not without its limits. The events of 2020 and first half of 2021 have exposed the shortcomings of Just-In-Time. The past year’s tumultuous events when businesses were shuttered as lockdowns were in effect in many countries, a lot of industries depending on supplies with no inventories in stock suffered immensely.
These industries became vulnerable to widespread inventory supply disruption. Concerns have reinvigorated that continuation of Just-In-Time may not be feasible for all time to come. Pandemic-hit industries could not produce goods as they were hampered by the shortage of supplies of inventories, which consequently led to overall scarcity of a vast range of goods —from electronics to lumber to clothing in many parts of the globe.
The irony of disrupted factory production is that the pioneering auto industries in embracing Just-In-Time for the first time became the victims of their own innovation. Auto factories need computer chips without which they cannot produce cars. As computer chips production taking place prominently in Taiwan and South Korea was hampered due to pandemic, the auto industries were crippled by shortages of vital car components.
Auto factories in many countries around the world have felt the pain of supply disruption of computer chips ranging from India to US to Brazil. The assembly lines in these countries have been forced to halt. This is the manifestation of the vast impact of Just-In-Time idea on global production of goods. Conspicuously, the acute shortage of medical supply viz the personal protective equipment last year when the coronavirus hit many countries almost the same time which left many frontline medical workers without adequate gear exposing them to new disease underscores the risk behind Just-In-Time idea.
Against this backdrop, experts contend that the health crisis will change the way different companies operate. It will prompt them to stockpile more inventories. The companies will be more inclined to forge relationship with extra suppliers as a hedge against problems. The shortages in the world economy are also due to factors beyond lean inventories. As COVID-19 has ravaged the countries in Asia, the factories producing goods intended for supplying to Europe and America have been impacted because port workers and truck drivers have been sidelined. Their absence has led to delayed unloading and distribution of goods. The ships loaded with products manufactured at factories in Asia arrive late in the destination causing the shortages.

Supply obstruction
In today’s globalised and interconnected world many businesses have increased reliance on suppliers in low-wage countries like India, Vietnam and China to make higher profits. Under such circumstance any disruption to global shipping has enormous effect on the market supply. The problem is compounded by unseen forces like extreme weather in global shipping. The most recent example of obstruction of supplies was seen in March this year when a huge ship loaded with goods from Asian factories and bound for Europe was stuck for a week in Suez Canal leading to traffic jam. That reminds of how big the risks are when global supply chain is disrupted.
Just-In-Time manufacturing was an innovation by Japan in the aftermath of devastation of World War II as it suited the country’s dense population, scarcity of resources and the need to adapt to economic turmoil. Its world famous auto company Toyota avoided warehousing by choreographing production with suppliers to make sure that factory parts were delivered when needed. By the 1980s many companies around the world embraced Toyota’s management system to boost profits. But the pandemic has proved that the management system of Just-In-Time is not flawless. The car manufacturers’ decision to curtail the demand for computer chips at the early stage of the health crisis envisaging the low demand for cars has been disastrous as they could not meet the high demand for cars later when chips could not be available within a short period of time.
There is risk of overreliance on Just-In-Time combined with global supply chains. No doubt natural disasters too have played roles in disrupting supply if we look back the history. The 2011 tsunami in Japan and the 1999 Taiwan earthquake are some instances when factories were shut down and shipping was impeded generating shortage of auto parts and computer chips. In the wake of every crisis the debate emerges whether long-term inception of Just-In-Time is worth-pursuing and the present pandemic has exposed its shortcomings more than anything else.

(Thapa was Foreign Policy Advisor to the Prime Minister in 2008-09. thapahira17@gmail.com)