A new study by researchers at the University of Birmingham (UK) shows that US manufacturers must redesign and reform their global supply chains if they want to survive and prosper in the wake of the COVID-19 pandemic.
The virus’ impact demonstrates that global manufacturing must switch from large production sites in a single location (such as China) to numerous smaller facilities around the world to reduce business risk, the study says. Stability, reliability, resilience and predictability are critical in the design of global production networks (GPN) that balance risk versus reward and harmonize economic value with values related to reliability, resilience and location.
“There is a real tension between optimization of GPN and risks which ripple out across the globe. COVID-19 is the first time that these ripples have impacted on every country and the majority of people living on this planet,” explains report co-author Prof. John Bryson. “It’s unfortunate that companies, governments and geographers did not consider the outbreak of SARS in late 2002 as a testbed to develop new approaches to the management of risk. GPNs and offshoring, come with many risks that have been ignored.
“There is a critical social-science debate within geography that must move from celebrating the dominance of GPNs as an organizational form to an on-going, fundamental rethink required by global manufacturing concerns.”
Researchers used a database of 91 American companies to show that the current dominant account of globalization cannot explain the international strategies of 25% of these firms. However, they found coronavirus highlights that the most-effective GPNs balance cost control with risk, balancing production in core markets against over-reliance on facilities in lower-cost locations.
The rapid speed and economic impacts of COVID-19 have shifted the balance between state, citizens and businesses within national economies, the study reports. During the pandemic, the state has engaged in a “process of nationalization” with its high degree of support for businesses and employees – becoming a key consumer and surrogate employer through items such as the individual stimulus checks, the Payroll Protection Program and additional weekly unemployment assistance.
The study highlights that the most common operational response among American companies to the US-China trade war involved relocating suppliers from China to other low-cost countries. However, the COVID-19 pandemic has seen firms develop strategies dealing with supply-chain disruptions – with larger firms building regional supply chains, leaning more on technology for smaller firms, and focusing on efficiency and resilience.
“Globalization is not a novel concept, but COVID-19 has emphasized the risks associated with increasing interconnectedness of people and places through economic, political, cultural, and environmental changes,” Prof. Bryson adds. “Existing thinking on GPN design minimizes costs and maximizes economic ‘value’ rather than balancing profit against risk reduction – a high-risk approach that must change.”