Are Supply Chains Recovering? Four Reasons To Be Optimistic

The COVID-19 pandemic led to significant social and economic upheaval. Its impact persists to this very day, with supply chains particularly affected.

Disruptions, delays, and uncertainty have characterized supply chains in the last couple of years. Any and all vulnerabilities faced by supply chains prior to the pandemic were magnified and exacerbated. However, there are signs that supply chains are beginning to recover in 2022.

Greater Reliance on Supply Chain Specialists

More and more companies have begun relying on supply chain specialists. More specifically, they have begun relying more on “Supply Chain as a Service” (SCAAS). According to Industry Star, SCAAS is a new supply chain model in which companies partner with specialists to support their procurement, production control, manufacturing, quality, warehousing and logistics needs.

This supply chain model offers greater flexibility and a greater tech-based approach to supply chains. According to KPMG, the former is due to SCAAS’ ability to break away from traditional linear supply chains and more quickly respond to sudden changes. 

The latter is due to SCAAS relying greatly on virtual supply chain teams enabled by the use of sophisticated cloud software capabilities. Moreover, SCAAS can help reduce exorbitant supply chain management costs as the service can be purchased for specific situations and “allow [companies] to create economies of scale as well as economies of scope…” writes McKinsey.

Stabilizing Consumer Demand

When the pandemic first began, consumer demand fell immediately. However, recently, consumer demand began has begun picking up again. Of course this has placed great strain on global supply chains causing massive backlogs and shortages. This was the case with the semiconductor industry.

However, “In the US, IHS Markit’s composite purchasing managers Index—which measures activity in both the manufacturing and services sectors—fell to 50.8 in January from 57 in December, to hit an 18-month low,” writes the Wall Street Journal. While seemingly a negative, the slowdown in manufacturing and services sector activities can help companies shore up supply chains. 

This is especially true considering how analysts predict the Omicron variant to have minimal long-term economic impact. Moreover, a different Wall Street Journal article quotes the Federal Reserve Bank of New York and the Institute for Supply Management who state supply chains and consumer demand are beginning to balance out against one another.

Building Up Inventory Stocks

Where companies previously sought to cut costs by maintaining minimal inventories to avoid goods and only produce goods in accordance with the “just-in-time” production models, companies have now begun to reverse these decades-old practices. 

COVID-19 shortages have spurred these recent changes, according to the Financial Times. Now, companies have begun building additional capacity, building up their inventories, and begun carrying out “just-in-case” production though at a greater cost. 

Moreover, some companies have also sought to shift from short-term non-binding supplier arrangements to long-term binding supplier agreements so as to prevent the scramble for components and parts that occurred during the pandemic.

Supply Chain Diversification

At the same time, companies have begun diversifying their supply chain. This means several things according to the Harvard Business Review. First, this means that companies will source components, parts, and goods from more companies. Second, this means that companies will source components, parts, and goods from more regions.

Many companies, for example, have been employing a “China Plus One” sourcing strategy, incorporating Southeast Asian countries such as Vietnam, Thailand, and Indonesia into their supply chains. This is especially true in the wake of the US-China Trade War.

In fact, as a result of the US-China Trade War, the US has been pushing for “friend-shoring.”“Friend-shoring” is a strategy which promotes an integrated supply chain built around shared values among like-minded countries.

Key values include greater cooperation, transparency and intellectual property protection. This new strategy has become a key policy of the Biden Administration, as evidenced by the strategy’s inclusion in the “Building Resilient Supply Chains” policy paper, writes Bloomberg. 

What It Means For You

All these new trends taken together indicate a brighter outlook for global supply chains than previously thought of during or even prior to the pandemic. However, admittedly, it will take some time for supply chains to return to “normal” once again.

This can be attributed to internal factors (e.g., Time needed to adjust current supply chains to aforementioned trends) and external factors (e.g., Fluctuating consumer demand, COVID-19 variants). Nonetheless, it can be argued supply chains will improve this year.