Canada’s post-pandemic supply chain challenge

Manufacturers know they don’t compete, supply chains do. COVID-19 is disrupting them and fundamentally altering the competitive landscape in global markets. But it’s also creating opportunities for companies most capable of responding to changing customer requirements and emerging gaps in supplier capabilities.

In some ways, COVID-19 has only accelerated a trend already underway to more localized sourcing of materials, components and finished products. It has been propelled by factors that will influence the reshaping of supply chain relationships, including:

• Exposure of lean and extended supply chains to natural and man-made disasters, and to risks associated with climate-related events;

• Market and technological changes that are outpacing the ability of extended supply chains to respond;

• Falling costs of production resulting from the deployment of advanced technologies;

• The importance of concentrating research, development, engineering and production activities for high value, more complex products;

• Innovation strategies that favour partnerships across local value chains and ecosystems; and,

• Increasing political risk and trade tensions.

Manufacturers have been forced to reconsider the security and resiliency of their supply chains – even the existence of individual suppliers. Cost considerations must also balance against higher levels of risk and ensure tighter control over the quality and origin of supplies.

Market uncertainty and supply chain constraints are affecting production and distribution capabilities. Demand has fallen off sharply with no clear sign of recovery. And production closures in regions affected by COVID-19 have created supply shortages around the world.

There is a further risk of lost capacity as companies experiencing financial difficulties shut down permanently. Purchasing models have been disrupted as oversupply has led to price crashes for some materials and spikes for others. Supply shortages and market uncertainty have also been aggravated by export restrictions and domestic production orders imposed by governments. After decades of dependence on international suppliers, manufacturers now face supply shortages from Canada’s three largest trading partners – China, Europe and most importantly, the US.

While manufacturers have expanded capacity and in many cases re-purposed production lines to supply health care products, supply bottlenecks, the need to meet product standards and regulatory requirements, and the time required to develop new solutions have slowed their response.

The way governments around the world respond to COVID-19 will have a lasting impact on sourcing activities. Further protective measures will stoke political and trade tensions. Governments – including Canada’s – are also likely to take a more active role in strengthening domestic manufacturing capacity and reducing dependencies on foreign suppliers, particularly for critical health care products. All of these factors will influence manufacturers considering the location of future production and sourcing activities.

A number of business considerations need to be taken into account. The focus will be on reducing costs and conserving cash, including closing down lower margin product lines. Companies will also need to make provision for an uncertain and perhaps extended period of supply and demand shortages.

Their approach will have to be just-in-time and just-in-case with increased buffers in inventory levels and in-house production of required parts and components, and finding alternatives and reliable sources of supply from domestic or more secure sources. But few are likely to end sourcing from established international suppliers because they might lose those sources to competitors.

Let’s not forget the opportunities! More near shoring will increase domestic demand for Canadian companies, especially for more critical, more highly engineered, or higher value products. Meanwhile, advanced technologies offer better ways to understand and respond to changing market conditions; map out and assess supply chain risks; track and trace critical materials and components through supply chains; simplify product designs; and increase their agility and flexibility.

Companies that secure their supply chains, bring production on quickly and diversify product lines while minimizing the costs of sourcing, production and distribution will be best positioned in the future recovery.

Jayson Myers, the CEO of Next Generation Manufacturing Canada, is an award-winning business economist and advisor to private and public sector leaders. E-mail jayson.myers@ngen.ca. Visit www.ngen.ca.

This article first appeared in the July-August 2020 print edition.