COVID-19 and climate change expose dangers of unstable supply chains

With the world undergoing its second “once in a generation” disruption in 12 years, a reappraisal of supply chains is in order.

 
When a high-rise goes up, it is designed to withstand everything from gale-force winds to earthquakes and fires. But few multinational companies have applied the same kind of preemptive stress-testing to their supply chains. Manufacturers have built intricate production networks to deliver efficiency but have left little margin for error. The COVID-19 pandemic has revealed how fragile lengthy, complex supply chains can be—and how much society has riding on their continued smooth functioning.

In recent decades, global supply chains have evolved in ways that leave them more exposed to shocks. Some industries, including communication equipment, computers, and textiles, have grown two to three times more geographically concentrated since 2000. Some 80 percent of world trade now flows through countries with declining political-stability scores, as measured by the World Bank. More global production happens in areas that are highly vulnerable to climate change. And the world has grown more interconnected: when disaster strikes in one region, flows of goods, finance, people, and data quickly transmit ripple effects far and wide.

Even before the pandemic, companies were facing mounting losses from periodic supply-chain bottlenecks and shutdowns. Those costs aren’t “unforeseeable” anymore. In fact, our research found that shutdowns lasting a month or more occur every 3.7 years, on average. Manufacturers in some industries can expect unexpected events to erase the majority of a year’s profits over the course of a decade—and that’s just the baseline, accounting for probabilities like recurring storms and shipping snafus. Extreme one-off events can be far more damaging for companies and societies at large.

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Πηγή: McKinsey