Supply chain shake-up as firms prioritise resilience

Almost all companies have suffered COVID-induced supply chain disruption this year, particularly those based in the US, according to figures from Euler Hermes.

Some 94% of companies reported some kind of disruption. Over a quarter of firms in the States reported severe levels of disruption (against a 17% global average), with machinery and equipment, IT, tech and telecoms and energy and utilities companies the most significantly affected.

The trade credit insurer’s latest report on global supply chains surveyed more than 1,000 executives across five key international markets (the US, the UK, France, Germany and Italy) to uncover the ways in which the pandemic has disrupted their businesses and to find out what they plan to do about it as we head into 2021.

Half of the companies said they were coping with disruptions using a range of hedging strategies including insurance, stockpiling and alternative supply solutions, while 32% said they were ramping up ESG due diligence on suppliers.

Highly digitised companies (reporting 6 to 8 different digital activities) took significantly more actions to mitigate supply chain disruptions than the least digitised companies (reporting 0 to 2 digital activities), according to the report. For instance, 57% of highly digitised companies resorted to hedging strategies vs. 43% of the least digitised ones; 47% improved their understanding of their supply chains vs. 33% of the least digitised; and 39% reported increasing ESG due diligence on suppliers vs. 14% of the least digital ones.

An increasing demand for protection and a multifaceted resilience strategy are the “post-COVID-19 game changers”, the study found. Most companies state they are ready to incur the higher costs of reshoring but 40% would pass it along to customers. Three quarters of companies surveyed believe customers are willing to pay more for domestically produced goods.

While more than half of companies surveyed have considered looking for new suppliers and moving production sites, just under 15% were said to be considering reshoring and an estimated 30% nearshoring. In a third of the cases, companies consider moving their suppliers to countries that are already in their top three existing supplier locations. Companies favour looking for new suppliers at home, with the US the most “economically patriotic” in this regard.

China remains surprisingly popular, possibly as companies search for “cost-effectiveness in times of great uncertainty and after an unprecedented shock”.

Alexis Garatti, head of economic research at Euler Hermes, comments: “We do not expect the return of the early 2000s globalisation trends, nor a complete de-globalisation. We see competing dynamics in global trade, and thus a multifaceted future, with increased demand for protection: traditional issues such as production costs, quality and transportation issues will continue to drive supply chain decisions, but companies seem to worry about environmental risk, potentially announcing more scrutiny and a shortening of less ESG compliant supply chains. Reshoring could happen conditional on appropriate incentives; in fact 17% of companies that are not planning supply chain reorganisation mention that the most effective measure to help them improve supply chain resilience would be domestic tax incentives to bring some production back home.”

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