Policymakers and corporate leaders must think about the sources of supply-chain vulnerabilities and building resilience in different ways. Key public policy considerations include economic competitiveness and national security.
In considering supply-chain risks, objectives and strategies, it is important to distinguish between the corporate and government levels. This chapter identifies the sources of supply-chain risks faced by individual firms and the rationales for government intervention.
Sources of supply-chain vulnerabilities
According to a report by McKinsey, supply-chain vulnerabilities at company level can arise from the following areas:
- The structure of supplier networks: issues might include a geographic concentration of production, the substitutability of suppliers, interconnectivity between suppliers, the number of tiers of suppliers in the production network and the visibility/traceability of the relationship between the tiers;
- Demand planning and inventory management: for example, unexpected surges in demand during times of crisis, or an inability to hold inventory;
- Transportation and logistics: such as unexpected disruptions to physical or digital infrastructure, border closures or customs delays;
- The financial fragility of suppliers in a network: this includes vulnerabilities in the debt and liquidity levels of downstream suppliers;
- Certain product characteristics: for example, the degree of product complexity, degree of product substitutability or degree of labour intensity.
Government motivations for strengthening supply-chain resilience
While firms focus primarily on commercial priorities when trying to increase supply-chain resilience, broader economic, societal and strategic factors constitute the main rationales for strengthening supply-chain resilience at the national and international level.
- Addressing market failures in supply chains: Government intervention is typically justified when there are market failures. These could arise because of information gaps in complex supply chains, or following a potentially incorrect assessment by individual companies of the risk of crises. Moreover, there could be externalities along the supply chain: in deciding how much to diversify or how much inventory to hold, firms might not consider the impact of their decisions on other firms in the production network.
- Enhancing crisis preparedness and response regarding health and personal safety: As the COVID-19 pandemic has highlighted, protecting supply chains is critical to support the provision of essential goods in the areas of food and agriculture, as well as pharmaceuticals and medical products.
- Strengthening national security: Certain industries – such as defence or energy – have long been considered strategic because of their role in national security. More recently, the technology sector has been at the centre of government attention and efforts to reconfigure supply chains, driven in particular by concerns regarding the concentration of the semiconductor industry and the security of foreign-owned or -controlled 5G telecommunications networks.
- Boosting industrial strength and economic competitiveness: In an effort to boost national industrial strength, countries around the world are taking steps that could reshape supply chains. To some extent there is an overlap here with the previous category: after all, economic security is closely related to national security. This is especially true for the technology sector more generally, and the semiconductor industry in particular. But while some elements of this category could be folded into the preceding one, the economic drivers warrant a separate grouping. For instance, the aerospace, automotive and machine-building industries are frequent targets for government intervention (with implications for supply chains) because of their high-value contributions to national economic output and international competitiveness. With the transformation to more highly digitalized economies, industrial strategies – for instance the EU’s new European Industrial Strategy – emphasize emerging technologies and aspects that affect their supply chains by focusing on securing innovation and investment, and ‘levelling the playing field’.
- Creating domestic jobs: With globalization facing challenges in recent years, in part driven by labour market dislocations, calls for ‘reshoring’ production and bringing back jobs have abounded. While the Trump administration focused on this aspect of supply-chain reorganization, President Biden has also stated a desire to ‘shift production of a range of critical products back to U.S. soil, creating new jobs’. But, while some limited reshoring has happened there is little evidence that manufacturing jobs are returning on a significant scale. Even if they were, reshored production is increasingly carried out by robots, and does not necessarily lead to higher levels of domestic employment or of wages.
- Promoting human rights and sustainability: In support of the green and digital transformation of the economy, important considerations include reducing the environmental footprint of supply chains and securing access to critical raw materials that are needed for the transition. Moreover, requiring companies to strengthen human rights and environmental due diligence and to report on their supply chains needs to be seen in the context of ‘building back better’ following the coronavirus pandemic and will have implications for the trade relationship with China, given the country’s human rights and environmental practices.
Because governments are pursuing a variety of different objectives in their efforts for greater supply-chain resilience in the wake of the COVID-19 pandemic, US–China strategic competition and the ongoing structural shift towards digital and low-carbon economies, more public policy interventions are likely.
Corporate vs government level
Policymakers have to think about supply-chain resilience in a different light to business leaders, in that they need to take different sectors into account, as well as the economy more broadly. For instance, diversifying the sources of supply could require firms to reduce their dependence on inputs from a specific supplier or country. However, if all companies were to take similar actions, their efforts would not combine to create more resilient supply chains: instead, the risk would just be shifted to a different location.
In addition, certain risks or shocks might occur, to which firms will not be able to adjust without the help of governments. For example, in order to deal with exceptional surges in demand, it could be helpful to maintain national stockpiles which go beyond inventory requirements for individual companies. Stress-testing and risk-management strategies for governments will be different from those for firms.
In terms of specific risks facing supply chains, there are some areas where the concerns of governments and private industry converge, and others where they diverge. The predominant thinking in policymaking circles about ‘dependence’ and ‘over-reliance’ on China is more about political-strategic considerations and less about actual economic resilience. Companies primarily want to work with reliable suppliers and are – to a certain degree – equivocal about whether their supply comes from China (or another country). During the COVID-19 pandemic, some firms have found Chinese suppliers more reliable than North American ones which have been hit by lockdown closures. This experience shows that being ‘dependent’ on China-heavy supply chains can sometimes be compatible with the goal of boosting resilience. To the extent that policy decisions (stemming from the imposition of tariffs, for example) become a risk to economic resilience for individual firms, the latter are more likely to think in the same terms as policymakers (i.e. along the lines of ‘dependence’ and ‘over-reliance’).
There is also a tension between the objectives of governments in terms of supply-chain resilience and of actual resilience, as defined previously. For instance, government efforts to reshore production are likely to reduce the capacity of firms to manage risks by shifting production across sites in different countries. Moreover, government interventions and market forces are at times pulling in opposite directions – as discussed below in the section on supply-chain design, there is limited evidence that firms are shifting production out of China on a large scale.
In sum, even though supply-chain resilience is ultimately boosted at the corporate level, strengthening supply-chain resilience means something different at the national and international level. This has implications for the role that governments can play in supporting moves to greater resilience.
