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Supply-chain design
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i. Location of production
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- Constraints on foreign production (taxes, tariffs, or local content requirements) or incentives (tax concessions or subsidies) for reshoring, near-shoring or diversifying supply chains;
- Free-trade agreements (FTAs), which could shift production or otherwise diversify supply chains; and
- Other efforts to work with allies and trusted partners to secure supply.
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- Government ownership for sensitive sectors; and
- Legislating for requirements in public procurement.
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ii. Supplier network
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- ‘Matchmaking’ with suppliers; and
- Public-private consortiums.
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Product design and production capacity
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- Simplifying products and reducing their complexity (i.e. by removing unnecessarily divergent regulation); and
- Supporting additional or more flexible production and distribution capacity.
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Demand planning and inventory management
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i. Buffers
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- Setting requirements and/or providing support for:
- extra inventory/stockpiles; and
- excess lead time.
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- Creation of national stockpiles (or stockpiles held jointly with allies) for sensitive products.
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ii. Preparedness
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- Setting requirements and/or providing support for:
- monitoring of supply-chain performance;
- visibility and sharing of information along the supply chain; and
- risk screening.
- Stress testing.
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- Stress tests for national stockpiles; and
- Risk-management strategies for governments.
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Transportation, logistics and security
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- Making available sufficient infrastructure funding to ensure availability and quality of transportation;
- Establishing more efficient customs formalities and expedited processes at the border for critical goods in times of emergency; and
- Developing and supporting a national strategy for protection against the theft or damage of products, as well as strengthening physical/cyber systems.
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Financial fragility of suppliers
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- Providing assistance with financial capacity/revenue management.
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Conducive business environment
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- Establishing a predictable regulatory environment;
- Supporting investment and technological innovation; and
- Reinforcing an open and rules-based global trade system (e.g. exercising restraint in the use of export restrictions; supporting WTO reform; negotiating FTAs).
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Sources: Author’s compilation, building on the supply-chain vulnerabilities identified by Lund et al. (2020), Risk, resilience, and rebalancing in global value chains. It also draws on the categorization of resilience-oriented investments by Melnyk, S. A., Closs, D. J., Griffis, S. E., Zobel, C. W. and Macdonald, J. R. (2014), ‘Understanding supply chain resilience’, Supply Chain Management Review, 18(1): pp. 34–41 (accessed 12 Feb. 2021).
Government action targeted at firms
Supply-chain design
In terms of affecting the design of supply chains, varying the location of production (by making supply chains shorter, more domestically- or more regionally-based), and diversifying supplier networks are key aspects for consideration in attempts to reduce over-reliance on a handful of (or, at times, single) countries or suppliers.
Much discussion is currently focused on reshoring supply chains. Governments can encourage or compel companies to revert to domestic production (or to secure a minimum production capacity within the domestic economy) through subsidies, taxation, tariffs, local content requirements or restrictions on outbound foreign investment. While such policies could potentially support the desired outcome of securing supply in an emergency, these measures also come with inherent pitfalls – including the potential for economic distortions, with adverse effects on innovation and competitiveness. Specifically, measures to repatriate supply chains could result in higher production costs (reflected in higher domestic prices) and thus in lower overall productivity and reduced growth, though this is hard to quantify. Some economies of scale might also be lost through having multiple suppliers. These measures could also lead to retaliatory action by other countries, thereby triggering a wave of protectionism. Moreover, increasing domestic production substitutes one source of vulnerability with another. Specifically, a greater reliance on domestic production is accompanied by a greater exposure to local shocks (such as natural disasters or disease outbreaks).
Measures to repatriate supply chains could result in higher production costs (reflected in higher domestic prices) and thus in lower overall productivity and reduced growth.
In short, the costs of extensive reshoring outweigh the limited benefits. Reshoring is not desirable as a singular strategy, but should target critical areas. There is little evidence of extensive reshoring taking place. Business surveys have confirmed that firms have limited interest in reshoring. For example, Euler Hermes found in December 2020 that only 10 to 15 per cent of surveyed companies were considering relocating production to their home country.
A broader and more appropriate strategy is to diversify supply chains and the supplier network. Concluding FTAs, which could entail shifts in production, could be one element of this. There are additional ways (the topic of Chapters Five and Six) in which working with trusted democratic partners can play a role in diversification efforts. Some authors refer to this notion of working with allies to rebuild supply chains as ‘ally-shoring’. Such steps would align with a shift towards the regionalization of supply chains.
To actively support diversification at the corporate level, a ‘strategic supply chain diversification fund’ could be set up. Governments can also support firms in ‘matchmaking’ with suppliers – for instance, by supporting trade fairs or digital platforms for connecting buyers and sellers. Strengthening public-private partnerships – for instance, in the form of consortiums to help manufacture essential medicines domestically or to boost domestic processing of critical raw materials – could play a role in creating more resilient supply chains.
However, diversifying supply chains comes with drawbacks and faces hurdles. Increasing the diversification of suppliers and source countries can be costly, and takes time. Among the common impediments to moving the location of production are a number of physical as well as financial and regulatory considerations, as follows:
- Access to natural resources and raw materials;
- The availability of skilled workers and specialized knowledge;
- The existence of an ecosystem of specialized business networks;
- Path dependence for capital-intensive industries (for example, those exhibiting large fixed investments and economies of scale);
- The existence of a conducive business environment (this can depend on the ease of doing business at the production location; technical barriers to investment and trade; taxation; and regulatory aspects); and
- Environmental or human rights concerns.
One key consideration regarding the practical feasibility of diversifying suppliers – and especially if this is being done to reduce dependence on China – is the strength of market forces, relative to the policy levers. First, multinational companies base their production in countries such as China – not with the primary objective of exporting from there, but increasingly in order to serve the local markets. With a growing middle class, and thus a burgeoning consumer population that will drive future demand growth, the business rationale of desiring proximity to major consumer markets stands in contrast to national governments’ efforts to sever economic ties with China. Second, as China has emerged from the COVID-19 pandemic-induced economic slump, and as its economy’s performance is key to the global recovery, diversification to other countries is challenging. In essence, many companies are reluctant to move their manufacturing out of China. A survey conducted by the American Chamber of Commerce in Shanghai, in partnership with PwC, found that 70.6 per cent of companies did not intend to shift production out of China, 14.0 per cent are moving some production to non-US locations, and only 3.7 per cent are moving some production out of China to the US and its territories. Likewise, European firms are not leaving China, but instead are doubling down by reinforcing their operations in China. A recent survey conducted by the EU Chamber of Commerce in China, in partnership with Roland Berger, found that over one-quarter of manufacturers are planning to move at least some of their supply chains into China, while the desire to leave the Chinese market has reached record lows.
Product design and production capacity
Governments can also take action aimed at simplifying product design and enhancing production capacity. By changing the regulatory environment, governments can play a role in supporting firms to reduce product complexity (for instance, by removing the need for products to fulfil slightly different requirements between countries). While harmonizing standards would primarily help to reduce costs, and thus increase efficiency, there is also a positive side-effect which can increase resilience. When products (and, in particular, inputs and components) are standardized to a greater extent, they can be substituted much more easily. This allows firms to manage inventory globally and to shift production across different sites in times of crisis. In other words, it allows for more flexible production and distribution capacities on a global scale.
At the same time, steps towards increasing standardization would come with the accompanying challenge of how to differentiate products. Consumers demand greater variety and increasingly personalized products: thus, businesses often have to manage the twin competing forces of standardization and personalization. Technology can help to overcome this tension, however, by allowing for mass< customization.
Demand planning and inventory management
Creating buffers can strengthen supply-chain resilience. This can take the form of excess inventories (i.e. stockpiling) or building in additional lead times. However, such extra buffers can have drawbacks. Holding larger inventories is costly for firms, and is not always possible, given the nature of the product or industry under consideration (for instance, because of limitations on the shelf life of food products or pharmaceuticals). Governments could, for example, require firms operating in critical sectors to increase their inventories. But the question remains as to who will shoulder the associated costs – governments, businesses or consumers?
In order to enhance preparedness, governments can support the ability of firms to anticipate, discover and deal with supply-chain disruption. Key areas for investment could include measures which facilitate the monitoring of supply-chain performance and risk screening.>
More broadly, improving transparency, enhancing the visibility as well as the traceability of supply-chain layers, and sharing this information along the supply chain are all beneficial actions for greater public-private cooperation to build more resilient supply chains. The more that is known about the different layers (tiers) of suppliers and the more visible/transparent those layers are, the easier it is for firms to identify potential problems in the supply chain, to improve the speed and quality of information for early warning systems, and to respond to supply-chain problems.
For enhanced preparedness, stress tests could be introduced. Some authors suggest developing such tests for companies in essential supply chains, along the lines of the stress tests which were made mandatory for banks in the wake of the global financial crisis that began in 2007. Stress-testing could require companies to quantify the cost of supply-chain disruptions under different scenarios, and to prepare mitigation plans.
Stress-testing could require companies to quantify the cost of supply-chain disruptions under different scenarios, and to prepare mitigation plans.
Schmitt and Kennedy have recommended a supply-chain analysis by drawing inspiration from the Committee on Foreign Investment in the United States (CFIUS). While CFIUS is currently set up to scrutinize the risks to US national security posed by investments of foreign entities, it could serve as a model for reviewing imports of critical products.
Transportation, logistics and security
Public investment in maintaining and building adequate infrastructure affects firms’ abilities to develop multiple transportation options and to help supply chains adjust to external shocks. To facilitate the movement of goods in times of crisis, governments can also take steps to expedite customs administration and the timely release of critical goods by simplifying procedures without undermining health and safety (for example, by intercepting the trafficking of counterfeited medical supplies).
Improving the protection of firms and supply networks against the theft or damage of products, as well as strengthening physical and cyber systems, can enhance the security of supply chains.
Financial fragility of suppliers
An important component of a smoothly-operating supply chain is the management of cash flows along that chain. Supply-chain finance fuels the operations across the production network, and thus drives global trade. During an economic crisis, the supply of trade finance can dry up as banks curtail lending. Corporate loan defaults and bankruptcies are not only likely to have a direct impact on the financial sector; they can also have ripple effects along the supply chain. Trade finance scarcity particularly affects small and medium-sized enterprises, and is most pronounced in developing countries.
Governments can assist firms with the management of their revenues and financial capacity through emergency loans or payment holidays. In the wake of the outbreak of the COVID-19 virus, the WTO and six multilateral development banks extended their trade finance programmes in support of essential imports and exports.
Conducive business environment
Governments can set a conducive business environment which facilitates adjustment to shocks and thus strengthens supply-chain resilience. This entails the establishment of a stable and predictable regulatory, trade and investment regime. In addition, government support for innovation and investment can help firms develop more flexible responses to supply-chain disruptions. Governments can take steps to facilitate the adaptation of new technologies by firms and to promote next-generation industries.
On the trade front, governments can encourage supply-chain resilience by reinforcing the global rules-based trading system, especially via the WTO and bilateral/regional FTAs. The WTO is at the centre of the multilateral trade regime, and plays a critical role in maintaining trade openness, which is crucial for supply-chain resilience. As discussed in Chapter Five, the WTO has taken steps in the context of the pandemic – particularly with regard to the monitoring of trade measures and the use of export restrictions.
Negotiating FTAs plays a role in the above-mentioned diversification of supply chains and reduction of trade barriers. Specifically, greater harmonization or mutual recognition of standards and regulations can not only help to reduce trade costs (and thus enhance efficiency), but also strengthen supply-chain resilience by facilitating the production of essential goods. FTAs can also serve to liberalize trade in digital technologies, which are a helpful tool for supply-chain resilience, and set new rules for the conduct of digital trade.
Governments as the primary actor
Areas where governments are the primary actor include public procurement. Critical infrastructure is perhaps the most prominent historical example, although the COVID-19 pandemic has highlighted the need for public authorities to purchase vital products and services needed to tackle public health emergencies. In January 2021, President Biden signed an executive order strengthening ‘Buy American’ provisions that increase domestic preferences in public procurement contracts. In July, the administration announced further steps in order to increase US-made content in federal purchases and to bolster critical supply chains.
Governments create and maintain national stockpiles for critical sectors. For instance, in the US, the Strategic National Stockpile covers critical pharmaceutical and medical supplies. The US Department of Energy’s Strategic Petroleum Reserve is the world’s largest emergency reserve of crude oil.
Stress tests could be used to determine if a government’s national stockpiling strategy is adequate to prevent shortages. In addition, regular reviews are necessary to identify which critical products, such as materials for advanced technologies, should be added to the stockpile. Under the Obama and Trump administrations, the US added certain rare-earth elements to the National Defense Stockpile. However, the latter is limited to defence purposes, and is not intended as an economic stockpile. Initiatives are therefore under consideration with regard to expanding the current stockpile in size and scope.
Identifying critical products and stockpiling them is challenging, and is further complicated by the fact that governments would have to anticipate which products will be essential for each specific crisis. Hence, risk-management strategies play a role in governments’ preparations for crises.
A number of countries have agreed to share stockpiles in case of emergencies. The Agreement on an International Energy Program, which established the International Energy Agency in the wake of the 1973/74 oil crisis, offers an example. At the present time, participating countries have agreed to hold emergency oil stocks and release them as part of a collective action in the case of a severe shock. Chapter Six explores some ideas for further collaborative steps regarding jointly-held stockpiles.
The role of technology
Technology cuts across all these issues and dimensions: first, it is a driver for government action. As discussed in Chapter Three, there are national security and economic rationales for strengthening supply chains of critical technologies, such as semiconductors. Second, technology is a tool to build resilient production networks. Increased automation and the use of robotics have the potential to shorten supply chains. End-to-end data platforms offer greater data security along the supply chain and can help to identify and manage supply-chain risks. Blockchain, for example, increases transparency and visibility in global production networks by creating an unchangeable record of supply-chain data. Third, technology also creates stumbling blocks for supply chains – with examples being cybersecurity concerns or a reliance on critical minerals for certain technologies.
As mentioned in Chapter Two, technologies such as 3D printing can help bridge the divide in terms of the traditional trade-off between efficiency and resilience. In other words, the adoption of new technologies means that greater resilience does not have to mean reduced efficiency. However, technology alone is not a magical solution for strengthening supply-chain resilience. Each approach outlined above comes with its own set of advantages and disadvantages. In addition, these strategies are not all mutually exclusive: rather, some can be interoperable and can build on each other.
