13 September 2020
From the very early stages of the COVID-19 pandemic, with its outbreak in China and its proliferation around the world, and the subsequent and ongoing lockdown periods, the impact on the supply chain has been one of the key considerations and vulnerabilities for the construction industry. Significant disruptions to delivery schedules and material supply remain a key challenge, with diversification and strength within the supply chain now a fundamental objective. With the risk of financial instability, the strain on resources, and reduced efficiencies, lower working capacities and increased sanitation checks leading to longer lead times to contend with, there are three core pillars to focus on with regards to securing the supply chain, as discussed below; investment, diversity and resilience.
Construction is an essential component in the recovery of the global economy, constituting a key contributor to GDP for most countries and a vital source of demand for raw materials. As the industry continues to recover and restart, investment in the supply chain is a fundamental requirement across all levels.
Private investment and financial support from clients and Tier 1 suppliers should be provided to the lower levels of the supply chain to protect and secure it, and avoid further casualties of COVID-19. These lower levels are key to a successful recovery of the construction industry, and with numerous suppliers affected by the pandemic, the focus should be to return to pre-COVID levels. Equity investments and acquisitions are crucial to the re-emergence of the supply chain.
It is also imperative that government stimulus packages are used to restart the economy and provide a boost to the lower levels of the supply chain to return to operations. The current shortage of materials will continue in effect if government support is not provided.
Lastly, with the delays caused by COVID-19, the sharing of business forecasting and planning is imperative to securing a supply chain. Many businesses are now employing the use of advanced purchasing and increasing inventory levels to provide short-term security in the supply chain. While this will provide encouragement to the suppliers, the onus must be on the supplier to maintain pricing levels and not pass the costs of inventory storage to the consumer.
With the considerable disruptions to the supply chain, which are well documented at this stage, there has been an increased focus on sourcing more local suppliers, who have manufacturing capacity and materials available to circumvent the overseas shipping delays. This includes Tier 1 suppliers looking into local suppliers, with an overall shift away from dependency on cheaper produce available from other regions. If COVID has highlighted anything to the wider industry, it has been the overreliance on China as the factory of the world, and there is now a marked effort to look at other low labor cost locations as alternatives.
The pandemic has undoubtedly spurred on key improvements across the industry and the supply chain, including innovation to maintain agility in the sources of supply and to mitigate the risk of issues in the supply chain. The ability to move quickly to activate secondary supplier relationships, and secure additional critical inventory and capacity is key. It may also be prudent to identify suppliers with shared resource pools for raw materials inventory, where it applies. Overall, the adaptability of suppliers is coming to the fore.
Furthermore, COVID-19 has impelled the digitalization of supply chain management, innovation and the advancement of technology. This extends across resource planning, supporting increased communication without the need for complex travel arrangements and enhanced supplier relations.
The severe impact we have all witnessed within supply chains around the world has led to a rethink around different supplier resources, and mapping those out to reduce the impact in the supply chain when 2nd and 3rd tier suppliers can’t meet demand. While it can be expensive as it requires time to build up a good risk-mitigation strategy and an updated list of companies in the market, it is ultimately worth it to avoid disruption at times like this.
Lastly, the importance of better due diligence checks and increased awareness across the supply chain cannot be underestimated. It is imperative to know all of the supplier base below level 1, and where the supply comes from to secure business continuity. There is also, of course, a need to now tighten up supplier selection protocols.
Needless to say, resilience within the supply chain has become all the more important in light of the current pandemic. The impact of COVID is reverberating down the chain, through Tier 2, 3 and 4, given the unavailability of raw materials and components to feed up through. With the reduced efficiencies and loss of revenue as a result of less purchasing during the pandemic, financial instability within the supply chain is a risk, and the increased strain on resources may drive some suppliers out of business.
Conversely, some businesses and supply chains have demonstrated their adaptability and changed their approach, and may have excelled during the pandemic due to demand, e.g. PPE, delivery services. We have seen collaboration across the supply chain in some instances, with suppliers working together with a common end goal in sight. Some have even seized opportunities presented by the crisis for growth, with new businesses emerging, although the long-term stability and viability of these companies could be considered somewhat precarious.
Ultimately, companies are quite susceptible to experience disruption in the challenging times we find ourselves in, with potential factory closures at play, whereby manufacturing can grind to a halt very quickly. Supply lead times are being prolonged by the extra security and sanitation checks required, with packaging, loading and shipping taking longer than previously, and scheduling becoming more difficult.
Undoubtedly, the impact of COVID-19 on the supply chain has been a huge issue since the early stages of the outbreak and has been felt around the world. It has proved to be a significant challenge and vulnerability for the construction industry, and the need to protect and secure the supply chain has never been more apparent. There are three core pillars that we view to be fundamental in this regard, as discussed above – investment, diversity and resilience.