Here's how global supply chains will change after COVID-19

• The coronavirus crisis has revealed the fragility of the modern supply chain.

• Recent data shows the devastating economic impact as week-on-week trade in China, the US and Europe halved because of the crisis.

• Diverse sourcing and digitization will be the key to building stronger, smarter supply chains and ensuring a lasting recovery.

The COVID-19 pandemic has hit global trade and investment at an unprecedented speed and scale. Multinational companies faced an initial supply shock, then a demand shock as more and more countries ordered people to stay at home. Governments, businesses and individual consumers suddenly struggled to procure basic products and materials, and were forced to confront the fragility of the modern supply chain. The urgent need to design smarter, stronger and more diverse supply chains has been one of the main lessons of this crisis.

What the data tells us

Recent data from Tradeshift, a global platform for supply chain management, reveals the magnitude of the impact on trade and demand. It suggests the effects of the initial shock may continue to linger for the coming months. In China, domestic and international trade transactions suffered a week-on-week drop of 56% beginning mid-February. The United States, United Kingdom, and Europe followed suit, with a combined initial drop of 26% in the beginning of April, and a continuing decline of 17% in late April.

Furthermore, trade has flatlined in every region affected by the lockdown. Overall weekly transactions on the Tradeshift platform since March 9th are down by an average of 9.8%, compared to pre-lockdown figures, with a pronounced decline in invoices and orders since the end of March.

Two side effects of the contractions in global trade have emerged. One is that it takes longer to settle an invoice, reversing a previous trend of faster payments. According to Tradeshift’s data, businesses took an average of 36.7 days to settle an invoice in 2019, compared to 36.8 days in 2018. In the first quarter of 2020, average payment terms have risen 1.7% to 37.4 days.

Secondly, the lack of orders going through the supply chain is building up to another tidal wave with new orders slowing and invoices dropping off. Average weekly order volumes on the Tradeshift platform have dropped by 15.9% since March 9th. Invoices have dropped by 16.7% during the same period. So far, businesses are still receiving money from orders placed before the lockdown, but those are drying up. The coming months could be very difficult for suppliers globally.

Despite recent efforts to reopen factories and ease lockdown restrictions, China continues to feel the effects of the broader slowdown. Factories may be reopening, but consumers aren’t buying.

China’s trade activity surged briefly after factories reopened, but that activity is now beginning to stagnate even after lockdown measures were eased in Wuhan. The return-to-work rate in China has crept up as more companies resume production, but the domestic landscape remains drastically altered.

China’s reputation as the ‘factory of the world’ is also causing problems as many of the country’s trading partners remain in lockdown. Exports account for a fifth of China’s GDP. As orders are flatlining in the US and other key trade partners, it is doubtful whether China can orchestrate a recovery purely on its own terms.

With a sizable portion of the global economy still in lockdown, optimism about a so-called ‘V’ shaped recovery is beginning to wane among business leaders. According to PWC’s April CFO Pulse survey, cash flow is the primary concern, with 77% of CFO’s implementing cost containment measures. 56% of respondents thought they could get back to ‘business as usual’ in three months, down from 90% when the survey ran in mid-March.

Although governments and central banks have reacted with impressive speed to inject liquidity into the system, the efficacy of such measures are fading. For a growing number of multinational companies, the reality of the crisis presents an increasingly stark choice between self-preservation and supplier solvency.

Median small businesses have enough cash in reserve to keep them solvent for 27 days. If cash flow dries up, it could have a devastating impact on supply chains, lengthening any recovery period dramatically. Companies such as Unilever have already agreed to pay suppliers earlier. However, such measures won’t be possible in every case. Financing arrangements will need to adapt to give smaller suppliers better access to working capital.

Reshaping the future

COVID-19 has exposed the vulnerabilities of complex global supply chains built on lean manufacturing principles. This is particularly true in the healthcare sector, where the scramble for protective equipment has laid bare the inherent risks of inventory and single-sourcing models driven exclusively by cost control.

The impact of China’s lockdown and its dominance in key areas of manufacturing have further highlighted the problem with modern supply chains. When Chinese factories closed, manufacturers struggled to pivot due to a lack of flexibility in their supplier base. One likely consequence is that global firms will diversify their supply chains in the future, instead of relying only on China. Manufacturing hubs such as Vietnam, Mexico, and India are likely to benefit from that shift.

We will also see a decentralization of manufacturing capacity, with companies looking to bring production home. This trend grew with the likes of automation and small batch production, which had become so cheap that a number of countries started moving portions of their supply chain back home. Policymakers may be increasingly pressured to consider whether certain products need to be manufactured in the country or the region.

The transition to a new model for supply chains will be underpinned by a rapid and wholesale digitization of the paperwork that accompanies global trade.

Despite rapid advances in technology, the relationship between buyers and suppliers remains predominantly paper-based. Digitizing the buyer-supplier relationship is a fundamental element for building sturdy supply chains, and will make identifying and recruiting new suppliers far less time-consuming. With technologies like artificial intelligence and the Internet of Things, supply chains could quickly switch to alternative providers when regular suppliers face disruption.

The current crisis is an opportunity to reset a system that has relied on outdated processes. Creating smart and nimble supply chains is the key to building a global trade and investment network that’s capable of weathering future storms.