The global manufacturing industry is increasingly disrupted by outside influences. Natural disasters, cyberattacks, and trade disputes are more frequent and their effects are more severe. COVID-19 is driving a deeper look at how to make production networks more resilient.
McKinsey Global Institute (MGI) analyzed 23 industry value chains and their exposure to different types of shocks in their report, Risk, resilience, and rebalancing in global value chains. they looked at how their geographic footprint, factors of production, and other variables influenced their exposure to these shocks.
Companies in most industries should expect a 45% erasure of one year’s EBITDA over the course of a decade. Additionally, companies will shoulder the cost of rebuilding or replacing physical damage, loss of market share to competitors, as well as loss of life, jobs, the shortage of critical goods, and damage to communities.
MGI also found 180 goods exported from primarily from a single country, which could cause supply chain bottlenecks during a shock. Another difficulty large multinationals face is the lack of visibility into tightly interconnected supplier networks.
Not all companies are restructuring their supply chains, however. Scale, complexity, and interconnectedness make value chains difficult to adjust. MGI estimated, however, that both economic and non-economic factors could trigger 15% – 25% of the global goods exports to move to new countries over the next five years.
“The prospect of a significant geographic rebalancing in global supply chains represents a risk for the companies and countries that might lose out—but a potentially significant opportunity for those that manage to capture a share of this production,” says Susan Lund, a partner at MGI. “But supply chains involve thousands of independent firms, reflecting specialization, access to consumer markets around the world, substantial sunk costs, and long-standing relationships. Relocating is not a simple task.”
Operational choices and the structure of supplier networks also factor into resilience. Mapping supply chains and connecting them digitally, the ability to spread production across multiple sites, and carrying more inventory can all help efficient reactions to shock.
“Supply chain shocks are not a new phenomenon, but the COVID experience has made companies realize that they have to do more to minimize their risk,” says Katy George, senior partner and global leader of McKinsey’s operations practice. “In the past, resilience has often come at the cost of efficiency. But that no longer has to be true. Now companies have new tools at their disposal to make their operations more flexible and more agile. With these tools, they can become more resilient and more productive.”