In these turbulent times, the pandemic has affected almost every industry, having a great impact on the global supply chain. However, in the near feature, this will also represent an opportunity for new and more flexible ways of doing business. Take a look at the upcoming outsourcing trends.
Do you remember life before the coronavirus? Do you remember that “life before the coronavirus” was only a few short months ago?
The coronavirus changed the shape of daily life at a breakneck pace. It also accelerated the rate of change for many businesses. Many trends that were already underway will pick up speed or will change completely — and many will stick once the pandemic is over.
In the case of outsourcing, that means a radical change to the way you conduct business. Here is why that is and what it means on the ground.
The fragility of our current supply system
Up to this point, the global supply chain (especially in health systems, although this might apply in several industries) was structured on the twin forces of outsourcing and thin margins.
As the coronavirus revealed, when demand spikes, everyone feels it. And at a time when everyone in the world is demanding the same things at the same moment, individual businesses cannot get what they need. Worse, supply chains are not designed to adapt to shocks like this and cannot move nimbly enough to make up the difference until demand drops.
In short, the system functions because it is designed to operate on the status quo. The moment the status quo changes, the entire system feels the shock. In fact, nearly 75% of companies are experiencing supply chain shocks due to Coronavirus, and 44% of companies do not have any backup plan to deal with it.
Merging supply chains
The bigger issue for companies is that it is hard to know where, exactly, their supply chain is falling apart. Suppliers have suppliers of their own, who in turn have their own layer of suppliers.
By one calculation, a multinational company like Volkswagen has 5,000 tier-one suppliers, or direct suppliers. Each of these suppliers has an average of 250 tier-two suppliers, which means that Volkswagen actually relies on a supply network of 1.25 million suppliers, most of whom it does not even know about.
Even the act of keeping track of tier-two suppliers may not be possible. And thanks to COVID-19, companies are beginning to understand exactly how risky that is. Remember, if the supply chain breaks down at any stage among the tier-two suppliers, it will affect the tier-one suppliers, who will, in turn, affect Volkswagen’s ability to perform.
Those supply chains are not just bad news for a business’s bottom line. The long-term impact on those supply chains will actually impact the long-term economic fallout of COVID-19.
The path back to growth after COVID-19 will depend on a variety of drivers. Generally, we can sketch three broad scenarios: V, U, and L.
A V-shaped scenario is a classic economic shock, and monopolizes the empirical shapes of prior economic shocks (including the fallout of previous epidemics like SARS and the 1918 Spanish flu). Basically, output is displaced, but growth will fully reabsorb the shock and will eventually rebound.
A U-shaped scenario is a V scenario’s ugly stepsister. Unlike a V-shape, where we hit rock bottom and start clawing our way back up, a U-shaped scenario sees persistent shock, and while growth does recover, there is some permanent loss of output.
An L-shaped scenario is the ugly and poor cousin of V and U. In order for this to materialize, there would have to be significant and permanent structural damage. Like, for example, breaking something on the supply side beyond repair, like the labor market or the productivity function. Even pessimistic assumptions find this implausible — eventually, this pandemic, like all pandemics, will end.
Simplifying Supply Chains
The moral of the story for supply chains? For one thing, companies spooked by the evidence of their frailty will likely spring into action to consolidate their supply chains into resilient ecosystems.
In addition, companies that previously relied on geographically concentrated risk are discovering the value of distributed, coordinated, and trackable supply chain components. One such example is remote software development teams. These components are what will allow them to stay flexible in a crisis, big or small.
Work from Home Revolution
On the other hand, the pandemic has worked relentlessly to crush brick-and-mortar businesses as public health officials nix almost all forms of public interaction. At the same time, it has boosted almost anything that can be done remotely and with minimal human contact.
This means two things. If anyone will emerge from the pandemic stronger than ever, it’s Big Tech. Second, companies that fast-track digital transformation will continue to hold their own — and those that do not will be left behind.
What does this mean for outsourcing opportunities? On one hand, companies will get smarter about how they outsource. As many previously outsourced employees are forced away from work under stay-at-home restrictions, companies will find new and inventive ways to offer flexible work options.
It also means that the outsourced workforce will likely become more distributed to minimize the risk. Investing your outsourced workforce solely in one country may have worked before, but as Covid-19 demonstrates, it does you little good if that country happens to be hit by a crisis.
Companies will also adapt to provide increased digital workspaces and flexibility to remote and outsourced workers. That way, they can accommodate a workforce that no longer sees each other face-to-face without a significant decline in productivity.
They will also have to invest in smarter technology to bolster productivity — for many companies, that means taking a risky leap into AI and advanced analytics.
Preparing for the world after Coronavirus
The world after Coronavirus feels like a distant future, one in which we are allowed to spend time together again and start working with our colleagues in person. But that world will come — and it will look radically different from the world before Coronavirus.
So the real question is this: Is your business ready to rise to the challenge? If you’re prepared to turn your old approach on its head, you can greet the post-pandemic business world with open arms.
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