When the first cases of COVID-19 were reported last January, few could imagine the tragedy and disruption that would soon follow around the globe. What began as a seemingly isolated virus in a single province in China has not just endangered public health, but also triggered economic shockwaves that have profoundly transformed global supply-chain management as we know it.
When mass shortages of essential goods such as personal protective equipment (PPE), medical supplies and cleaning products occurred even in economies not yet reporting widespread case numbers, the public spotlight shifted to the supply-chain industry in a way we’ve never seen before. With businesses forced to rethink supplier and sourcing strategies, shortfalls and looming risks were vividly exposed against a dicey backdrop of volatile demand, production halts and travel restrictions. Since then, many of the most pressing trends we’ve observed during the pandemic are continuing to reshape what supply chains will look like post-pandemic.
With businesses forced to pivot and adapt business plans, the pandemic has been filled with teaching moments. For supply chains, one of the most staggering lessons is that demand-side shocks in consumer markets pose greater disturbance to sourcing than production shutdowns in supply-oriented markets.
In the first half of 2020, many North American and European businesses were able to circumvent pandemic woes throughout Asia by pivoting to regions that were operating at higher capacity, according to data from QIMA, a quality-control and compliance service provider. Even though sourcing volume in China had plummeted 75% by February, demand subsequently slipped by a marginal 4.5% year over year globally, indicating that businesses were able to continue supply chain operations even when the world’s largest manufacturing giant shut factory doors.
However, demand-side shockwaves told a much different story, exposing a lack of resiliency. When lockdowns took hold in buyers’ home regions, volatility in consumption was triggered, and demand for inspections and audits sharply collapsed by 31% YoY in the period of April and May 2020. When lockdowns and stay-at-home orders were reinstated in parts of the U.S. and in Europe in late 2020, this pattern began to repeat itself again.
Even before COVID-19, supply chains were being rerouted as businesses found themselves caught in the crossfire of the U.S.-China trade war. During that time, they were increasingly adopting a nomadic sourcing framework to help them shift production and sourcing to the lowest-cost and highest-value geographies. When the pandemic took hold, this same nomadic sourcing framework also proved helpful for maintaining operations and asserting supply-chain agility.
Even though has China fared better in its economic recovery than originally anticipated, the pandemic boosted the long-term trend of businesses diversifying and engaging suppliers in China’s regional competition. For example, demand for inspections and audits across Southeast Asia rose 19% in 2020, clocking in at twice the 2019 versus 2018 growth rate. As a whole, this region recorded double-digit expansion in inspection and audit demand starting from July, buoyed by record orders for PPE and rising demand from buyers looking for alternatives to China both in the short and long term.
Not surprisingly, buyers’ choices were closely influenced by the level of pandemic-led disruption that a sourcing region experienced. While sourcing activity in Southeast Asia more than doubled, South Asia’s draw as an alternative sourcing region to China was decidedly less pronounced, with just 2.6% volume growth in 2020. This modest increase pales in comparison to the double-digit growth the region recorded in 2019 against 2018. In particular, manufacturers struggled to bounce back from the halt of April and May. Recovery was then further exacerbated by the combination of domestic lockdowns stunting productivity across the region and continued lockdowns in the West crushing consumer demand, especially in the region’s most popular product categories of textiles, apparel and footwear.
In the early days of the pandemic, it appeared that China would ultimately be the hardest-hit by the pandemic, both health-wise and economically. But after recording an abysmal first quarter, where production volume was incapacitated by factory shutdowns and demand shocks, COVID-19 case numbers had sharply dropped by March. The world’s second-largest economy began to reopen during the second quarter, with sourcing in China then following a gradual yet stable upward path toward recovery throughout the rest of 2020.
By the end of the second quarter, China became an anomaly against the widespread global slowdown. Sourcing volume in China quickly bounced back to 2019 levels, according to QIMA. From there, sourcing volumes continued to grow throughout the second half of the year, only stalling in December after lockdowns were reinstated in multiple countries in the West. In sum, inspection and audit volumes in China contracted overall by just 2.8% in 2019 compared with 2020.
In a year of extraordinary business disruption around the globe, this figure remarkably accounts for a smaller drop in sourcing volumes when compared to the larger 3.3% drop observed in 2019 compared to 2018, a period when businesses were looking to avoid newly implemented tariffs from the U.S.-China trade war.
What’s perhaps more unexpected than China’s surprise recovery is that it’s being driven, at least partially, by U.S.-based buyers. When 2020 kicked off by the signing of phase one of the trade deal between the U.S. and China in January, signs of trade tensions were finally letting up. With American businesses already less anxious about leaving China, the pandemic proliferated and factory shutdowns hit other parts of the globe. Among the first countries to return to work, China then found itself back on the sourcing hot list for many U.S. businesses.
As a result, demand for inspection and audit orders in China from North American brands tracked above 2019 levels throughout the second half of 2020, falling by a total of 3%. By comparison, this is a much smaller dip than the sharp 15% drop recorded in 2019 versus 2018.
Shutdown and quarantine measures, combined with the extraordinary number of people working remotely, have deeply influenced consumer behaviors and shifted patterns of global trade. This monumental shift is wreaking havoc on some industries. For example, demand for inspections by textile, apparel and footwear companies plummeted 11% YoY, a drop that was particularly detrimental for South Asia, as previously alluded to. As consumers take shelter in their homes and limit social contact, the priority once placed on shopping for new clothes and shoes has evidently taken a back seat.
On the other hand, the pandemic has kicked open doors to create new opportunities in other industries. Demand for communication equipment and various home entertainment products is on the rise, thanks to mass remote working, home schooling and people just generally spending more time at home. To confirm this trend, inspection and audit volume for products in electronics, homewares and toys among U.S.-based retailers is surging, with these sectors concluding 2020 with double-digit growth of 44%, 28% and 46.5%, respectively.
In the middle of a public health emergency, we’re also battling an economic crisis, with workers around the world facing rising poverty. Job losses have trounced that seen during the 2008-2009 global financial crisis by an estimated four-fold, according to a report released in January by the UN International Labour Organization.
Adding fuel to the fire, more risks in human rights and labor violations are being tracked in factories. To protect their supply chains, businesses must heed caution against rising incidents of modern slavery, child labor and rising labor violations. Some violation reports suggest that workers are being put at increased risk as less scrutiny is placed on safety measures not related to the virus, a trend that is particularly alarming at a time when health and safety resources are already in distress.
Factories ranked "red" for critical non-compliances more than doubled in the second half of 2020 compared to the first, according to remote audits by QIMA. In China, where the sourcing and manufacturing recovery has exceeded expectations as previously discussed, 14% of factories received a failing grade after amassing critical violations in the areas of working hours and wages. These violations included workers being burdened with additional sanitation duties as unpaid overtime, as well as those being forced to clock excessive hours so that factories could meet tight deadlines and overflows. This is particularly true in factories that produce high-demand items like PPE and cleaning products.
To offset limited ground access to factories and escalating compliance risks, more businesses are turning to digital solutions for compliance and quality control. The digital capabilities being favored by businesses to weather pandemic woes include remote audits, worker voice interviews and integrated quality-control and compliance platforms. When paired with traditional inspections and audits, these digital capabilities help empower the nomadic sourcing framework and end-to-end supply-chain mapping that businesses need to thrive in today’s unpredictable supply-chain landscape.
Sébastien Breteau is the founder and chief executive officer of QIMA, a quality-control and compliance service provider.
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