Disruptions and Interruptions Risks in Global Value Chains
- by Anna Maria Pinna – University of Cagliari and CRENoS
- Read the article online here
During the last year and a half, we learned how the system of production that has emerged globally in the last 3 decades is fragile and easily exposed to disruptions and interruptions. The COVID pandemic has revealed how relying on a limited number of countries for the provision of standard consumption goods has challenged supply chain resilience worldwide. The enormous increase in the demand of personal protective equipment (PPE) at the beginning of 2020 immediately revealed an insufficient global supply of masks, sanitizing products and protective gears, but shortages started to affect also products whose demand was not altered. Started in February 2020, the dearth of semiconductor chip production has been cramping until nowadays the production of several goods: the first on list are cars, graphics cards, game consoles, and PCs.
As discussed in Lodi and Pinna (2021), two are the main culprits for the fragility of the global production system. Firstly, the complexity of supply chains, whose shape reflect both the complex linkages between sectors, where products are used as inputs in other productions, and the geographical distribution of production at the global level. Decentralized optimization of multi-tier supply chains for multiple retailers and manufacturers becomes more and more important, but even in this case bottlenecks can hit a stage of the chain in an unpredictable way and impose halts with a domino effect on downstream activities. This is exactly what has been happening with semi-conductors, where a temporary slowdown has created a systemic instability in the whole chain.
The second critical element is the huge concentration of world manufacturing production in one specific geographic part of the globe, China, and other South Asian countries whose production capacities are hinged on the demand of companies located in China. For example, when the grounding of the Ever Given ship blocked the Suez Canal for 6 days last March, the consequences of putting all eggs in one basket have been evident to all global actors.
The urgent need to design smarter, stronger, and more diverse supply chains without sliding into protectionism has been one of the main lessons of this crisis, which both US and EU have learned. Access to supply chains, supply corridors, trade routes and means of transportation are increasingly considered, by big global actors, to be not just a functional tool for production, rather an instrument for exerting political and economic power. The most critical factor pertains to the transparency of global chains. Beyond the immediate relationship between upstream and downstream companies, darkness prevails. The Strategic Investment Facility presented by the European Commission May 2020 can potentially be an important instrument for reducing vulnerability, if oriented to increase the traceability of products along the value chain. Although firms seemed reluctant to disclose information, fearing that the practice would undermine their competitive advantage, information on each stage of production helps companies to shrink their reliance on single linkages, reducing the impact of unpredictable bottlenecks both in the provision of products necessary for their activities and in the possibility to place their goods in the market.