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COVID-19 Impact Theme #4 – The Global Supply Chain Thumbnail

COVID-19 Impact Theme #4 – The Global Supply Chain

Could COVID-19 be the black swan event that finally forces many companies, and entire industries, to rethink and transform their global supply chain model? One fact that is beyond doubt is that it has already exposed the vulnerabilities of many organizations, especially those who have a high dependence on China, to fulfil their need for raw materials or finished products.

As per a March survey conducted by the Institute for Supply Chain Management, nearly 75 per cent of companies reported supply chain disruptions in one form or another due to COVID-19 related transportation restrictions.

Another interesting figure that emerged from the same survey is the lack of any semblance of a contingency plan for almost half the companies in the event of a supply chain disruption leading back to China.  Well over 50% of the companies also reported experiencing sudden, unexpected delays in receiving orders, a problem compounded by supply chain information blackout from China.

While many are drawing comparisons with COVID-19 to the Spanish Flu pandemic of 1918, there are several key differences from a global trade and supply chain perspective between the post-World War I scenario of 1918 and the world we inhabit today. The current situation is also different from past pandemics from recent history, due to the vastly different economic equations. To give just one example, when the SARS virus hit in 2003, China contributed approximately four per cent of the world GDP. Today, that figure is 17-20 per cent, making the origins of COVID-19 in China more painful and damaging from an industry perspective.

The peak of this pandemic had a profound effect on global supply chains with disruptions from sourcing to fulfillment. Perhaps obvious but important to state nonetheless – the driver of disruption was a rapidly changing demand environment and the ability of enterprises to respond, reallocate and scale production. Even if enterprises had full visibility into what was about to happen, their ability to respond would have still been limited. The reality is that those enterprises with more progressive supply chains were able to adapt despite limitations, while those without were paralyzed. All that’s to say is the supply chain has become more prominent across enterprises.

Some Key Macroeconomic Supply Chain Challenges Associated with the Global Crises:


Today, manufacturing is a far more complex process compared with just a few decades ago, with subcomponents required to assemble a single final product sourced from several places across the globe. The raw materials required to manufacture these subcomponents could also come from different countries and continents, and the finished/semi-finished goods may then need to be transported all over the world. This massive dependency upon logistics make import, manufacturing and export a difficult proposition in case of disruption to the supply chains.

Consider a current example: India imports well over half of its active pharmaceutical ingredients (APIs) from China. Between the Indian government selectively restricting API import and the logistics challenges created by COVID-19, India’s pharmaceutical industry is going to find it difficult to maintain its export numbers. Considering that India is the biggest supplier of generic medicines worldwide, this could very easily lead to a global shortage.


On the other side of the coin lies the procurement challenge for the sourcing organization.

In a globally integrated world, a drive towards efficiency has caused an increasing consolidation of production in lower cost areas – primarily based in China, Taiwan, Vietnam or other low-cost economies. With the pandemic starting in China and hitting countries across the globe, and the resultant fallout and shortages, the need for distributing risk has become more evident than ever.


Distribution of products is experiencing some unique challenges such as staffing of warehouses, a need for direct distribution and more intelligent and responsive allocation across channels.

On the consumer side, hoarding/stocking of essential commodities and over-the-counter medicines has led to unusual stress on the supply chains. It is not unusual for consumers to panic-stock food and other essential commodities during times of crisis. While this leads to stress if the stockpiling goes beyond a few weeks, it is natural for consumers to be anxious about availability and resort to this kind of behavior. This unnatural spike in demand and the required supply fluctuations are extremely difficult to handle and together create a bullwhip effect in the entire supply chain often leading to artificial shortages.

Another example of this demand spike has been seen in the lumber industry where prices have increased 50 to 75-per cent .

What Will Supply Chains Look Like on the Other Side

From a supply chain perspective, it appears COVID-19 has only caused a secular shift to accelerate just as we have seen with the acceleration of the digital transformation in multiple sectors/areas. Going forward, there is likely to be meaningful diversification of supply chains, and some key industries may even repatriate supply chains if only from a risk management perspective.

In a recent PwC survey related to COVID-19, 56% of CFOs were developing alternate options for sourcing, and 54% were looking to better understand the financial and operational health of their suppliers. The same survey also noted that some companies had started to invest in creating data-backed profiles of their supplier bases in order to identify second sources, and automation processes — to eliminate time-consuming manual tracking. No doubt, technology will play a key role

How Technology will Shape the Supply Chain on the Other side

1 – Global Supply Chains Were Already Upgrading from a Technology Perspective 

Supply chains had already been undergoing a technology upgrade and shift for some time even before the health crisis, COVID-19 only amplified those changes.

And as topical as China was from a supply chain perspective at the peak of this pandemic, manufacturing had already been moving out of China (as seen in the chart below) because the rising cost of labor was already eroding that former arbitrage. As a result, manufacturing had been moving to countries like Vietnam and India, among others.

Import Share Growth by Country AND Average Annual Manufacturing Wages in China 2008-2018

2 – What Technologies Will Benefit from Shifting Supply Chains 

In the figure below are some of the beneficiary segments along with their market sizes and growth rates:

 What Technologies Will Benefit Most?


Fulfillment has become top of mind and even prior to COVID-19, fulfillment was becoming one of the most prominent themes when it comes to the supply chain. COVID has underscored and amplified that. Even the most progressive companies had their challenges, including those that had ample access, like merchants selling through Amazon, who saw fulfillment of their products paused as essential products were given priority. For now, fulfillment networks have stabilized, but their importance within supply chain management equation has become that much more essential.  That said, rather than scrambling for short-term piece-meal solutions, it seems the most progressive enterprises are thinking about fulfillment more holistically. When it comes to the variables that drive online purchase decisions, free shipping and no-hassle returns rank high among consumers and it’s those capabilities that will enable merchants to future-proof their platforms.

Variables That Drive Online Purchase Decisions

 One of the major problems with fulfillment, particularly if you’re a small merchant, is the investment needed. In order to offer same-day delivery to 90% of the U.S population, a merchant/retailer would require more than 90 fulfillment centres – depicted below.

 For reference Amazon has ~110 FCs in North America. Notable public companies in fulfillment are Amazon (Fulfillment by Amazon), Shopify (Shopify Fulfillment Network) & Rakuten (Rakuten Super Logistics).

Supply Chain Management Software

Disruptions in supply chains due to COVID-19 have highlighted the need for supply chain management software from planning to execution. Kinaxis, one of the companies owned in our All-Cap Basket, reported a 20% increase in usage on its platform in Q1 with  some customers running “hundreds” of supply chain simulations per day to help mitigate risk.

Even more broadly, a recent survey showed 65% of companies viewed their supply chain as a competitive differentiation and the technology supporting those supply chains has been a big part of that differentiation. Respondents identified data availability and supply chain visibility as the most significant impediments to better supply chain planning. Here’s the kicker - more than 50% of the 1,839 companies surveyed still use spreadsheets to manage supply chains. It’s likely that most enterprises are looking to change that, but with the recent supply chain constraints and implications from COVID-19, it is apparent that the need to adapt or die is even more prevalent. This is also supported by the data from the survey that showed 40% of respondents said they are looking to update IT-related supply chain infrastructures. Notable public companies here are Anaplan, Kinaxis, and SAP.

 Technology Foundation of Supply Chain Planning & Supply Chain Priorities by Region: In the Next 12 Months

 Logistics Platform

Another area that is gaining momentum from supply chain shifts are logistics platforms. On the sourcing side, resilience requires diversification of supply chains, and logistics can become complex when sourcing from different suppliers/countries. In such a scenario, companies need to deal with multiple governments, carriers, shippers and intermediaries.

For some perspective on this complexity, according to a Reuters report, it currently takes an average of 228 hours to process the necessary documents and stamps for shipping a container of citrus fruits out of South Africa. No doubt an integrated platform for administering logistics can add significant value.

One company that is seeing this shift is Descartes, which is also owned in our All- Cap Basket. On a recent earnings call, their CEO Edward Ryan, pointed to “big changes in how and where companies source and ship goods” and customers wanting to “remotely manage logistics functions and shipments securely and efficiently” as a tailwind for their business.

 Descartes Global Logistics Network


It seems apparent that repatriation of manufacturing could be expensive for developed countries with high labour costs. No doubt, efficiency-enhancing technologies will help offset that cost. As of today, manufacturing labour costs in US are 4x that of China. This is where robotics could help. It seems manufacturing in developed countries will need to be automated to another level to compete from a cost perspective. But its not all about costs.  The pandemic highlighted issues around the need to diversify supply chains and the deployment of robotics could mitigate some of those risks.

Hourly Manufacturing Labour Cost by Country

 Industrial Internet of Things (IoT)

The IoT is the network of physical objects - “things” - that are embedded with sensors, software, and other technologies for the purpose of connecting and exchanging data with other devices and systems over the internet. It seems the IoT will play an important role in optimizing complex supply chains. IoT should enable manufacturers in creating “smart” factories, where data is shared between sensors, robots and applications, enabling high levels of synchronization.

Some practical use cases include inventory tracking, automatic restocking and environmental (safety) monitoring. Such data could also be collected and analyzed to measure performance and detect inefficiencies.

According to The MIT Sloan Management Review, IoT could reduce unnecessary facility maintenance costs by 20-25%. The potential applications for IoT in an industrial setting are vast with the industry expected to grow 43% over the next five years (Statista).

Investable Names Benefitting from Changing Supply Chains

The list below are some of the notable players that operate within the technology segments we discussed. Not surprisingly, the group has collectively shown its muster – while the S&P 500 is now up ~4% YTD, the group of names below are up ~23%% on average.

We’d note a few of the Canadian names listed - Shopify and Kinaxis and Descartes, are all held in our All-Cap Basket. 


To draw a conclusion from the preceding, one mite simply state, “Companies will evolve and adapt to meet disruptions head on to mitigate loss.”  However, in practice, this conclusion does not play out evenly across all companies and sectors as only the most nimble organisations will be able to act fastest and get ahead of demand. It should be remembered that in reality it is that those enterprises with more progressive supply chains that were able to adapt despite limitations, while those without were paralyzed.