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Restructuring supply chains could impact a quarter of exports

Up to a quarter of global products could be sourced from different countries over the next five years as companies restructure supply chains, according to research.

The study, by McKinsey Global Institute, estimated that 16% to 26% of global goods exports, worth between $2.9bn and $4.6tn, could move to new countries over the next five years.

The report said threats to global production of manufactured goods were growing more frequent and severe, a trend that was seen even before the Covid-19 pandemic.

It estimated supply chain disruptions of a month or longer happen every 3.7 years on average, and that the resulting financial costs of extreme events are rising.

Labour intensive supply chains, such as clothing, were highly exposed to pandemics, heat stress, and flood risk, the report concluded, while food and drink and fabricated metals have lower average exposure to shocks because they are less traded and have more regional value chains.

When examining losses from supply chain disruption, the study calculated that businesses could expect on average to lose 40% of a year’s profit every decade, while almost an entire year’s earnings could be lost by some industries if a severe event disrupted production for 100 days. This was likely to happen every five to seven years, the study said.

Associated effects of disasters including deaths and damage to communities, production shutdowns, job losses and shortages of goods, means that employing measures to increase supply chain resilience pay off over the longer term.

The study added that although the Covid-19 pandemic had been the biggest shock to global supply chains in recent history, it is the latest in a long series of disruptions, including the earthquake and tsunami in Japan in 2011, flooding in Thailand the same year, and Hurricane Harvey in 2017 in the US. These all had major impacts of production in major industries.

The interconnected nature of supply chains meant that there was not always a strong economic case for large changes in geographical location, especially where they were capital or knowledge intensive, according to the study. But for some labour intensive supply chains, such as clothing and furniture, there was a stronger case for shifting location.

The study also examined other ways to make supply chains more resilient, apart from geographical relocation, including strengthening risk management capabilities and improving transparency, building redundancy in supplier and transportation networks, holding more inventory and reducing product complexity.

The study said: “Our research highlights the many options for strengthening value chain resilience, including opportunities arising from new technologies. Where companies cannot directly prevent shocks, they can still position themselves to reduce the cost of disruption and the time it takes to recover. Companies have an opportunity to emerge  from the current crisis more agile and innovative.”

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