March 1, 2021 Pros and Cons of Pandemic-Provoked Supply Chain Trends

Against the headwinds of COVID-19, today’s most pressing supply chain trends are posing both challenges and opportunities in the long term.

When isolated cases of a novel coronavirus were first reported in Wuhan in January of 2020, it was difficult to imagine the pending tragedy and threat to global health. Also unfamiliar to many at the time was the virus’s ability to rapidly plague supply chains, soon triggering widespread shortages of essential items including cleaning products, medical supplies and PPE.

From the onset of the pandemic, supply chains have held the public eye like never before. Shortfalls and alarming risks have been disastrously exposed against a perilous backdrop of erratic consumer demand, production lags and travel restrictions. With a year of disruptions on the books, many of the most unyielding trends we’ve observed are continuing to reshape what supply chains will look like post-pandemic, presenting both positive and negative implications for businesses.

Pro: diversification enables agility against supply-side shutdowns

An illuminating lesson learned amid the pandemic is that demand-side shocks in consumer markets pose greater disturbances to sourcing than production shutdowns in supply-side markets. In the first half of 2020, QIMA data shows that many U.S. and European businesses were able to sidestep pandemic woes in Asia by pivoting to suppliers in less impacted geographies. Even though China’s sourcing volume had sunk -75% YoY by February, overall demand merely slipped a nominal -4.5% YoY globally, according to QIMA data.

Con: demand-side shocks continue to be a pain point

However, on the other side of the coin, volatile consumer patterns continue to be a pain point that inhibit business volume. Demand for inspections and audits tumbled by -31% YoY in April and May of 2020 when shutdowns in buyers’ home regions sparked consumption instability. This pattern was mirrored in late 2020, with lockdowns reinstated in parts of the U.S. and in Europe.

Con: sourcing diversification is hampering quality and compliance

Even before COVID-19 took its grip on global trade, supply chains were being rerouted as businesses found themselves caught in the crossfire of the US-China trade war. During that time, nomadic sourcing frameworks helped businesses source from the lowest cost and best value geographies. Throughout the pandemic, this same strategy has proven key for maintaining operations and asserting supply chain agility.    

Even with sourcing in China bouncing back faster and stronger than anticipated, the pandemic proliferated the long-term trend of businesses diversifying to engage suppliers in neighboring regions. For example, demand for inspections and audits across developing markets in Southeast Asia rose +19% YoY in 2020, representing twice the 2019 vs. 2018 YoY growth rate. As a whole, this region logged double-digit expansion in inspection and audit demand starting from July, bolstered by record orders for PPE and rising demand from buyers looking for alternatives to China both in the short and long term.   

The diversification carryover is potentially a negative for supply chain integrity because China, by far the world’s leading manufacturing, has historically outperformed its regional competition in terms of quality and compliance measures. For example, in Indonesia the total “beyond acceptable quality limits” (BAQL) rate skyrocketed by 50.1% YoY (netting a BAQL rate of 25.7%), exposing weaknesses in accommodating new business. Comparatively, China’s BAQL rate dropped by 15.5% YoY, yielding a stronger BAQL rate of 20.2%.

Con: suppliers are cutting ethical corners 

In addition to a public health emergency, we also face an economic crisis rife with poverty and global job contraction four-fold that of the 2008-2009 global financial crisis, according to the UN International Labour Organization. Fanning the flames, instances of modern slavery, child labor and miscellaneous labor violations at third-party factories are increasing.

Ethical audit data collected by QIMA at reopened factories and through remote audits confirms a dire situation, with the share of factories ranked “red” for critical non-compliances more than doubling during the second half of 2020 compared to the first half of year. Notably, in China, 14% of the factories QIMA audited received failing grades after recording critical violations in working hours and wages.

Mixed: evolving demand is favoring some industries, disadvantaging others 

Shutdown measures, combined with surges in remote work, have profoundly influenced consumer demand and wreaked havoc on some industries. For example, demand for inspections by textile, apparel and footwear companies declined -11% YoY, a plunge particularly damaging to industry in South Asia.

Conversely, the pandemic has kicked doors open in other industries. Demand for communication equipment and various home entertainment products is soaring, due to mass remote working, home schooling and people staying home more. As a result, inspection and audit volume for electronics, homewares and toys among US-based retailers concluded 2020 with double-digit growth of +44% YoY, +28% YoY and +46.5% YoY, respectively. 

Pro: digital solutions are helping businesses safeguard their supply chains

To stay ahead of the eventual rebound, businesses must hedge rising compliance risks and bridge ethical pitfalls. Businesses are increasingly deploying digital solutions to compensate for limited ground access to factories and escalating supplier risks. In a QIMA survey of over 200 global brands, two-thirds of respondents reported that the pandemic has fast-tracked their digital transformation, including the adoption of new digital and remote inspection capabilities. The digital solutions being favored include remote audits, worker voice interviews and integrated QC and compliance platforms.  

Despite its many challenges, the pandemic’s mass digitization movement will likely propel a long-term windfall for supply chains. When accompanied by traditional inspection and auditing, digital capabilities safeguard supplier diversification so businesses can uphold strong quality and compliance measures in today’s volatile supply chain landscape – now and for years to come.

Sébastien Breteau is the founder and CEO of QIMA, a quality control and compliance service provider that partners with brands, retailers and importers to secure and manage their global supply chain. He has more than 20 years of experience in supply chain management, founding his first sourcing company in 1997.

Founded in 2005, QIMA has become a leading player in Asia and has expanded its operations globally to 35+ labs and offices, 3,800 employees, and operating in 85 countries. In 2020, the company launched QIMAone, a collaborative platform that digitizes quality and compliance management for global brands, retailers and manufacturers.

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