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Context: Events like Covid Pandemic, the Russia-Ukraine war have highlighted the importance of global supply chains for economic resilience.
The global events of the last 2 years have proved that intermediate goods procurement is really important. For example, the shortage of semiconductors has upset the production schedules of automobile companies across the world.
How have companies responded to global supply Chain disruptions?
The April edition of World Economic Outlook has listed some examples:
First, General Motors has decided to reduce the use of unique semiconductor chips down to just three types of microcontrollers.
Second, Tesla rewrote the software used by its cars so that they could use available semiconductors, rather than stopping its assembly lines.
Third, following the 2011 earthquake in Japan, Toyota standardized components across models so that different units could share inventory across various factories. It regionalized its supply chain to reduce dependence on any one location and told its single-source suppliers to either produce in several locations or hold excess inventory.
How have Indian policymakers responded?
The Indian government has started holding excess stocks to deal with unexpected shocks after Food shortages in the early decades after independence and the Balance of Payments crises before 1991.
What should be done?
Protectionism or the aim to produce everything within the country are impractical ideas. For that, a country would require to reinvest everything. The International Monetary Fund has provided two useful principles for making supply chains more resilient.
First, supply chains must be diversified geographically.
Second, there should be greater ease of substitution so that a company can quickly switch input sourcing from one country to another.
Source: This post is created based on the article “What severe disruptions taught us about supply chain resilience” published in Live Mint on 5th May 2022.