Coronavirus and oil shocks are the “push” while trade tariffs are the “pull” forcing manufacturers to rethink WTO legacy supply chains

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Blockchain is working to fix both near and long-term dynamic supply chain shocks

Recent weeks’ precipitous $3.6 trillion stock market decline is the largest since the 2008 financial crisis. Investors see Monday’s sudden 2,000% drop as a sign of anxiety behind uncertain corporate supply chain responses to a looming crisis caused by the coronavirus epidemic and now compounded by oil energy shocks. With the alarming news on COVID-19 arriving hourly and deadly cases spreading in metro areas enveloping the legacy production bases of the world’s largest brand manufacturers, business is getting heavily disrupted.

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More and more analysts note that contemporary supply chains are archaic and require revision with major consequences already occurring and more expected as early as mid-March. Indeed, many OEMs and corporate supply chains are not well positioned to respond to recent shocks. This is a result of legacy supply chain structures formed to take advantage of international jurisdiction cost arbitrage in cheap labor, inferior workers rights, lesser environmental protections with little regard for economic sustainability much less quickly graduating consumer tastes for rapid iteration design requiring smaller batch manufacturing with shorter times to market.

Legacy Global Supply Chains Rooted in Fallible Y2K WTO-Era Economic Logic

Historic precedent trade agreements that led to the current global supply chain structure dictating most of today’s corporate supply chain decisions originated in GATT and WTO era trade negotiations circa Y2K. These discussions had good intentions but were far from perfect. Economists like to combine simple arguments of comparative advantage with complex econometric models to solidify perceptions of their discipline as a science and not rhetoric.

Yet the application of most economic theory is rooted in assumptions created in vacuums “all else being equal,” and less so in real world contexts of irregular supply chain shocks such as virus pandemics, competing national market indirect subsidies, biased legal systems, inferior IP protections much less reapplication of trade tariffs to protect unfairly eroded national industries. Thus has been the result of recent steel trade tariffs, which have greatly impacted American Industrial OEMs that rely heavily on steel for raw material input in their end products, such as the aerospace and automotive industries.

If the logic mechanics of such economic arguments was applied in the context of mechanical engineering for a spaceship that had to survive in space where people’s lives depended on it, for example, such flaws in design arguments would be quickly laid bare as people undoubtedly would perish in the poorly designed spaceship based on unrealistic assumptions in imperfect scientific theory. However, the point of modern economic negotiations is meant to improve people's quality of life, including not only their consumables but also their worklives and environmental surroundings, not degrade their quality of life based on flawed economic arguments “all else being equal.” This has resulted in a problematic contemporary setup of supply chains based on similarly flawed assumptions.

Just in Time Global Supply Chains vs Responsive Local Supply Chains

The predominant supply chain structures have been “Just-in-Time” manufacturing supply chains distributed across the jurisdictional arbitrage model highlighted above. In this context it is easy to confuse “Just-in-Time” supply chains with “Responsive” ones. Borrowing from the above economic trade logic “free” market will respond in a timely manner to correct market imperfections.

That is simply not the case when local supply chains have been neglected for so long in favor of directing business elsewhere for so long not only influencing local infrastructure and workforce composition but also leaving a poor impression with supporting suppliers at home. One area where market theory will prove to have a proper reaction is with the development of new digital manufacturing technologies and supply chain solutions like SyncFab who partnered with the NTMA to rebuild goodwill and incentivize local supply chains with secure digital manufacturing solutions using blockchain.

Rigid OEM Supply Chain Systems Limit Response Time due to Legacy ERPs

To compound the poorly conditioned historical response to local supply chains, rigid ERP systems were developed over time to manage the globally distributed corporate supply chains based on the predominating systems of the time. Unfortunately - these ERPs are so rigid and so entrenched that they make it difficult for modern industrial OEM supply chains to take advantage of rapidly evolving digital manufacturing and supply chain technologies surfacing to help OEMs take advantage of real time optimization opportunities be it in their local supply chains or elsewhere outside the entrenched legacy structures.

How Blockchain is working to make supply chains more dynamic and responsive

While under normal conditions decision-makers do have time to find most appropriate substitutions to satisfy their internal supply chain needs, the disruptive COIVD-19 virus is creating an unprecedented sense of urgency. Among possible cures for the supply chain broken links, blockchain technologies could offer some novel and unorthodox approaches. Here are a few advantages that can not only make supply chains not only more transparent, but also more responsive to changing dynamic needs of a company:

  • Rapid Response Incentive Mechanism
  • Local content inclusion network
  • Dynamic content inclusion based on real-time need changes
  • Virtual supplier verification in an age not only of the "trust tax" but also where travel and interaction may be limited

The coronavirus is the current and ugly "push" of the necessary change of culture in supply chain systems. At the same time, trade tariffs are the "pull" and they are forcing manufacturers to rethink how they approach the global supply chains. Antiquated cheap labor, lax environmental and workers’ rights jurisdictional arbitrage supply chain models were already being tested by the introduction of trade tariffs. With the onset of the coronavirus, the opportunistic global supply chain model is facing a real wakeup call.

Blockchain technology adoption helps facilitate modern responsive supply chain restructuring for greater transparency, improved sustainability and local inclusion that are more ethically responsible. It is a technology that is providing immediate patching but can also benefit long term.

Time to adapt Blockchain Technology to meet the needs of a Modern OEM Supply Chain

A rapid response procurement platform – an external supply chain marketplace, which could help find new buyers and suppliers in a number of industries affecting supply chains, could allow getting new “replacement” orders to continue production, for instance. Blockchain creates a permanent record of an order that cannot be altered, thus adding transparency to the supply chain. In addition, by offering unique and novel incentive mechanisms to compensate local suppliers neglected for their past contributions we can create a more responsive and engaging local supply chain.

Local content inclusion in various markets can provide deeper visibility within an extensive supply chain system on blockchain. Dynamic content inclusion that blockchain offers allows to adjust various elements of a part order, for example, in real time, thus creating unsurpassed level of mobility and flexibility even for a giant company.

The coronavirus and the associated lockdowns are limiting travel and interaction between people. With these restrictions, remote supplier verification becomes priceless. With full certification compliance via blockchain, the security and immutability of the distributed layer technology becomes dominant.

Large companies are only beginning to tap into blockchain, but catastrophic losses in a number of industries affected by the coronavirus may require a much quicker approach that could save and modify the external supply chain in the process.