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Will COVID-19 alter agile manufacturing supply chains in the years ahead?

Since the start of 2020, COVID-19 has upended agile manufacturing supply chains, and companies have had to adapt.

Who is best positioned to adopt these new types of supply chains over the long term? Will the current situation alter the agile manufacturing landscape over the coming years?

To give us a solid look into how this future may unfold, Shawn McGrath, industry research analyst at IBISWorld, a leader in industry research and data, spent some time with us. He shared his insights and expertise.

Q: If we think back to the end of 2019, what had happened over the past decade in manufacturing?

Shawn McGrath: Over the past decade, the global economy, for the most part, came out of the financial crisis in a strong position. China grew significantly, the US and Canada experienced some good times, and so did most of the EU—with, of course, some places excluded.

And as a result of that, globalization and a lot of manufacturing increased. In a large portion of Canadian industries, either import penetration increased or exports increased as a share of revenue, or both occurred. As a result, the supply chain got a lot more globalized over the 2010s. While this is great for developing the global economy, it doesn’t really work as well when a pandemic hits, because parts of the supply chain come offline at varying times and can really cause a lot of disruption.

Q: Starting in January 2020, global manufacturing was affected by the COVID-19 crisis—first in China, then in Europe and then in North America. Could you briefly describe the impacts on supply chains and manufacturing practices?

Shawn McGrath: A lot of manufacturing occurs in China, and the virus hit there first. Many plants there shut down to try to mitigate the spread of the virus. However, that didn’t really work because people were still travelling, and the virus moved across to Europe and into North America.

As China was starting to emerge from the worst of it, places like Germany, the US and Canada really started to get into it in late February and March. And so, as China’s manufacturing came back online, secondary manufacturers in the US, Canada and Europe went offline and retail stores closed. On top of this, shipping was an issue throughout, because countries were closing their borders, which created additional logistical issues and slowdowns in trade.

Q: What types of industries do you see as best positioned to adopt agile manufacturing tactics more wholeheartedly in the future?

Shawn McGrath: Agile manufacturing benefits industries that have a lot of different products and where a lot of the inputs for those products are easily procured domestically, as that eliminates that leg of the supply chain. It also benefits industries that require skilled labour—because if you’re paying international workers high wages, you’d be paying domestic workers a similar wage.

Plastic and resin manufacturing are a great example of this, because you need a lot of skilled workers and plastic has a whole ton of applications, from cars to toys. And there are a lot of different plastics that can be used. The big input in plastic is oil, and, in this example, Canada (specifically Alberta) has oil sands reserves, so it wouldn’t need to deal with OPEC or even the US to get those inputs. And as any political instability rises—say, in the Middle East—you can rely instead on your own domestic inputs in the supply chain.

Q: What are the drawbacks of adopting agile manufacturing tactics?

Shawn McGrath: It’s really two sides of the same coin. You’re agile, but when you adopt agile manufacturing, you’re really at the whim of the consumer. You have to have strong processes in place or else things can really go awry.

It’s also difficult to measure completion because of the fact that you’re constantly changing. Your company metrics aren’t always going to be accurate, because things are constantly on the move. At the same time, you’re constantly on the move—so it just comes down to what you value.

Q: Could COVID-19 be a catalyst to make agile manufacturing take hold as a popular way to manufacture goods in the future?

Shawn McGrath: I think it definitely could be. We’ve seen food and other types of shortages, but something like this has never happened before. The last time we had anything even close to this scale was the 1918 flu pandemic, and manufacturing wasn’t nearly as global as it is now. The world was very different.

I think risk-averse companies in particular are going to look at this and say, “If we can stay domestic, if we can reshore, then that can protect the supply chain.”

When the borders closed and limited trade, a lot of companies had to alter their supply chains anyway. So, they’ve already spent money on developing new relationships and figuring out where to procure their inputs or sell their outputs domestically (or more locally, at least). In Canada’s case—probably less so than in the United States—the trend may be to regroup and ask, “Why would I manufacture in China, and spend however many days getting it over by boat, when I can pay Canadians and use Canadian inputs, and protect myself from political instability?”

I think something like this was not on most people’s minds before COVID-19. And now that it’s at the forefront, this is something that could really change the landscape if companies decide it’s worth it.

Q: Looking ahead to the next five years, how do you think the landscape will look? What are the key drivers to reshoring manufacturing operations to domestic markets over the long term?

Shawn McGrath: This situation is so unprecedented that it’s really difficult to say how individual companies will be feeling five years from now. There’s a small possibility that this could wash over and companies will go back to the way they did things before, because people are creatures of habit.

But it wouldn’t be surprising in the least if companies decide it’s no longer worth it to manufacture in Asia or elsewhere, and bring production back to North America.

For example, the Canadian effective exchange rate measures the Canadian dollar against its largest trading partners. That is forecasted to increase, which means imported goods are going to become less expensive compared to domestic goods, because those dollars or currencies will be worth less.

So domestic manufacturers are going to have to figure out something to make their products worth it. They’ll need a value add there, and I think agile manufacturing can fill that need because it enables you to be responsive to customers. The same goes for primary manufacturers: Your customers might be other businesses or manufacturers, but you’d still be more responsive.

Additionally, IBISWorld forecasts that the industrial capacity utilization rate is going to rise over the next five years. It’s expected that Canada will use more of its industrial capacity to manufacture more goods, which will crowd the marketplace. And when the marketplace is more crowded, you need another outlet. Similar to when you’re competing with international companies, agile manufacturing could be that extra value add.

Overall, I’d say Canada is fairly uniquely positioned to really adopt this shift wholeheartedly, should it so choose, because it has the skilled workforce, the resources and the manufacturing capacity. A lot of other places don’t have that—they’re either smaller in population or they don’t have the resources or what have you. There are few nations out there that I think could really reshore in large numbers, and Canada is definitely one of them.

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