GCC governments should make supply chains more resilient

25 August 2020 Consultancy-me.com

The Covid-19 pandemic has disrupted supply chains, which has in turn damaged global manufacturing. This has forced governments and businesses to reflect on the long-term viability of their supply chains. 

Fortunately for GCC countries, the reassessment has more or less coincided with the recent scaling up of ambitious and wide-ranging national development plans. Therefore, rather than having to make substantial changes to developments already underway, governments are able to incorporate a sustainable and resilient supply chain strategy virtually from the outset. 

Supply chain challenges

In recent decades, manufacturers have invested heavily in more globalised, specialised and lean supply chains to reduce costs and to capture efficiencies. Certain countries have provided the majority of the components, supplies and raw or processed materials for many global industrial operations. China, the US and Japan were responsible for approximately 29 per cent, 17 per cent and 7 per cent of global manufacturing output in 2018, respectively.

GCC governments should make supply chains more resilient

However, the Covid-19 pandemic has taught the industrial world a harsh lesson about the fragility of global supply chains. It has experienced a large-scale shutdown of factories, a shortage of supply and a reduction in logistics capacity. Output has declined substantially, with China’s purchasing managers’ index dropping to a record-low in the first quarter.

Further reading: Covid-19 supply chain disruptions pose multi-trillion economic threat

As a result, governments and businesses are reflecting on their manufacturing and industrial strategies. GCC states must start this process now as their economies rely heavily on imports of manufactured goods. The proportion of manufacturing output to total national output has been 5.8 per cent in Saudi Arabia and 2.6 per cent in the UAE, compared to about 27 per cent in China and 19 per cent in Japan. 

A reconsideration of supply chains should occur in the GCC in the context of national development plans that seek to transform the manufacturing sector with diversification, localisation and sustainable growth. The UAE’s national development plan, for example, is focused on developing pharmaceuticals, machinery and equipment, food and beverage, and aerospace industries. It is important to learn the relevant lessons from what is happening globally, and integrate the goal of agile, efficient and resilient supply chains. 

Creating resilience

To make their supply chains more resilient, governments should consider a series of actions.

Domestic supply chains must be established for vital goods. Throughout the pandemic, many countries faced supply chain problems related to food and medical supplies. They were forced to find alternatives to imports by establishing their own factories or converting production lines. Through increased localisation of selected food and medical supply chains, GCC countries would ensure their resilience to shocks and generate other socio-economic benefits. 

The right balance must also be set between localisation, regionalisation and globalisation. Strategic autonomy must be secured by eliminating excessive dependence on international supply chains. Simultaneously, it is necessary to build a carefully considered network of international suppliers to reduce supply-side risk and take advantage of the efficiencies of globalisation. 

In addition, governments should promote innovative technologies such as blockchain to instil monitoring mechanisms for cross-border trade, manage supply-side concentration risk and increase transparency. As GCC countries scale up their manufacturing activities, they need to clearly set out their national supply-side risk tolerance level with defined guidelines regarding product origin and desired exposure to different global manufacturing hubs. 

It is also necessary to establish a policy framework that encourages domestic production and sourcing of supplies. This would involve providing the right environment and incentives to attract investors and suppliers to the region and redirect GCC manufacturers towards domestic and regional suppliers. 

Digitisation

Furthermore, governments should aim to accelerate investment in digital infrastructure and technologies and promote their adoption by domestic manufacturers. GCC manufacturers need to catch up with Industry 4.0, the intelligent, digital automation that is reshaping manufacturing. Manufacturers should be encouraged to deploy cyber-physical network technologies and advanced data analytics that have already become standard supply chain management tools in advanced economies. 

To become relevant and competitive on a national or regional scale, GCC manufacturers will need to master these technologies. Governments in the region would be well-advised to extend equivalent support to their manufacturing champions to that which advanced economies provide to their own. 

Finally, an appropriate government body should run rigorous stress tests to analyse the response of manufacturers, particularly in critical industries, to various sorts of disruption. This simulation would help regulators and industry leaders to gauge the resilience of supply chains and take the necessary action to strengthen them.

By highlighting supply chain weaknesses, the Covid-19 pandemic has provided an opportunity for the GCC region to re-examine and re-build its manufacturing industry on a secure foundation and thus move closer to its goals of improving domestic production and economic diversification.

About the authors: Ulrich Koegler and Per-Ola Karlsson are partners at Strategy& in the Middle East, while Maha Raad is a principal at Strategy&.