Linking the chains
How goods and services move around the globe
The elaborate supply chains that link global trade have faced many disruptions in recent years. Despite these stresses, supply chains continue to provide benefits to businesses and consumers.
Global value chains
Companies around the world use sophisticated supply chains to produce all kinds of goods and services. These networks are known as global value chains. They got that name because the companies in these networks tend to specialize in just one or a few of the things that make up a product. In other words, each company serves as a valuable link in the chain.
Helping firms go global and prosper
Starting in the 1990s, doing business abroad became easier than ever because of:
- freer trade and investment across borders
- advances in technology
Companies in Canada and elsewhere began relying much less on end-to-end assembly lines at home. Instead, they worked with other companies around the world to build complex value chains. These global value chains allow companies to get parts or services from anywhere to then use in their own production processes.
The shift to global value chains helped many companies in Canada and around the world become more efficient, competitive and international. Today, increasing numbers of companies—and countries—specialize in products, parts or expertise.
For any given product, different companies:
- invent it
- make each part
- assemble it
- sell it
- ship it
While specialization allowed for a greater variety of products at better prices, the impact on workers was mixed. For example, many routine, lower-skill jobs in Canada and other advanced economies moved to places where workers get paid less. At the same time, specialization created new higher-skill, well-paying jobs in many countries.
The risks of being connected
Value chains have become more sophisticated, efficient and connected over the years. That clearly carries benefits. But the far-reaching, web-like networks can also make it easier for problems to spread.
The effects of the Great East Japan Earthquake of 2011, for instance, disrupted production chains. This left factories around the world short of supplies such as parts for motor vehicles. Even so, firms were able to rely on these extensive networks for support to quickly resume production.
More recently, the COVID-19 pandemic and the invasion of Ukraine caused widespread disruptions to global value chains.
Despite the vulnerabilities of global value chains, the companies that use these chains have become better at finding ways around the disruptions they know can’t be avoided. This has helped them navigate the problems caused by the pandemic and the invasion of Ukraine. Establishing and improving global value chains takes time and investments. That’s why companies that build supply chain relationships try to maintain these relationships despite occasional disruptions. To prepare for unforeseen challenges, companies may improve the resiliency of their supply chains by investing in:
- staff or outside partners dedicated to managing supply chain risks
- backup plans that draw on alternative suppliers in emergencies
- the ability to get back up and running quickly once a disruption has passed
COVID‑19 and value chains in Canada
Shortly after the pandemic began, the Bank of Canada regularly consulted companies that support supply chains. We wanted to learn how disruptions caused by the pandemic were affecting the value chains Canadian businesses rely on.
They told us that the pandemic had a negative effect on their operations, particularly when it came to:
- getting products
- transporting and storing goods
As supply chain disruptions continued, many companies saw their sales affected. They also reported a surge in prices for the things they needed to produce goods or offer services, known as inputs.
Overall, the networks that Canadian companies rely on had to adapt to shutdowns, shortages and delays. Companies also made various adjustments, such as limiting their product lines or finding different suppliers. And businesses increased their inventories to avoid shortages of key inputs. Several firms say they navigated significant challenges in part by working closely with larger firms in their network.
Supply chains are unlikely to return to their pre-pandemic form after all the events of the past years and the effects from other long-term trends.
The Bank’s consultations show that businesses will continue to adjust. Many companies say they will maintain some of the strategies they adopted in responding to the pandemic and the invasion of Ukraine. These strategies include:
- finding just-in-case or nearby suppliers
- holding more inventories
These measures will add to operating costs—but they will make companies better prepared for the next disruption.
We haven’t yet seen a lot of evidence of “reshoring” (that is, shifting production to a firm's home country) or “friend-shoring” (that is, shifting production to politically friendly countries and allies). But firms are certainly thinking twice about where to expand production.
Many companies are also adopting digital technologies more quickly than planned. Most recognized that evolving technologies increased their efficiency and allowed them to connect more seamlessly to global value chains. These technologies include blockchain, artificial intelligence and cloud computing.
Here to stay in one form or another
As international trade accelerated in the 1990s, global value chains grew rapidly. But now they seem to be stalling.
This is mainly because the initial, massive impact of bringing China and other major emerging-market economies into the global economy has already been felt. Other factors have slowed the growth of global value chains in recent years, including:
- trade and geopolitical tensions
- a decline in global economic growth
- the COVID-19 pandemic and the invasion of Ukraine
Going forward, climate change will also shape the future of global value chains.
Global value chains may never again grow like they once did. But given their success, these networks are likely here to stay—in one form or another.
Getting supplies from different places and producing globally
Building strong networks with other firms in your region of the world
Using technologies like big data, cloud computing and blockchain to manage and monitor supply chains