Thou shalt… test and reimagine supply chain scenarios
In recent decades, supply chains have become longer and more complex due to globalization. Access to global markets and the ability to manufacture in low-wage countries with low or no import taxes have produced supply chains that are very efficient, but not resilient. This lack of resilience has become abundantly clear in the past two years, due to the pandemic, the war in Ukraine, the energy crisis, the global geopolitical situation and the high number of production and logistics-related disruptions in supply chains.
The topics of resilience and decentralization of production and logistics have gained a place on the boardroom agenda. However, it is difficult to predict whether they will remain there permanently; senior management's long-term memory can be quite short in certain industries and cultures. There is always a chance that rising pressure on profitability due to high inflation, economic stagnation and the global recovery of the supply side will cause the pendulum to swing back in favor of the time-honored tradition of cost-cutting.
Supply chain redesign
Resilience can be created in three ways: by redesigning the
supply chain from a production and distribution perspective, by
adapting the internal organization and by using technology.
Let's focus here on supply chain redesign.
Supply chain redesign strategies include reshoring, nearshoring,
friendshoring and decentralizing/regionalizing supply chains. In my
view, it is better to talk about ‘rightshoring':
decentralizing production and logistics. The mass exodus from China
as the ‘factory of the world' was already underway
before COVID-19 arrived. Among other things, this was due to
China's soaring labor costs and deteriorating geopolitical
relations, in particular with the USA. This led to ‘China +
N' strategies based on additional sourcing and manufacturing
in countries such as Vietnam, Malaysia, Thailand and India.
A recent study conducted by Supply Chain Media and Buck Consultants
International shows that as many as 60% of companies surveyed are
considering bringing some of their production back to Europe or the
USA (onshoring) or closer to those regions (nearshoring) over the
next three years. However, less than 20% say they are bringing back
the lion's share of production. Often, this measure concerns
a (small) percentage of the total volume that particularly requires
agility and responsiveness.
We will see decentralization not only on the production and
procurement side, but also downstream. In many industries, the days
of the centralized European distribution model – based on
just one distribution center for the whole of Europe – seem
to be numbered. Companies will need to segment more by
product/market/sales channels and operate hubs or satellites close
to their markets, for example, as well as shipping directly from
the factory to the end customer when it makes sense.
Duplicating production and distribution chains comes with a price
tag, or rather an insurance premium. Companies with small batch
sizes/low volumes tend to adopt a single-source/focused-factory
concept for capacity and efficiency reasons. Duplicating such an
operation increases resilience, but at a cost.
Required ecosystem
The required ecosystem is another important consideration in the
supply chain footprint strategy. Several industries are
concentrated in a small number of geographic clusters around the
world, where companies have access to relevant knowledge,
specialized suppliers and a skilled workforce. Consider, for
example, the semiconductor industry and the recent initiatives by
the USA and Europe to revitalize the industry in their own regions.
Samsung and Intel alone have each announced plans to invest $20
billion in new factories in the USA!
Sustainability is taking on an even more important role in
companies' footprint strategies. One example is the Carbon
Border Adjustment mechanism, which imposes a carbon tax for
specific carbon-intensive products (e.g. steel and aluminum) that
are manufactured outside of Europe and then imported. This is aimed
at creating a level playing field and preventing ‘carbon
leakage'. Another example is the German Supply Chain Act
(LksG), under which companies of a certain size must audit their
supply chains for compliance with universal human rights and
environmental protection standards.
Global supply chains under scrutiny
In conclusion, companies should frequently (i.e. at least once a year) scrutinize their global supply chains to reduce complexity and vulnerability. Regional sourcing, production and distribution (‘make in region, sell in region') will continue to increase in the future.
The optimal supply chain design for your business depends on
several factors. You will need to do your homework to test various
supply chain scenarios and regularly imagine new ones. This calls
for careful trade-offs between integral supply chain costs,
service, risks, sustainability, compliance and resilience. In this
venture, it is important to manage your stakeholders at board level
in terms of potential risks and possible insurance premiums. It is
also important to understand the tipping points from one footprint
model to another, because this provides insight into those
trade-off factors. So when will you make a start on your
homework?
Originally Published by Supply Chain Movement
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
