A set of complex business decisions are being made by executives to optimize operations globally, in the bid to reinforce a new way of thinking called supply chain shift in the aftermath of the pandemic. The unending list of disruptions, accelerated as cost pressures, policy incentives and new ways of thinking recently converged, to influence supply chain resilience strategies.
The goal of this emerging pattern on the one hand, is to de-risk the operations from geopolitics which is currently prone to high-profile wars and coups that shake up sourcing and logistics nodes. The other is to move production networks as a way to lower cost, emissions and lead times.
1. Emerging perspective of looking at costs
Costs assessment and reduction have remained the primary motivation behind network shifts and it has long been starting point for businesses looking to cut costs. The development is looking like a welcomed one in the event of consistently rising wages in major manufacturing hubs like China and Mexico coupled with the global trade wars that inflated the price of commodities and international freight rates. Now, this new method re-shapes how business executives use KPI’s – total cost of ownership, landed costs and revenue impact etc, in measuring modern business dynamics.
Apparently, the variation of these performance indicators will influence the decisions regarding the costs of tariffs, transportation, product lead times, brand risk, emissions etc., on the emerging network design.
2. Government Policies
Tariffs and subsidies are both used to alter the shape of supply chains in the form of financial penalties and incentives. As carrot-and-stick, authorities mostly governments used tariffs as a policy tool to force global trade conversations, and penalize importers from sourcing products from cheaper markets abroad. An example is the US section 301 that added 25% duty on hundreds of products from China by President Trump’s administration. On the contrary, President Biden’s administration offered companies billions of dollars in federal incentives to tip the balance of production back to the United States and at the same time accused the past administration of discriminatory trade practices. Basically, both of them can be used to achieve the same effect but with different mode of intervention.
These rare consistency in industrial policies giving investors the certainty and flexibility to react to events like the pandemic and several other factors to move production out of China or targeted regions, to places like Vietnam (low wage), Mexico and Canada (near US) or other destinations ready to absorb new capacity for key industries like Ireland, Switzerland and the United States.
3. Geopolitical risk and foresights
In the past three years, executives have had to navigate extreme disruptions to production from protracted lockdowns to regional conflicts like the U.S.-China trade war as well as the Russia-Ukraine war still currently going on. These geopolitical flashpoints are consistently threatening the global supply chains. The concerns around tariffs and subsidies have also highlighted another emerging risk factor in modern supply chain decisions making model as countries are being graded by their likelihood to have a prolonged interruption in supply channels.
These concerns are becoming emotionally complex as some expert argue to justify paying moderately more, as an insurance to have the components made in their regions and readily available for sell at their request. However, other experts have argued that geopolitics are not the leading factor on executives’ decision models. Decisions to move investment into a particular region takes rather 10-15 years before you have your return on investment, within these period geopolitics will mean nothing to the decision. They also warn against de-coupling from China without complete visibility of tier 2 and tier 3 suppliers as China is currently investing in greenfield projects that will drive imports to the US in countries like Mexico and Vietnam.
4. Already existing supply networks and structures
The function of supply chain global re-allocations are the sizes of the labour pool and specific industry presence already, in any location. With so many countries competing to be production hubs, a country’s ability to absorb new production capacity is top of the mind for executives making new value chain decisions. Basically, countries are primarily attracting investments in sectors they already have a strong presence in. Mexico is a good example as the country has long been an industrial hub for auto parts production, which means companies are more likely to find legal support to operate as well as workers with industry-specific skills.
5. The need to meet lead times and speed
The need for speed and supply chain agility, are being re-emphasized after considering how swiftly demand patterns shifted throughout the pandemic. Although companies in the pre/post pandemic phases have been investing in technology and other practices to improve demand forecasting, but forecasts meant little if inventory was not at the right place at the right time. This development has also triggered some companies to restructure logistics processes to import and store goods closer to the consumer markets they are serving in order to boost agility in the supply chain. Furthermore, these shifts in processes provide quicker transit times, greater speed to market, scale advantages and process standardization, which are all compelling reasons to diversify geopolitical risk by nearshoring.
6. ESG goals
Executives were increasingly prioritizing ESG goals to supply chain design decisions. As sustainability takes centre stage, environmental, social and governance concerns are being increasingly considered when changing supply networks. However, it’s important to note that moving supply chains is not a panacea for sustainability because moving a production plant from one country to the other, may result in more emissions if local suppliers are unable to meet the demand of the production facility. The fact remains, the shift becomes greener when the carbon emission from the total value chain is optimized in supply chain move decision. Otherwise, near-shoring, friend-shoring and re-shoring efforts could have a side effect on the value chain with serious consequences on brand image and carbon reduction goals.