Author: Nick Zabikow, Executive Vice President of Global Sales and Marketing, Yojee
Supply chains have become profoundly global over the last two to three decades. Many businesses shifted to a global sourcing model as logistics costs have steadily decreased during this period along with improvement in the international logistics efficiency. Global Supply Chains became the new norm of the pre-COVID world, where companies focused primarily on reducing costs by bringing in the economies of scale through specialized vendors.
China’s Impact in the Global Supply Chain
Based on MIT research, such supply chains had concentrated their operations in China and with the advent of the novel coronavirus, circumstances changed for these supply chains even before they could realize it. Nobody could have predicted what would happen if the world’s second-largest economy went offline, cutting off all external logistics links.
COVID-19 had a significant impact on Chinese manufacturers, and since Chinese companies were playing a pivotal role in other companies’ supply chains globally, the ripple effect was even worse. Manufacturing across different industries has been impacted by the pandemic, especially in the electronics and auto industries.
What Drove Such Rapid Globalization?
While the cost remained in the center of all such off-shoring decisions, there were other factors as well that fueled the rapid globalization (or should we call it, concentrated off-shoring?)
- Tradable or Generic products
The degree to which goods can be manufactured remotely from the market where they are intended to be used determines tradability. As a result, for products with a high value compared to their size and shipping cost, it is often more cost-effective to produce in a low-cost region, such as electronics.
The increased use of subcontracting has also contributed to the development of global supply chains. Subcontracting has become more common for a variety of reasons, including increased component complexity, manufacturing processes that need specialists, and manufacturers’ desire for more flexible capacity.
This created layers in the supply chain which reduced the visibility for the companies, especially during the pandemic.
- Improvements in global logistics
With the advancements in global logistics, navigations, tracking, and other IT-related improvements, it became possible to track the shipments in real-time. All this, while the costs continued to go down due to increased competition.
- Reduced trade barriers
Supply chains were transformed into global multilevel production networks under a favorable climate of globally falling trade barriers and a perceived ability to accept increased interdependence and the risks that came with it.
Supply Chain Risk Re-evaluation
The present situation demonstrates that the risks of supply chain disruptions and globalization have been largely undervalued and ignored.
What is driving Regionalization?
The trade war between the United States and China has already reintroduced the discussions on manufacturing regionalization. While several companies have started to relocate their manufacturing operations, localizing their supplier base should be considered along with it.
This pandemic showed that several global supply chains have become too long and fragile, lacking the resilience and agility required to respond to operational shocks such as the coronavirus.
Supply Chain Dive highlights that future supply chains must not only focus on reducing the costs but also mitigate risks, particularly in overwhelmed systems with little insight into the various processes handled across international markets.
Companies may be required to handle more than one supply chain permutation and have active Business Continuity Plans (BCPs) through actively investing in the regionalization. This supply chain network would have the resiliency that many businesses lacked during the pandemic.
- Sustainability and Circular Economy
Regionalization is consistent with sustainability and circular economy. The focus on circular economy is on the three following points:
- Recycle – Design out waste and pollution.
- Reuse – Keep products and materials in use.
- Regenerate – Recreate natural systems.
Circular economy is also related to lean six sigma and its efforts on reducing waste. From this standpoint, global supply chains with global sources or suppliers can be considered a waste, when there is shipping of goods – with the cost and time associated – that can be produced regionally, instead. Sustainability and circular economy or circularity propel resiliency in regional supply chains.
- Local Partnerships Booster
While regionalization should empower the companies to create active BCPs, local partnerships will enable the companies to reduce dependency and also balance the cost trade-offs with higher agility and in some cases even improved quality controls.
These partnerships will also help in adding the localized version of the product offering that will help in increased opportunities in that region. One such example is how Kellogg’s has started a new ready-to-eat range of Indian breakfasts to suit the liking of the Indian consumers.
Yojee is a dedicated specialist in the Asia region helping logistics hubs and partners collaborate more effectively on a single platform. We will be glad to help you build your regional supply chain on solid foundations. Contact us here.