Global supply chains are undergoing major changes due to various factors such as cost, tariffs, regulations, risk, emissions, and lead times. These factors are pushing companies to rethink their sourcing, logistics, and production strategies and consider alternatives such as onshoring, nearshoring, and friendshoring. In this article, you will learn about the six reasons why global supply chains are shifting and how you can prepare for the future of trade.
If you want to stay ahead of the curve and optimize your supply chain performance, you need to understand the drivers and implications of these shifts. Read on to find out more!
Business, Economics, Trade, Logistics, Manufacturing, Sustainability, Strategy, Management, Globalization, Innovation.
The article by Edwin Lopez, published in Supply Chain Dive, explores the six main reasons why global supply chains are shifting and how companies are responding to them. The six reasons are:
- Cost: Supply chain costs have increased due to factors such as trade wars, inflation, freight rates, regional conflicts, and rising wages in major manufacturing hubs. Companies are looking for ways to reduce their total cost of ownership, landed costs, and revenue impact by considering the costs of tariffs, transportation, product lead times, brand risk, emissions, and other factors.
- Tariffs and regulations: Tariffs imposed by the US and other countries have created a disincentive for companies to source from certain markets, especially China. Regulations such as labor standards, environmental policies, and data privacy laws also affect supply chain decisions. Companies are seeking to avoid or mitigate the effects of tariffs and regulations by diversifying their sources, relocating their production, or applying for exemptions or waivers.
- Risk: Supply chain risk has increased due to geopolitical instability, natural disasters, pandemics, cyberattacks, and other disruptions. Companies are looking for ways to increase their supply chain resilience and agility by reducing their dependence on single sources, increasing their visibility and traceability, building redundancy and flexibility, and collaborating with partners and stakeholders.
- Emissions: Supply chain emissions have become a major concern for companies, customers, regulators, and investors. Companies are looking for ways to reduce their carbon footprint and align with the Paris Agreement and other sustainability goals. Some of the strategies include switching to renewable energy sources, optimizing transportation modes and routes, using circular economy principles, and investing in green technologies and innovations.
- Lead times: Supply chain lead times have become longer and more uncertain due to factors such as congestion, capacity constraints, labor shortages, and quality issues. Companies are looking for ways to shorten their lead times and improve their customer service and satisfaction. Some of the strategies include moving production closer to demand, adopting lean and agile methods, leveraging digital tools and platforms, and offering customization and personalization options.
- Technology: Supply chain technology has advanced rapidly and enabled new possibilities and opportunities for companies. Technologies such as artificial intelligence, blockchain, internet of things, robotics, and 3D printing have improved supply chain efficiency, effectiveness, and innovation. Companies are looking for ways to adopt and integrate these technologies into their supply chain processes and systems, as well as to cope with the challenges and risks they pose.
The article by Edwin Lopez is a well-written and informative piece that provides a comprehensive overview of the current trends and challenges in global supply chains. The article uses relevant data, examples, and quotes from experts to support its arguments and claims. The article is also well-structured and organized, with clear headings, subheadings, and bullet points. The article is suitable for a general audience who wants to learn more about the topic, as well as for professionals and practitioners who want to gain insights and perspectives on the issue.
The article is not very critical or analytical, but rather descriptive and explanatory. The article does not offer much guidance or advice on how to implement or evaluate the strategies mentioned, but rather leaves it to the reader to decide. The article could be improved by providing more case studies or best practices from successful companies, as well as by addressing some of the potential trade-offs or drawbacks of the strategies suggested. Overall, the article is a valuable and timely resource for anyone interested in global supply chains and their future.
Following the pandemic and other disruptions, many companies are taking steps to improve and often shorten their supply lines. Bordering countries, such as the United States, Canada and Mexico, are making more efforts to “nearshore, friendshore and onshore” manufacturing. As Edwin Lopez reports in Supply Chain Dive, the multiple factors that influence corporate supply chain decisions range from reducing costs to mitigating risks of all kinds, whether climate related (drought affecting the Panama Canal) or geopolitical (Houthi attacks in the Red Sea). Lopez explains six factors companies are considering as they adapt their supply chains to deal with constant change.
- 1. Six major factors influence corporate supply chain decisions, beginning with cost.
- 2. Tariffs and other regulations exert pressure on supply chains.
- 3. Geopolitics is a primary source of supply chain risk.
- 4. Companies must decide to keep, adapt or drop their existing supply networks.
- 5. Supply chains depend on manufacturers’ “agility and lead time.”
- 6. Environmental, social and governance (ESG) issues also influence corporate supply chain decisions.
1. Six major factors influence corporate supply chain decisions, beginning with cost.
Multiple factors shape corporations’ decisions to maintain or change their supply chain. Interviews with experts found six major decision points, starting with cost.
“Growing costs tipped the scale for many companies’ considerations of the optimal country to source from.”
Supply chain costs have risen everywhere, due to a variety of pressures, including extended supply lines, trade wars, inflation, freight costs, regional conflicts, and increased wages in manufacturing centers like China and Mexico. Other cost factors include tariffs, transport time and cost, and environmental impact. Such issues have inspired a movement to “reshore” supply chains.
2. Tariffs and other regulations exert pressure on supply chains.
Former president Donald Trump enacted tariffs to use as leverage in global trade negotiations and to create a disincentive for companies to procure goods in certain foreign markets.
“Tariffs and subsidies are two sides of the same coin, and the past two US presidents have used both to alter the shape of supply chains.”
President Joe Biden kept Trump’s 25% duty (section 301 tariffs) on products from China. The tariffs became a major reason for companies to stop producing in China and generated billions in incentives for manufacturers to produce their products in the United States. The tariffs also help ensure that US companies wouldn’t source goods from China’s Xinjiang region, in compliance with the Uyghur Forced Labor Prevention Act.
“Rather than revoke the tariffs on a partisan basis, President Joe Biden kept the tariffs in place alleging discriminatory trade practices — and offered companies billions of dollars in federal incentives to tip the balance of production back to the United States.”
As manufacturing left China, companies opened facilities in other countries. Major investments went to low-wage Asian nations close to China, such as Vietnam, and to US neighbors Canada and Mexico. Some companies have turned to Ireland and Switzerland, which have high manufacturing capacity in relevant industries, as does the United States, where some companies have returned to domestic manufacturing.
3. Geopolitics is a primary source of supply chain risk.
The trade war between the United States and China was only one of the geopolitical issues recently affecting supply chains. At this point, the major supply chain risk factor is geopolitical. As David Shillingford, co-founder at Everstream Analytics, explains, “The thing that’s really in people’s minds at the moment now is geopolitical risk. And that of course —it relates to tariffs, but it’s also country risk.”
“In the past three years alone, executives have had to navigate extreme disruptions to production from protracted lock-downs or regional conflicts like the Russia-Ukraine war.”
During the pandemic, companies grew accustomed to orders being up to a month late – or simply never arriving at all. With this in mind, experts graded supplier countries by risk level. As extended delays beset some supplier nations, shipping executives had to calculate potential lost sales and ask if they could justify paying for more insurance.
4. Companies must decide to keep, adapt or drop their existing supply networks.
Manufacturers have to think long-term about the best location for their production facilities, in terms of supply lines, labor pool, legal infrastructure, costs and multiple other factors.
Meeting US production needs at home by 2030 would require 10 times more workers than manufacturing has today and an investment of $500 billion, according to Patrick Van den Bossche, a Kearney partner and head of its Consumer Technology Association study on electronics supply chain resiliency. Because American manufacturers are having trouble finding laborers, the US may need to use a “team approach,” investing in manufacturing in different nations depending on their capacity in specific sectors. Relocations, whether to Asia or Europe or within North America, work better when the new location already has manufacturing strength in the relevant industry.
“A country’s ability to absorb new production capacity is top of mind for executives making production shifts and that’s a big reason why countries like Mexico and Vietnam, with a strong existing share of exports to the United States, are winning even more business.”
When a company decides to move its production facilities the return on investment just for new infrastructure takes 15 years or more. As Van den Bossche explains, “You’re basically putting steel…in the ground for at least the minimum of 15 years before you have your return on investment. On a timeline of 15 years, political stuff doesn’t matter.”
5. Supply chains depend on manufacturers’ “agility and lead time.”
Realistic business predictions require accurate inventory information, which is impossible to derive – even with advanced technology – amid unpredictable shipping delays due to port and warehouse congestion, geopolitical problems, and more. This gives companies additional reasons to cut manufacturing lead times, perhaps by bringing production operations closer to home.
“In some cases, companies chose to rework their logistics flows to import and store goods closer to the consumer markets they were serving. Then, a push to nearshore production followed, with many companies touting the advantages of having products stored or produced close to the next step in the supply chain as a boon to agility.”
For example, Helen of Troy, which manufactures water flasks, moved its bottle-making operation from China to the West to achieve quicker transport, get to market faster, and scale up and standardize manufacturing. “This will help us diversify geopolitical risk, enhance our responsiveness and reduce inventory,” explained COO Noel Geoffroy.
6. Environmental, social and governance (ESG) issues also influence corporate supply chain decisions.
Environmental, social and governance goals are increasingly important in corporate decisions about supply chain networks. For instance, relocating production facilities can eliminate the need for long-distance transportation, thereby reducing emissions. When most supply chain systems were developed, ESG wasn’t a priority, but today’s supply-line changes have the potential to support corporate efforts to cut emissions and avoid problems – such as polluting practices – that cause brand damage.
“Some experts warned moving supply chains is not a panacea for sustainability. In fact, moving a facility from one country to another could result in more emissions.”
Sustainability goals are increasingly important in supply chain decisions, though achieving maximum emissions reductions as a side effect of supply chain shifts will require pivotal suppliers to get on board. Companies are finding that keeping their supply chains shorter also facilitates innovation and heightens their ability to respond to market shifts.
About the Author
Edwin Lopez is the managing editor for Industry Dive. He is also responsible for the daily operations and strategy at Supply Chain Dive, Transport Dive and Manufacturing Dive.