Supply chain vulnerabilities are high in the minds of many leaders in both the public and private sectors. On February 24, 2021, President Joe Biden set in motion a 100-day government review of potential vulnerabilities in U.S. supply chains, centered around critical items including medical gear, batteries for electric cars, and computer chips. Additionally, a private-sector research report showed that 73% of companies surveyed were hit with some kind of supply-side challenge during the COVID-19 pandemic.
Going forward, it’s clear that suppliers will be a big focus for supply chain managers looking to build more flexibility into their operations.
In this installment of our Insights from the Pandemic series, we’ll take a closer look at how the pandemic has affected the way many companies are viewing their supplier relationships, now and into the future. If supply-side issues affected your organization—or you’re simply proactively looking for ways to build a supply chain that’s more responsive to future events—we’ll offer some areas to ponder and strategies to consider.
Diversifying, Reshoring, and Nearshoring
Although the pandemic has sparked a number of discussions around reshoring and nearshoring, the concept is one that’s been rising in prominence for a number of years.
Reshoring: The process of returning anywhere from a single link to an entire supply chain to its home country.
Nearshoring: The process of moving a portion of a supply chain to a location that’s close to the home country. For example, nearshoring in the U.S. might mean moving operations to Latin America, especially Mexico.
In fact, during the recent U.S. trade war with China, many companies were already transitioning their sourcing and manufacturing out of the country—or considering it—in order to avoid the steep tariffs that resulted from the conflict. Gartner research from February-March of 2020 revealed that 33% of supply chain leaders surveyed had either moved some of their sourcing and operations out of China or planned to do so in the next few years.
Additionally, data from the Reshoring Initiative, a non-profit dedicated to bringing manufacturing jobs back to the United States, reports that 955,814 jobs have been brought back to the U.S. in the last 10 years, confirming a longer-tail trend.
As companies begin to reshape their supplier strategies in the coming weeks and months, we expect to see three key trends emerge.
Supply-Side Trend #1: More Due Diligence
For many organizations, the COVID-19 pandemic underscored the need for more research on suppliers. In a Business Continuity Institute (BCI) survey, a majority of organizations knew the locations of all their Tier 1 (63.4%) suppliers. However, when it came to Tier 2 suppliers, the number of organizations who knew their suppliers’ locations dropped to nearly half: 36.0%.
The wide-scale disruptions of the pandemic took out suppliers of all tiers, making it abundantly clear that many organizations were vulnerable to disruptions from suppliers they knew little about. As a result, 60.2% of the organizations surveyed in the BCI survey plan to do more research into their suppliers.
Even if it doesn’t lead to the elimination of the threat of supply chain disruption, this kind of due diligence will at least offer an organization insights into where their vulnerabilities lie so they can at least be aware of them and, ideally, manage them proactively.
Supply-Side Trend #2: Impact on Asia and the Far East
As mentioned earlier, prior to the pandemic, the tariffs resulting from the U.S.–China trade war had already sent many companies searching for ways to decrease their reliance on the country.
One solution favored by a number of companies is the “China plus one” ideology. Under this model, an organization would spread diversify its manufacturing and/or supply activities between China and one other location, often in Southeast Asia. That said, questions remain as to whether this strategy creates enough geographic diversity to mitigate regional risk. As a result, many companies are looking even closer to home, with North American companies considering nearshoring alternatives in Latin America and those in Europe looking to locations such as Ukraine, Poland, and Romania.
A recent initiative within the U.S. government in February 2021 offers another example of how reshoring initiatives might affect Asian countries. Whereas China had long been a critical source of dysprosium oxide, a material used in lasers and nuclear reactor control rods, in February 2021, the Pentagon signed a contract with an Australian company to establish a processing plant in Texas to shore up domestic supplies of the material.
As more examples emerge, the long-term question will be: How significant will these moves be—and how will they affect the Chinese economy? However, locating alternative suppliers isn’t as simple as deciding that you’re going to do it. China’s freight infrastructure and manufacturing facilities have made it an incredibly easy place to do business. Additionally, when it comes to particular components and raw materials, China simply owns the market.
That leads us to our final insight.
Supply-Side Trend #3: Incremental, Slower Change Is Most Likely
Although the fall-out of the pandemic has created urgency for change in many organizations, some of these pivots will simply take time. Locating alternative suppliers and establishing new relationships won’t happen overnight. Additionally, if these new suppliers have to ramp up production to meet demand, that, too, will add even more lead time. In other words, initiatives that start now will take several years to fully take effect.
Additionally, many organizations will likely tweak their supplier relationships, rather than scrapping them and starting over again. For example, one strategy for creating greater resilience in supplier relationships suggests a hybrid approach, one in which some products are designated high-risk and, others, low-risk. For those high-risk products, production and supplies may be reshored or nearshored to reduce the potential for disruption. However, the production and supply strategy for lower-risk products might be left as-is.
In a similar vein, other companies are simply choosing to take greater control over Tier 1 suppliers through reshoring, nearshoring, or diversification, while taking less action as it comes to junior-tier suppliers.
No matter the direction your company chooses, it’s important to remember that the answers for your supply-side questions may not be black and white, but rather found in shades of gray.
The Future of the Global Supply Chain
This is the third article in our Insights from the Pandemic series on the supply chain and logistics strategies that resulted from this global event. Make sure to check out the other two articles in the series, 4 Supply Chain Risk Management Strategies for 2021 and The Future of Just-in-Time Logistics.
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