Many would agree that the disruption caused by the COVID-19 pandemic is one of the most significant shocks the global supply chain has faced since the advent of globalisation decades ago. This, coupled with the U.S-China trade war, has meant widespread uncertainty and lack of trust in the functioning of vital supply chains across all sectors. Cheap labor and modern transport are no longer the be-all and end-all of global supply chain management.
There have been shortages of goods across the globe, from essential everyday products like toilet paper and food, to manufacturing components, as logistics firms struggle to keep up with demand in a volatile market. 98% of firms were affected, according to a Resilience360 (now called Everstream) survey of supply chain professionals.
So how are companies reacting to this disruption? A recent survey by Heartland Forward in the U.S., showed that 70% of companies questioned are considering reshoring their manufacturing to the homeland in the coming years in an effort to solidify control over supply chain logistics. “Firms are starting to recognize the growing costs and dwindling benefits of offshoring,” said Ross DeVol, president and CEO of Heartland Forward. “The U.S.—especially the Heartland—is still a great place to do business.”
Indeed, it would seem that the firms that have avoided catastrophe since the pandemic have chosen to produce locally and shore up their supply chains, adapting their strategy, which has been in place for years, and showing a particularly impressive resilience in a highly deteriorated context.
Going Local for Greater Resilience
The automative industry, for example, has been hit by global supply chain disruption, with firms often relying on manufacturing in the Far East for vital components for engine production, for example.
“One of the big issues that’s come up during the pandemic is European companies have seen key sources of supply close. China shut down, then India and recently it’s Latin America. Many weren’t aware of what this could mean for a critical component of their vehicle engine or for a pharmaceutical product,” said Dr Sam Roscoe, senior lecturer in operations management at the University of Sussex Business School.
As a result, companies that are able to ride the wave of supply chain disruption are those that source and manufacture components locally. One such company is Ford Engineering in South Tyneside, UK. The company manufactures components for the aerospace and automative industries. The firm’s managing director, Chris Ford, has stated that sourcing materials and staff locally has helped reinforce its supply chain: “We don’t source materials from East Asia, but we’re hearing from our contacts that the cost of shipping and air freight has gone through the roof,” he says.
They are not the only ones. Many companies are being forced undertake a delicate balancing act when it comes to efficiency and resilience, with resilience becoming an ever-more important driving force in supply chain strategy during the crisis. The most resilient supply chains have undoubtedly been those with a local dynamic, where firms can exert detailed oversight at all stages of production and supply.
“Essentially, global trade has led to supply chains becoming more localized. Trying to produce and ship locally will ensure less disruption in case of limited movement of people and goods,” says Bettina Büchel, Professor of Strategy and Organization at IMD. Localisation “does offer some wider-reaching benefits such as increasing employment opportunities and increasing tax revenues… It could also offer manufacturers tighter control of supplier standards leading to better product quality and higher levels of customer satisfaction,” according to Simon Roberts, Associate Director of Jonathan Lee recruitment.
Going Local to Secure the Supply Chain
Not only have companies with localised supply chains proved more resilient to the adverse effects of the global economic crisis, but their strategy has also proved more secure at all levels of supply chain management, notably in regard to product quality and customer access.
One such example is the French banknote printing and security firm, Oberthur Fiduciaire, which shored up its local supply chain in 2017 with the acquisition of the Dutch banknote printing company VHP Security Paper and its intellectual property, which has an annual production rate of 6,500 tonnes. The acquisition was not only aimed at shoring up the supply chain locally, but also at securing the entire operation from production to delivery, thus further building confidence among customers.
“Our facilities are all located in Europe and received the ECB accreditation. Even raw materials such as paper and ink, for example, are essential for quality and safety. Their origin must therefore also be perfectly secured. As far as our customers are concerned, this means that they have access to the entire supply chain and a right of control and supervision over the entire process,” Thomas Savare, CEO of Oberthur Fiduciaire.
This operational mode has proved highly effective during a pandemic that has ravaged other sectors. Transparency and a robust supply chain allow companies like Oberthur Fiduciaire to weather the storm.
Going Local for Greater Agility
Re-securing supply chains has been an obvious reaction to the instability brought on by the pandemic, especially for companies with global supply chains that pass through China. It has become widely acknowledged that reshoring or near-shoring supply chains is the best way to build not only supply chain resilience in the current climate, but also agility.
One example of a company consolidating its agile supply chain during the pandemic is the American company 3M, which produces more than 55,000 products including adhesives, laminates, electronic materials, medical products, optical films, dental and orthodontic products and more. The company switched focus to PPE and respirators for health systems on the brink of collapse and its success was in part down to the agility of its supply chain.
“You can see the work the supply chain teams have done to keep our supply chain lines running despite supply chains in general being broken,” said Monish Patolawala, senior vice president and chief financial officer at 3M.
The company’s work expanding manufacturing in the US and reinforcing local supply chains during the pandemic resulted in it being named ‘Supplier of the Year’ by Supply Chain Drive.
Going Local for Survival
Resilience, security and agility, three key words in supply chain management during time of crisis. All this can be facilitated by focusing on local, or near-shore, operations. The American professional services firm PwC has suggested that near-shoring operations out of China to Mexico to cut operating costs by up to 23 per cent.
PwC Strategy Consulting Principal, Kevin Keegan, states that “while the term ‘resilience’ has been overused in recent months, the priorities we see for many companies as they look at their supply chain have included the essence of this term: increased emphasis on trust and predictability while remaining true to traditional focus on cost, time and quality.”
Furthermore, this move towards more local production chains with a focus on resilience and agility has also been affected by ecological concerns about carbon footprints and reliability of supply, as import tariffs across the globe are often unstable.
With 94% of Fortune 1000 companies experiencing widespread supply chain disruption since the outbreak of the pandemic, now might be the time to reassess current structures and prepare for future turmoil and risk mitigation by reimagining supply chain management. The promise of cheap labor and retail costs that surfed the wave of globalization has been jeopardised, and firms may well look to reshoring, relocating and ‘going local’ in order to consolidate their supply chains and ride out the latest wave of uncertainty.
