New Strategies for De-Risking Global Supply Chains

As industries reevaluate long-standing sourcing strategies and strive for greater flexibility in their distribution streams, the focus may shift to North America, with the U.S. becoming a more attractive location for manufacturing. Those companies that are the most agile, adaptable and quickest to take advantage of a regionally based product pipeline will come out on top. 

The COVID-19 pandemic and subsequent supply interruptions have shown the risk of an extended and concentrated supply chain. Business leaders have been forced to reevaluate supply chains, especially those with ties to China. Now, the best solutions may be closer, geographically speaking, than one might realize. It’s time to capitalize on regionalization.

Regionalized production has many competitive benefits over centralization, including less currency risk, reduced impact of geopolitical issues, and the ability to alter manufacturing capacity in various locations, depending on given situations.

With a centralized approach to sourcing, interruptions can affect the entire production and supply chain, impacting sales, customers and even a company’s brand image. This played out on a global scale with microchip production issues in the automotive industry over the last few years. As automakers learned, putting all one’s eggs in one basket can be potentially disastrous — especially if the basket breaks.

To regionalize production, companies must take an overarching look at larger swaths of the globe. They need to analyze detailed information about the location of suppliers, customers and ship-to points. Only then can they determine the ideal location for sourcing — not just those that seem most convenient. To make the right decisions, they might find it beneficial to tap an outside perspective, one that can help them understand how products move, and ask questions from an unbiased perspective.

The best move isn’t necessarily to immediately exit China, which remains a vast and growing market. Instead, manufacturers need to scale back and look into other regional opportunities that can bolster production and selling power.

Nearshoring and Friend-shoring

A regionalized approach will likely include nearshoring and friend-shoring. Nearshoring affords operational proximity, with sourcing and production closer to the end market. The shorter the supply journey, the more adaptable it can be, especially in the deployment of people and resources. There’s less travel, time zones and work hours are the same, communication and follow-up happen faster, and the overall process is simpler.

Friend-shoring involves the establishment of trusting relationships with suppliers, focusing on countries that align in values, economies, styles of government and other factors.

Tesla, for example, recently announced plans to build its next production facility in Monterrey, Mexico. The company will sell within the North American region and take advantage of Mexico’s extensive trade agreements. The move also keeps operations close to the company’s Texas headquarters, and enables it to tap into highly skilled talent that has been harder to find in the U.S.

Having selecting the appropriate geographies, companies can then project imminent disruptions and plan accordingly, by closely monitoring local news sources. Even subtle changes in politics or labor relations can have significant impacts. Spread the responsibility for this analysis among management teams, to always have a pulse on what's going on and how it could impact product pipelines.

Awareness of potential impacts is critical to avoiding or mitigating interruptions to supply chains. Take last December’s narrowly avoided rail worker strike: By the time everyone realized how truly disruptive this would have been, it was too late to take remedial action. There wouldn't have been nearly enough trucks to move supply, and it would have halted just about every industry. Businesses need to be in tune with local logistics and understand how far facilities are from major transportation hubs, including ports, highways and railheads.

Data dashboards can help define the trajectory of a business by tracking information on geopolitical, economic, labor, transportation, currency exchange and other critical issues. By creating data-centric dashboards, companies can identify successes and gaps, what future markets look like, and whether any potential risks are on the horizon.

Working With Suppliers to Create Flexibility

It’s becoming increasingly critical to understand how and where supplier source materials. In the past, companies had supplier development engineers on staff. They weren't just purchasing agents; they worked directly with suppliers to develop the latter’s business and outputs. This approach creates a strong, loyal relationship by supporting the supplier’s business and helping it to grow. 

For increased flexibility, consider having multiple sources for the same category of products. If one supplier shuts down, there are secondary sources to take over immediately. Such a strategy adds additional costs, or course, so it’s necessary to strike a comfortable balance. 

Business leaders today must reevaluate the best ways to solve the puzzle from a global perspective, while safeguarding against future concerns tied to geopolitical tensions, labor shortages, yet another pandemic or any number of other uncontrollable forces. 

There will always be global and national events that no one can control or predict. But having eyes and ears on the ground, and taking strategic steps such as regionalizing product streams, can help organizations stay ahead of disruptions and minimize their adverse impacts.

Lou Longo is partner and international consulting practice leader with Plante Moran.