News | October 19, 2020

Supply Chains Brace for Change

From trade wars to Covid-19, recent events have caused a dramatic rethink of how businesses can remain resilient in a time of crisis. An overhaul of globalization as we know it has accelerated in recent years. Business leaders are now faced with the inevitable task of restructuring their supply chain.

Globalization has been in retreat from its peak in the mid-2000s following the financial crisis. What was once unavoidable took a U-turn as leaders began to appeal to a more self-sufficient approach to the economy.

The fragility of supply chains, exposed by the inability to rapidly source goods during the pandemic, demonstrates that looking inwards has some merit.

However, much like globalization was not an inexorable process, its breakdown should not be taken for granted.

The rise of nearshoring

Bringing operations back home, or reshoring, is an attractive option for companies that were unable to deliver on contracts because of issues overseas. However, doing this at scale is an expensive task. Regulatory requirements in advanced economies are often onerous and create financial hurdles, such as higher minimum wages, that will reduce competitiveness.

If anything was learned from the issues faced during the pandemic, it is that a robust supply chain is a diverse one. The search for efficiency that resulted in manufacturing clustered in Asia is now being questioned.

Reshoring might not be the solution but increased regionalization appears extremely likely. Relying on nearby countries will allow firms to take advantage of cheaper labor, while also allowing for increased inventory and quality control. Where globalization suffers, nearshoring could see a boost.

While creating excess capacity can be costly, the alternatives might be worse.

Geopolitical hurdles

The pandemic is not the sole catalyst. It is a mere acceleration of what was an already escalating trend.

Trade wars, sanctions and a retreat from international treaties have made it hard for businesses to have confidence when investing overseas. Public sentiment to goods sourced from certain countries has soured.

Cross-border goods flows have fallen in the last decade, relative to GDP growth, after increasing for several decades.

But where there is chaos there is opportunity.

Invoking a slogan of 2020, Nataranjan Chandrasekaran, chairman of Indian conglomerate Tata says “geopolitical conflicts have become a new normal for every business.”

Navigating conflicts and searching for stability has become a necessary cost of doing business during the withdrawal from globalization.

However, while there have been political victories for globalization skeptics, the signing of the EU-Mercosur trade agreement, along with the Trans-Pacific Partnership (TPP) shows that trade barriers are still being removed.

Derisk, don’t decouple

Businesses across the world have seen their futures exposed to the perils of a fragile supply chain. Though a radical overhaul of supply chains in a search for a quick fix might be attractive on paper, it’s imperative they avoid acting rashly.

A de-risking of the supply chain, spreading operations over multiple locations, or nearshoring, are far more plausible solutions than a full decoupling with countries like China.

The idea of single-site sourcing will become one of the past. Years of low-inventory operations and just-in-time manufacturing could also be reassessed.

Challenges are sure to affect those managing supply chains in the coming years, but the key will be maintaining flexibility, diversifying and creating contingency plans.

A return to the peak of globalization is unlikely to be seen in the short-term, at least, but it is far from the end, with too many benefits derived to withdraw completely.

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