Companies Seeking Greater Resilience, but that Comes with a Cost

Data from a new survey report released last month by the analysts at Gartner says about one-third of companies have or are planning to move at least some production or sourcing work out of China.

The survey was completed by 260 supply chain managers, with respondents located in North and South America and the EMEA and APAC regions.

Supply Chain Digest Says...   But increased resilience comes at a price. Fifty-eight percent of respondents agree that more resilience also results in additional structural costs to the network. What do you say? Click here to send us your comments Click here to see reader feedback

The survey was conducted in February and March - after the coronavirus crisis had broken out in China, significantly affecting product supply, but just as it was starting to gain hold in the US, Europe and South America.

Whether results from the same survey if taken today would show similar results or maybe even a higher percentage of companies planning at least some China exit can only be speculated.

The survey found that 33% had moved sourcing and manufacturing activities out of China or plan to do so in the next two to three years. Survey results show that the COVID-19 pandemic is only one of several disruptions that have put global supply chains under pressure and caused a rethinking of China-centric sourcing. The US tariffs on many Chinese imports of course also loom large.

Companies are also rethinking overall sourcing strategies to build more resilience into their supply chains.

"Global supply chains were being disrupted long before COVID-19 emerged," said Kamala Raman, senior director analyst with the Gartner Supply Chain Practice. "Already in 2018 and 2019, the U.S.-China trade war made supply chain leaders aware of the weaknesses of their globalized supply chains and question the logic of heavily outsourced, concentrated and interdependent networks. As a result, a new focus on network resilience and the idea of more regional manufacturing emerged. But this kind of change comes with a price tag."

Gartner notes that since at least the early 2000s, China has been the go-to destination for high-quality, low-cost manufacturing, and it has established itself as a key source of supply for almost all major industries, including retail and pharmaceutical.

However, Gartner research showed that the gap between those companies planning to add jobs in China versus taking them away narrowed sharply in 2019. The primary reason for that change is the increase in tariff costs.

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"We have found that tariffs imposed by the US and Chinese governments during the past years have increased supply chain costs by up to 10% for more than 40% of organizations. For just over one-quarter of respondents, the impact has been even higher," Raman said. "Popular alternative locations are Vietnam, India, and Mexico."

Perhaps surprisingly, only 21% of survey respondents believe that they have a highly resilient supply chain network today, defined as having good visibility and the agility to shift sourcing, manufacturing and distribution activities around quickly.

However, 55% expect to have a highly resilient network in the next two to three years.

But increased resilience comes at a price. Fifty-eight percent of respondents agree that more resilience also results in additional structural costs to the network.

"We are at a crossroads in the evaluation of global supply chains that pits just-in-time systems designed to improve operational efficiency against just-in-case plans that emphasize planning and preparing for a range of plausible scenarios," Raman added. "To find balance, supply chain leaders must engage in risk management to assess their organization’s willingness to take risk onboard and decide how to quantify that risk against other network objectives such as cost effectiveness."

Moving Closer to the Customer

One-quarter of survey respondents stated that they have already regionalized or localized manufacturing to be closer to demand. Despite the cost of adding more players to the ecosystem and increasing the overall network complexity, regional supply chains can ease delays and shortages in times of disruption - if the model is economically viable, Gartner says.

Garter says that a likely result of this challenge will be much greater use of automation to reduce costs in higher cost production locations.

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