Are the Risks of Global Supply Chains Starting to Outweigh the Rewards?

After two years of global disruptions, and seemingly never-ending geopolitical risk, is it time for some f not many companies to rethink their approaches to global supply chain?

Of course, there have been calls for companies to reconsider Chinese sourcing even before and certainly after the still in place Trump tariffs on Chinese exports to the US. But that has in the end appeared to have done little to reduce US imports of Chinese made goods, and to the extent that there was an impact for a time, it mostly involved US companies moving sourcing to other low cost countries in Asia and elsewhere.

Supply Chain Digest Says...   There may also be “carbon tariffs” on some imported good and/or imports from specific countries, a further catalyst for home country sourcing. What do you say? Click here to send us your comments   Click here to see reader feedback

Predictions of a wave of reshoring of manufacturing back to the US have once again proven inaccurate, as the numbers show little change, despite occasional anecdotal stories of some company or the other bringing some production back to US soil.

But once again, there are events that are causing companies to look at their global sourcing strategies. Most immediately, that is obviously the Russian invasion of Ukraine and the resulting supply chain disruptions and price surge of wheat, cooking oil, palladium, cobalt, nickel and more.

Add to that the on-going disruptions in sourcing and shipping out of China, most recently as factories and ports are closed once again due to yet another outbreak of COVID19 and China’s severe response to it.

And that now comes after two years of significant disruptions across supply chains from the start of the pandemic in early 2020, including shortags of just about everything, chaos in ocean and air shipping and more, disruptions that go on and on for reasons that still aren’t clear.

So are we getting to the point where the risks of global supply chains are starting to outweigh the rewards?

That is the question recently asked by Willy C. Shih, the Robert and Jane Cizik Professor of Management Practice in Business Administration at Harvard Business School, writing in the Harvard Business Review on-line.

Shih says business and supply chain leader must answer that question by looking at four key dimensions. Those are:

Geography and Geopolitics: With growing risks, managers who have relied on labor arbitrage or distant global sourcing strategies increasingly will have to develop regional alternatives, Shih writes. This in turn will mean aligning production capacity and consumption within geographic trade blocs (e.g., North and Central America.)

Shih, however, notes that not everything will be localized.

“I also envision a scenario where a firm concentrates major parts of production in two or perhaps three sites centered within major trade blocs and then exports some intermediate materials and finished goods to markets in other blocs,” Shih notes.

Logistics: The logistics links that connect different parts of global supply chains have been taken for granted, Shih says, adding “Those days are past.”

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Shih notes large firms tend to have the resources and technology to see some logistics trends in terms of costs and delays much earlier than smaller ones, which are more dependent on logistics service providers. That means larger firms can sometimes steer at least somewhat clear of the troubles, or reduce their impact.

Switching gears, Shih says that greatly increased cost of logistics “call into question the practice of moving relatively bulk, lower-value (per unit volume) goods over long distances for processing,” citing as an example sending metals ore or rare earth minerals to China for processing before an onward journey to markets where they are consumed.

“It will take time to establish many processing capabilities within market blocs, but the rationale for doing so is now as strong as it has been in decades,” Shih comments.

Decarbonization and Sustainability: Shih notes the growing interest by corporate boards in reducing and reporting on corporate CO2 emissions. He then cites a coming regulatory regime for ocean shipping, in which ship-level emissions will need to be reported by owners, with targets for annual improvements.

“New environmental regulations are likely to become a more important factor in manufacturing location choices,” Shih notes, with those factors perhaps causing a move to domestic or close by country sourcing.

There may also be “carbon tariffs” on some imported good and/or imports from specific countries, a further catalyst for home country sourcing.

Suppliers’ Health: Many suppliers are teetering financially with soaring material and components and fixed price contacts with automotive or other US companies, Shih say.

Any sourcing decisions, he adds, should consider the business health of the relevant supplier base in these very strange times.

“Supply chain management is entering a new era,” Shih concludes, adding that the relatively benign environment of the last three decades is over.

Finally, Shih says that “The new focus on resilience and sustainability is going to present managers with fresh choices and challenges as they reorient their production footprints to ones that will be more flexible and more regional.”

The full article can be found here

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