Our supply chains have not always been the complex, globalised networks we know today. In the 1990’s, low labour costs and a growth in manufacturing across Asia drove European and US companies to relocate production facilities and reconstruct their supply chains to cut costs. More recently, international trade has been rife with disruption; a mixture of short and long-term global events, such as the blockage of the Suez Canal and Covid-19 pandemic. As a result of ongoing disruption, many companies are beginning to rethink their supply chain models. This post will explore the motivations behind changing the models and feasibility of a step away from globalisation and towards localisation; bringing supply chains closer to home.
Global events and geopolitics – contributory factors to supply chain stress
The Covid-19 pandemic and Russian invasion of Ukraine have had significant implications on international trade. Worldwide lockdowns brought disruption throughout the supply chain; shutting down ports, skyrocketing container costs and causing shortages of basic household supplies. The invasion of Ukraine and subsequent sanctions on Russia have eliminated 25% of world grain supply, among other commodities, leaving the world scrambling to secure supply elsewhere. Such global events, among others, have forced businesses to reconfigure their overall supply chain process. You can read more on the effects of the Ukraine invasion on supply chains here.
What is reshoring and how will it help?
The idea of reshoring is to bring production closer to consumers, and, in doing so, reduce the potential for disruption, with shorter delivery terms and better service to end consumers. Localised supply chains will also provide better visibility for the monitoring of supply chain Environmental, Social and Governance (ESG) credentials, while cutting down on the carbon emissions associated with shipping, an industry responsible for 2.5% of the world’s total CO2 emissions.
While many companies are redoubling their efforts to build more resilient supply chains, we are also beginning to witness increased government support for domestic manufacturing. In mid-July, the UK announced its first ever Critical Minerals Strategy in a bid to reduce UK reliance on minerals and fossil fuels sourced far afield. The US government has also outlined plans to invest in domestic manufacturing, in a bid to build more robust supply chains and reduce reliance on China. This is amid ongoing US-China trade tensions. As a result, some companies have paved their own way, with Tesla making headlines for pioneering a model of vertical integration, whereby nearly 100% of the design and manufacturing remains in-house.
Is change here to stay?
Over the past few years, supply chain management has been and continues to be pushed to the forefront of business agendas. According to EY, more than two years in, the pandemic continues to upend global supply chains. In its survey conducted, nearly half of respondents experienced disruption from logistics-related delays (45%) and production input shortages or delays (48%), while more than half (56%) saw disruption from production input price increases. See full details of the EY survey here.
The reshoring of supply chains is a significantly expensive and complex solution and many businesses are expected to opt for alternative solutions before contemplating such a change. In the short-term, storing more inventory may help to avoid the risks and downfalls of the ‘just-in-time’ model, designed to deliver goods as and when needed and cut down on waste. In the long-term, diversification will be one of the main solutions for risk reduction; particularly the expansion of existing supplier networks and manufacturing or production facilities, if one market is unable to continue supply. Investments in technology will be equally important as a means of further automating manufacturing and reducing labour costs. This will therefore offset the cost implications of diversification.
How can OCI help?
At OCI, we specialise in commercial process outsourcing and will work with your organisation to optimise your supply chains. Our team of specialists and years of expertise will help to alleviate supply chain constraints related to procurement, logistics or financing. Whether you are looking to source a new supplier, locate a new warehousing facility or ease working capital constraints, we will help you to find a first-class solution. If you would like to get in contact to learn how we can support your business, you can reach us by email at email@example.com or call us on +44 (0) 20 3137 7326.