Increased tensions between the two largest economies, a recent war, and a pandemic have caused the economic and geopolitical world order to shift. These tensions have increased supply chain risks and caused companies to evaluate strategies that reduce reliance on certain regions. It is a tall task for any economy in the world, and especially for the US, which for example is reliant on China for over half a trillion dollars of imported goods in 2021.
Apple Inc. is a highly visible example of the risk that companies assume by overrelying on non-localized production. That strategy will cost Apple an estimated 6 million units of lost iPhone sales in 2022 given recent factory shutdowns, and Apple is certainly not alone.
Diversifying the supply chain comes with benefits, but is no easy task. It is frequently a costly endeavor, increasing the cost of goods and requiring significant investment. If it were more profitable and efficient, more companies would implement it. Below are some of the key areas to watch out for while reshoring production or diversifying your supplier base.
1. Where are my suppliers' suppliers?
Let's say Walmart wants to buy more US-manufactured stuffed animals. If the eyeballs, nose, fabric, and stuffing are all made in India, has Walmart reduced its reliance on India? The supply chain of a finished good is dependent on the production location of all its components and raw materials. Moving finished good production further away from component production frequently adds complexity and cost, even if closer to the end market.
2. Is the global transportation and power infrastructure in place?
China has tremendous rail and port infrastructure that enables it to efficiently move goods from the factory floor to the world. Other regions of the world don't possess the excess port and rail capacity required to efficiently absorb additional production. That doesn't mean you can't move your supply chain to those regions; it just becomes even more vital that your logistics team finds the right local partners that reliably operate in the area.
Additionally, many parts of the globe are not able to supply the population centers that might be ideally suited for a factory with reliable electricity and gas. This adds risk of lost production. Significant investment is required to build a strong infrastructural ecosystem, and that investment usually requires government support.
3. Can my organization manage a diversified supply chain?
Companies have made significant investments into their organizations to build the technical know-how required to manage a single source supply chain—whether that be supplier quality or purchasing department. That organizational know-how would have to be duplicated in more regions.
4. Can I find people to work in my factories?
Labor shortages in the US have been well-documented. Finding skilled employees to fill up a factory in the US is a challenge. Fed Chair Jerome Powell recently mentioned many disruptive factors in the labor market such as pandemic deaths, early retirements, and lower immigration. Furthermore, labor is not as plentiful as you might assume in certain low-cost countries such as Vietnam and Mexico. Vietnam has a 2% unemployment rate and Mexico a 4% rate. If you want employees in these countries, be prepared to offer competitive wages or operate with greater efficiency using automation.
5. Can I find space to build my factory?
There is currently a 3% vacancy rate for industrial real estate in the United States, which is a historically low figure. If you want space, be prepared to outbid your competitors for an expensive lease or put on your hard hat. If you decide to invest in a new building, don't expect it soon due to global supply chain issues for building materials.
6. Am I willing to absorb increased inventory?
Companies that diversify their supply chain must financially and operationally be prepared to manage the complexity of more inventory piles around the globe.
In conclusion, supplier diversification is beneficial to obtain control and maintain continuous supply, but it comes with huge investments, upskilling, and added costs in a competitive environment. It is crucial for companies to ensure people, processes, and systems are upgraded and a detailed actionable plan is in place when ready to execute.