Supply chain executives at large companies have been playing a high-stakes game of Whac-A-Mole in recent years, rushing to keep up as problem after problem emerged—from pandemic-induced shutdowns to container scarcity to semiconductor shortages to trade disruption.
Today, that exercise has morphed into a more intense game of risk. Companies are operating in an evolving world with a business landscape increasingly shaped by a dynamic global economy and geopolitical tension. Executives who had become accustomed to filling supply-chain holes and weathering inflation have now shifted the focus back to cost management and building resilience by way of diversified supply bases and near- or on-shoring.
Amid this transition, managers are grappling with the difficulty of identifying suppliers with the required capabilities and sufficient capacity. Investment dollars need to be allocated to highly critical supplier development programs.
Our recent end-to-end supply chain survey, completed in September and fielded among 100 executives performing relevant roles in five industries, shows the shift is in an early but critical stage. Companies are targeting a roughly 40% reduction in China exposure; deep analysis is now devoted to “make vs. buy” strategies and global procurement cost modeling is increasingly employed. This is further necessitated by the fact China, in many cases, is no longer the total landed cost leader, especially when adjusted for risk.
These respondents—60% of whom work for companies reporting at least $5 billion in sales— are placing more attention on cost efficiency even as they implement a more robust China-Plus strategy.
Growing Importance of Cost Efficiency
As the pandemic moves further in the rearview mirror, cost efficiency is coming into sharper focus, joining resiliency and agility on the priority list (Figure 1).
For several years, manufacturers, packaged goods providers, retailers, industrial providers, and many other industries simply needed the supply chain to work—lead times and inventory headaches needed to be addressed regardless of the cost. Today, with consumers pressured by inflation and high interest rates, many of those companies face growth constraints, and margins are under pressure.
As the emphasis evolves, more urgency is being placed on managing spending, improving overall equipment effectiveness, and lowering freight costs. Our recent report titled Shifts in the global supply chain outlined various opportunities to harness tools ranging from automation to AI to a total cost and risk of ownership model to address costs.
At the same time, the need for investment in capabilities, however, is not being ignored. Survey respondents identified supplier development programs as being of the highest importance, followed by logistics and distribution changes, global procurement cost modeling, capability additions, and risk quantification.
Capability and capacity: Key to reducing China exposure
Executives continue to see diversification away from heavy China dependence as a priority, with nearshoring and organizational changes helping achieve this goal. Many executives have started by creating a roadmap, and this could give these managers latitude to heighten their focus on cost efficiency. But there is ample work to do.
Specific changes to consider include:
- Global supply chain visibility
- Dynamic cost forecasting
- Predictive risk modeling
- Generative AI simulation
As companies are targeting a 40% overall reduction in China’s share of sourcing, the U.S. and Mexico are expected to gain 10% and 30%, respectively (Figure 2). Nearly three-quarters of companies have started reducing exposure, and more than half plan to reduce China exposure next year by more than 10% via insourcing, re-sourcing, or other means.
Importantly, developing a make vs. buy strategy is seen as critical, regardless of industry. Among those polled, however, as many as 45% in certain sectors have not yet developed a strategy for execution (Figure 3).
To be sure, it is impossible and imprudent to just pack up and move operations overnight. While executives feel urgency when it comes to change, respondents say the greatest difficulty is identifying suppliers with the required capability and sufficient capacity.
When it comes to optimizing supply chains, our survey indicates companies see cost, quality, and service/lead time as the biggest priority concerns for supply chain executives. These are closely followed by concerns related to working capital, CapEx, and sustainability concerns (including decarbonization).
Nearshoring comes with its own unique list of challenges, with labor availability, CapEx, and location selection topping the list. The past few years, however, have taught us that the priority list can change due to unforeseen events that sometimes crop up seemingly overnight.
Special attention needs to be paid to developing a better understanding of U.S. incentives. While there is familiarity with federal and local incentives (including the Inflation Reduction Act (IRA) or the CHIPS and Science Act (CHIPS) programs) and planning to utilize them, this is still where companies feel the least ready.
Optimizing from end to end
Reducing China exposure remains highly important, but this priority is increasingly shaped by a need to improve cost and deliver long-term solutions to supply constraints. This requires a broad view that seeks to optimize the entire value chain spanning inbound to outbound logistics while applying close scrutiny of procurement, manufacturing, and distribution tactics and strategies (Figure 4). Companies will need to enhance global supply visibility, cost forecasting, risk modeling, and harness generative AI simulation capabilities.
AlixPartners has extensive experience helping clients optimize and restructure end-to-end supply chains to drive bottom-line impact. Our proprietary GTO (Global Trade Optimizer) digital platform is a differentiated capability allowing rapid mapping of the entire global supply base, enabling total cost of ownership modeling and implementing alternative supply chains. Our senior consultants have real-world operations experience optimizing each stage of the end-to-end supply chain, from supplier identification to final assembly and customer delivery.
Please reach out to discuss ways that AlixPartners can help you navigate the road ahead.