In previous blogs, we’ve discussed how in a post-pandemic world there’ll be a greater emphasis on supply-chain transparency and derisking relationships with suppliers. But another big way the landscape looks set to change is a significant move towards sourcing locally rather than globally.
Supply chains are now more global than ever—and for good reason. Globalization has lowered costs, introduced a wider selection of suppliers, and given us the ability to utilize expertise and industry from all corners of the world.
But when the COVID-19 pandemic crippled production and disrupted logistics in critical economies across the planet, the risks posed by the global supply chain abruptly rose to the surface. For instance, companies that relied on parts manufactured in Eastern China (hard-hit by the Coronavirus) suddenly saw production plummet. And as shipping lanes ground to a halt (or pivoted to the supply of PPE), many organizations found their orders languishing in warehouses on the other side of the world. As a result, lean and just-in-time inventories started to dry up.
Economists are now predicting what many CPOs have been quietly suspecting for months—that the Coronavirus will reverse globalization and bring an increased emphasis on regional supply chains.
A big driver of this trend is a desire to reduce dependence on Chinese manufacturing, but in the US and other western economies, there has long been a grassroots movement towards the repatriation of production. Various industries in countries that—over several decades—saw business and jobs move overseas are often big proponents of so-called “reshoring”. And as a reaction to the supply chain disruptions caused by the global pandemic, this movement has gathered speed.
The Economist Intelligence Unit says the coronavirus pandemic will push companies to relocate parts of their supply chain—particularly away from China. The goal will be to provide a hedge against future shocks—not just shocks from another pandemic, but also trade wars, cyberattacks, and severe natural disasters, which are also likely to increase in a world where risk is on the rise.
So, what steps do CPOs take if they want to bring more of their supply chain closer to home?
Amid this changing manufacturing and distribution landscape, the first thing to do is reassess your local procurement options. As more companies shift production from one region to another, this provides chief procurement officers with new sourcing opportunities that will need to be evaluated. In the future, there are likely to be far more opportunities locally than there have been in the past.
Second, companies should reconsider their soul-sourcing practices. Even in normal times, using just one supplier to procure a given item—especially key components—opens companies to a range of risks, including physical failures at the factory or disruptions to services delivered. But in times of severe global disruption, those risks are exacerbated and can take on monumental proportions. CPOs can evaluate the risk of relying on just one supplier—especially if that supplier is overseas—and perhaps look for a second supplier closer to home. Even if that second supplier is a little more expensive, the risk mitigated by having them on hand nearby may be worth the extra cost.
The third step for procurement professionals could be exploring ways to collaborate with suppliers to leverage manufacturing innovation and automation. Ask your suppliers how you can collaborate to operate more locally. Is there a way technology can be used for process automation, supply chain streamlining, or generally improving the speed of getting things to people faster? Through CPO and supplier cooperation, strategies could be developed to produce more quickly and closer to home.
Lastly, reshoring the supply chain allows chief procurement officers to think differently about price versus the risk of supply shortfalls. For key items, it’s probably better to have what you need at a higher differential than to not have the item at all. For these reasons, pricing and inventory are likely to figure prominently in the conversations CPOs will be having with other senior members of their organization in the months ahead, so it might be worth looking at the data and modeling various scenarios to see how localization can work for you.
As the trend towards regional and local supply chains continues, procurement leaders must think hard about what this new dynamic means for their organization.