59% of procurement and supply chain professionals say the Fortune 500 should reduce globalisation by bringing manufacturing back home. But is it practical?
The best way to describe the supply chain disruptions caused by COVID-19: pervasive and severe.
Our research found that 97% of the organisations experienced a supply chain disruption. Let that sink in for a second. We knew the supply chain impact of COVID-19 was extensive. This finding takes it up another level – indicating the disruption was near ubiquitous.
So what’s next? The majority of procurement and supply chain professionals (73%) are planning seismic strategy shifts post-pandemic – and rightfully so. Changes under consideration include expanding supply bases, adjusting inventory strategies, increasing financing for key suppliers and localising supply chains. The latter is the most ambitious, and will be the hardest.
Obstacles to Bringing Manufacturing Back Home
The idea of reducing globalisation in response to COVID-19 is both popular and logical. Nearly 60% of those surveyed believe the Fortune 500 should reduce globalisation by localising supply chains and bringing manufacturing back home.
But as every industry veteran knows, doing so is easier said than done. Modern supply networks and production strategies were built to be global. Reversing this will require fundamental strategy, technology and financial changes.
Consider the core drivers of supply chain globalisation. First and foremost: it’s about costs. The never-ending race to the bottom has made low-cost country sourcing the norm for procurement. At the same time, products – especially smart technologies – are getting more innovative, complex, personalised and sophisticated by the day. This forces manufacturers to outsource critical components to other manufacturers, who outsource to sub-suppliers, and so-on. The sheer expertise and technical capabilities needed to produce smart and connected products (consumer electronics, cars, healthcare equipment, etc.) goes well beyond what one manufacturer could reasonably provide on their own.
As Harvard Business School professor Willy Shih puts it: “A consequence of these complex interdependencies is a deep tiering of supply chains, with manufacturers dependent on their first-tier suppliers, which, in turn, are dependent on a second tier, which are themselves dependent on a third tier, and so on. Visibility into third, fourth, and more distant tiers is challenging, making wholesale replacement of anyone in the chain, let alone the entire chain, extremely difficult.”
In other words: reversing decades’ worth of low-country sourcing strategies, supplier specialization and network expansion will be complex, time-consuming and costly.
While organisations will take the necessary time to evaluate the brand, supply chain and product ramifications of such a change, the national implications are more urgent. Nations across the world – including Australia, the UK and the U.S. – are making big investments to bring manufacturing, especially for critical healthcare supplies, back home. This problem erupted early in the COVID cycle due to global shortages of masks and ventilators, and has become more pronounced as countries prepare to develop vaccines, once approved.
The issue: According to the Financial Times, World Bank data shows “manufacturing’s share of the economy in the US, UK and Australia has shrunk to its lowest level in more than 30 years to 11 percent, 9 percent and 6 percent respectively.” In a time of crisis, where life-saving equipment is needed as soon as possible, the delays creating by strained, outsourced supply chains are highly limiting, to say the least.
What’s Next for Procurement and Supply Chain Leaders?
The pandemic was a wakeup call. But what happens next remains uncertain. Will enterprises invest to reconstruct supply chains, or decide to make more targeted strategy and resource tweaks? Will they see this pandemic as a black swan event or a fundamental course-changer? Only time will tell.
We want to hear what you’re planning. Share your thoughts below.
For more insight, download the How, Now: Supply Chain Confidence Index today.