Disruption in supply chains is here to stay; and logistics will get more complex.
As long as we understand the benefits of organizing mass production and taking advantage of current “auto-pilot” logistics structures in global markets, thinking about going back to local production would be too costly, risky and full of challenges. But what about shortening delivery times and reducing potential disruptions by looking at closer shipping locations?
Many developing economies are ready to comply with manufacturing standards, human talent and logistics infrastructure to fulfill global requirements; and companies are calculating costs and risks to reformulate their manufacturing to meet customers’ needs and reduce risks caused by big disruptions (like pandemics or natural disasters). It is utopian to see a new “winner-takes-all” manufacturer case (like China’s a couple of decades ago), so regional trade cooperation will be needed. But let’s first understand what are the possible options.
Relocation in its different versions:
Regardless of these multiple relocation options, we should not forget the cost of transitioning from one place to the other. As per several studies, the total combined cost for US and European companies to move manufacturing out of China would come to some $1 trillion over the next five years. If products might end up costing quite more, companies need to weigh the costs of current delays and bottlenecks option vs assuming that customers will be willing to pay more for locally-manufactured products option.
Also, when global companies relocate, their upstream and downstream stakeholders (i.e.: customers and suppliers) might be forced to follow them as well for the whole process to make sense. Otherwise risks are not entirely mitigated.
The impact on costs from these changes could bring the following scenarios:
For specific industries with high value density products (i.e.: pharmaceutical products, medical devices, luxury items) or critical just-in-time setups (such as the automotive industry) the immediate availability could outweigh the extra costs.
It is key to emphasize that barriers to entry in any relocation scenario should take into account China. It offers vast advantages in terms of infrastructure, labor costs, manufacturing know-how, adaptability and scaling-up possibilities that will not be replicated easily in any other single country around the world. Hence, many players will choose to leave their current supply chain procedures as they are today.
Why is visibility more important than ever:
Depending on the (re) location chosen strategy by companies and considering the post-pandemic future, additional fragmentation could happen in supply chains that will need a visibility tweak.
As per Gartner’s predictions on future supply chains, “Through 2024, 50% of supply chain organizations will invest in applications that support artificial intelligence and advanced analytics capabilities”. For sure, COVID-19 discovered and accelerated a latent need that many wanted to ignore and its consequences are causing ports, truckers and warehouses to go out of control now. Planning ahead is quite more difficult in 2022 and unpredictability is more than usual in many companies.
That is the reason why visibility in all processes will determine how resilient companies can become to major changes. Relocation is on the table for manufacturers but many other importers might choose to buy regionally. The problem is they either do not know where to buy the same products in nearby locations or they do not partner with other similar companies to bundle purchase orders to regional suppliers and benefit from consolidated purchases.
Also, changing locations means different shipping procedures, specific documents per country, barriers, transit times and new learning curves. But it additionally means different cost setups. Take maritime transportation. It does not follow a constant scalability of rates per navigated nautical mile that you can sometimes find in cargo airfreight. The impact of supply/demand relationship, waiting times at ports and the imbalance of containers per area represent an important stake of transportation costs. Therefore, maritime transportation costs from closer ports to be considered on a relocation scenario might result to be higher on an initial phase. Know-how for importers to access these new areas is also needed. However, if shipping demand increases from those ports due to relocation, a freight cost reduction might be expected in the long-term.
In any case, what is certain is that reliance on maritime transportation will be the rule, so shipping companies should make important efforts to expand their services for track & trace via technology no matter which port of origin is used. Other critical stakeholders, like trucking companies and warehouses, should make sure they are able to connect to these track & trace services easily. Exporters and importers need to have seamless visibility. Relying on phone calls or old-school methods will compromise this goal; relying on workers phones as an IoT device for tracing purposes will help.
The implementation of tracking devices on containers, the harmonization of machine-to-machine communication via IT systems using standard protocols and a change of culture towards a collaborative ecosystem will give end-to-end visibility to stakeholders and it is key for relocation processes to be smooth and attractive.