After decades of longer and more global supply chains, some are becoming shorter and more localized. This trend has important implications to supply chain planning. But first let’s take a look at the factors driving this change.
Contracting Supply Chains
A recent special report by The Economist says that while most people assume that shrinking supply chains are caused by political factors such as tariffs, in fact there are deeper long-term trends at play. According to the McKinsey Global Institute (MGI), cross border investment and trade have been decelerating for more than a decade. They say that while trade continues to grow in absolute terms, exports as a percentage of overall value chains has shrunk from 28% to 22% of gross output in the past ten years.
A decade ago it was unrealistic to compete with “the China price”. Global supply chains boomed thanks to bountiful cheap labor, dramatically less expensive communications, and lower-cost transportation. Manufacturing was transformed into a global enterprise. And this low cost fostered a mentality of incremental thinking with mid-level managers focused on squeezing out 1-2% a year in cost savings through sourcing, says Pete Guarraia of Bain consultancy.
But converging costs have reduced the need for far flung supply chains in many industries. The Economist says that more companies are sourcing with proximity to their major markets – for instance servicing the EU from Eastern Europe and Northern Africa or the US from Mexico. One senior executive quipped that he was thinking about eliminating the “global” from his title of Chief Global Supply Chain Officer because “over half my spend is moving to a regional or a national level.” A recent survey of European firms by Credit Suisse, the investment bank, says that companies will “no longer plan and source their supply chains predominantly on the basis of cost.” They are focused less on raw cost and more on supply chain risks, added services and added flexibility.
Ecommerce is also driving supply chain change. Localized supply chains can be more responsive to fulfilling the promise of an endless variety of products delivered almost instantly. Not surprisingly, technology is also playing a role. Technologies such as machine learning and demand analytics can favor shorter, smarter and more demand-driven supply chains. In some cases, 3D printing can provide a low volume part at a competitive cost and in a fraction of the time of a traditional low-cost off-shore supplier.
So while politicians (both in the US and in other countries) have been ratcheting up the protectionist pressure on global supply chains, this recent development only adds to an existing trend.
What Do Shorter Supply Chains Mean to Planning?
Supply chains have been getting more global for so long that it may be hard to recall planning for nearshoring or localization. Of course trade-offs of higher manufacturing costs are balanced against reduced inventory costs, lower freight/logistics costs, lower duties and taxes and all the other parts of “total cost to serve”. In addition, there are the benefits of far greater resiliency and certainty. Faster response times means far less buffering to respond to all sorts of disruptions, such as exchange rate fluctuations or inventory uncertainty.
But a key benefit of shorter supply chains is an increased ability to perform what Gartner calls “Response Planning”, the connecting of upstream product demand sensing with downstream network planning and execution response. It enables faster cycle times and faster review cycles more responsive to customer preferences and increased agility to changing market conditions.
In an ideal scenario, the response network model begins with a dynamic and profitable assortment at the Point of Sale (POS) fed by a responsive system able to continually and seamlessly synchronize the network to meet customer expectations across multiple channels, either online or physical. This approach reflects a convergence of supply chain planning and execution for synchronized action and response. Managing the supply network is not be viewed solely as a cost-driven activity, but rather an integral part of orchestrating fulfillment needs. It means a move from supply-driven to service-driven supply chain fulfillment with the data and information needed to make more-timely, predictive and informed decisions to execute required service levels.