Over the past decades, industrial companies have increasingly globalised and established international supply chains. This was done to maximise production as well as cost-efficiency, resulting in a leaner supply chain with little ‘fat’, i.e. buffer.
In many cases, these supply chains also became heavily reliant on a small number of existing, established sources.
As time passed, supply chains and manufacturing facilities became more exposed to external factors. Issues like the COVID-19 pandemic, geopolitical conflict, increasing protectionism and tariffs have all played a role in disrupting supply chains, which were initially assumed to be resilient.
And the economic impact was – and is – significant. One estimate suggests supply chain disruption may have resulted in US$4 trillion in lost revenues globally, while a 2022 Accenture report predicts the Eurozone’s cumulative GDP could potentially decrease by €920 billion (around US$970 billion) by 2023 as a result of supply chain disruption.
The real question now is: how should companies build resilience into their supply chains going forward?
Clash of the titans: supply chain resilience in the context of the US and China
The US and China have had a tumultuous relationship in recent years amidst protectionist policies and implementation of tariffs.
Over 50% of US companies have near-shored or re-shored operations within the past two years, according to the EY Industrial Supply Chain Survey, while 55% have changed their supplier base to be closer to their operations.
This is especially true for electric vehicle (EV) makers, which have moved manufacturing and sourcing for critical raw materials in or near the US.
In China, there is a heavier focus on supply chain resilience as they have a competitive industrial system. Coupled with expanding domestic consumption, China has implemented a dual circulation strategy that places greater emphasis on domestic markets and reduces reliance on exports, driving greater independence and internal focus.
With a huge domestic market of 1.4 billion consumers, this is a sound strategy that has resulted in a higher percentage of Chinese companies (65%) near-shoring or re-shoring operations, with 75% having changed their supplier base.
In a bid to boost resilience, many companies have diversified their supply chain away from China, but full decoupling of the supply chain may not be possible due to shifting consumer sentiments.
One poll found that the share of respondents who say they would buy a local Chinese brand over a foreign brand has increased from 15% in 2011 to 85% in 2020. A “China plus one” approach can thus help preserve foreign firms’ past investments and market access, while also improving supply chain resilience.
How are different sectors addressing supply chain problems?
Certain sectors are more affected by supply chain disruption than others.
For instance, diversification has become an urgent requirement in the aerospace, defence and chemicals industries to ensure they remain competitive, in part due to their sensitive nature and operational complexities in their value chain. These sectors take different approaches to establishing supply chain resilience.
Aerospace and defence companies often already have shorter, domestically oriented supply chains due to the sensitive nature of their business. Technologies like additive manufacturing and automation are used to preserve margins and offset the higher operating costs associated with near-shored facilities.
The chemicals industry is also diversifying its supplier bases and expanding capacities to demand hubs. China accounts for about 45% of the global chemical market today, up from 26% in 2010.
No wonder then that many MNCs remain invested in China to ensure country-wide positioning within the Chinese market, as well as for global markets. At the same time, they are adding capacity in other Asian nations, along with India and the US, to mitigate supply chain risks.
What needs to be done to improve industrial supply chains?
As global supply chains shift from ultra-low costs, just-in-time delivery and bare-minimum inventories, there are four things industrial leaders need to do to fundamentally transform and future-proof their supply chains.
First, leaders need to redefine their supply chain strategy. This can be done by assessing global product flows, tax models, as well as network footprint, before implementing a supply chain architecture that can handle new risks and opportunities.
Secondly, leaders must build agility into the supply chain footprint and supplier network. Real-time monitoring and scenario planning, which will in turn improve responsiveness, are key. A shift in the mindset of teams and partners away from command and control, towards visibility and trust, also helps in this endeavour as partners can make snap decisions without waiting for the gears of hierarchy to turn.
Thirdly, business leaders will need to focus on riding the green wave and embracing sustainability. Your business will need to engage stakeholders to drive competitive advantage and environmental outcomes via circular economy principles, which aim to eliminate waste and pollution by circulating products and materials in a closed loop.
Finally, businesses should shift from doing digital to being digital. By focusing on digitally fluent talent, businesses can open new revenue streams with supply chain technologies, and not simply optimise efficiency.
An example of a company that has adopted these four steps to improve their industrial supply chain is Feyen Zylstra. They have a robust supply chain architecture, and an agile supply chain with an internal procurement team that is empowered to make snap decisions. They have also integrated sustainability into their processes, and are a digital-first company.
The future of supply chain resilience
There is a growing expectation that supply chains will continue to move near-shore or on-shore. In fact, a study in 2021 indicated that no less than 41% of US companies have specifically stated that they are trying to reduce reliance on China.
As production facilities required for this transition are being designed and built, businesses ought to now be considering what the manufacturing facilities of tomorrow should be like.
To future-proof the supply chain and build resilience, businesses need to ensure sustainability and green initiatives remain high on the agenda, as environmental, social and governance concerns become increasingly elevated due to climate change.
We anticipate that the green wave will likely be the next disruptor, not just to supply chain resilience but to the manufacturing industry in general.
Therefore, the shift towards a circular economy, which is a model of production and consumption that aims to reduce waste as much as possible, is a big factor to consider when building your business’s supply chain.
Design an effective and resilient supply chain for success
The International Centre for Industrial Transformation (INCIT) champions manufacturing transformation, and has both the tools and the reach to provide support to major industries and manufacturers globally to build supply chain resilience.
To learn more about how you can position your business for success in this increasingly protectionist business landscape, contact us here.