Rapidly changing customer expectations make the case for greater flexibility.
By Herbert Reutter, Jack Yao, and Heidi Bauslicher
The US-China trade dispute had been an initial wake-up-call in boardrooms around the world. That was even before the seismic impact of covid-19 on global supply chains, followed then by the Russian invasion of Ukraine and the geopolitical fallout unfolding in the middle east. As companies are continuing to scramble to avert cost pressures from each of these events, and other supply chain challenges, many are now considering a bigger opportunity—the chance to redesign their supply chains for the future. Building a more flexible operations network can help companies adapt to rapidly shifting customer expectations and protect against future risks including geopolitical, climate, another covid, etc.
The negative impact that these recent and current events have had and continue to have on global supply chains is a serious concern. Starting with the US-China trade war alone, organizations have seen some >$70 billion in added annualized cost been realized for Chinese imports to the US and >$20 billion in higher annualized costs for US imports to China. A recent MPKi survey shows 65% of US multinationals with suppliers or operations in China incurred a negative impact from the US-China trade war. Of those, nearly 40% incurred overall cost increases of more than 5%, and another 40% incurred a rise of 3% to 4%. Importantly, 50% of all respondents to our survey said a more flexible supply chain would have helped mitigate the impact of the trade war (see Figures 1 & 2).
Figure 1
Forty percent of the US multinationals incurred a negative impact from the US-China trade war with cost increases of > 5%
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Figure 2
Half of the companies surveyed said a more flexible supply chain would have helped mitigate trade war’ impact on their operations.
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In the event of ongoing negative events globally, or subsequent disruptions, short-term tactical moves by organizations can help limit potential damage. Leadership teams can seek new raw material suppliers and hedge those costs, shift contract manufacturing to a different region or rebalance manufacturing around the world. In a recent MPKi survey, 25% of corporate executives said they have already or were planning to redirect investments away from single offshore country sourcing and moving towards dual or multi-country sourcing and 42% said they expect to get materials from an entirely different region by the end of 2024.
But the long-term strategic challenge is getting supply chains right for the future. That’s a complicated balancing act. For example, wage levels in China today are 20 times higher than they were in 1992, pushing low-cost manufacturing to other developing countries and making automated assembly lines more compelling than in the past. The domino effect of moving manufacturing and supply out of China in the last 6-7 years has already seen the predicted inflationary pressures on other Asian countries, with wages and the cost of manufacturing increasing in countries including Vietnam, Cambodia, Thailand and India, etc. These countries and most countries in developing regions will inevitably follow the same path as China in terms of cost increases in the coming years. This is already forcing organizations to set up much more agile supply chain solutions that are enabling multi-country sourcing and manufacturing.
At the same time, rapid changes in consumer preferences are making far-flung supply chains costly, cumbersome, and vulnerable to a growing number of risks. Consumers want more customized products, and more variations. Those preferences are increasing product portfolios. Global manufacturers are starting to realize that producing customized products closer to market demand is smarter and can be more cost effective. Importantly, it allows them to allocate production in tandem with shifting demand, instead of months in advance.
Broad macroeconomic shifts also are transforming global markets. Manufacturing cost is still important, but agility and speed to market are becoming increasingly vital to competitiveness. Companies that fail to adapt to rapid changes in market demand risk producing the wrong products.
Supply chain of the future
Leading manufacturers are using new technologies to reinvent their supply chains for an era of faster change and uncertainty. The digital technology that powers next generation Industry, for example, helps companies produce far more efficiently through intelligent, digital supply chains. Workstations fitted with augmented reality software to instruct workers are increasing productivity rates and enabling more complex workflows.
As these advances make the workforce in the US, EU and other high-wage markets more efficient, low wage rates are becoming less important than they were two decades ago, when companies rushed to invest in China and CES regions. Take the case of an existing MPKi client, a global consumer products company that recently began rethinking its decades-old strategy of consolidating facilities in a few low-cost regions. The company’s leadership team realized its far-flung supply chain limited flexibility and slowed the introduction of new innovations to market. Senior executives also worried about geopolitical fallout including increased tariffs and other potential tax implications.
To increase the company’s responsiveness to changing market demand and develop more locally customized products, they started shifting some production closer to their key markets. The company’s new production sites are smaller but have a more flexible layout. The good news: Digital solutions helped offset the costs of local production and increase margins by more than 5%.
By negotiating contracts with suppliers that offer capacity in multiple countries, companies can shift sourcing or production as geopolitical risks, or other factors threaten to disrupt supply. One global technology company has increased the resiliency in its supply chain by working with its material and parts suppliers and contract manufacturers to build capacity outside of their traditional regions. At the same time, the leadership team is looking for opportunities in its existing network to rebalance manufacturing and take advantage of free trade zones.
Made in China 2025
In 2015, the Chinese government launched a policy initiative called Made in China 2025 to achieve dominance in global high-tech manufacturing. For Chinese manufacturing companies, the initiative meant increased complexity and a greater focus on intellectual property, rather than the continued unsustainable reliance of low-cost labor. That shift, together with the now well-established US-China trade dispute, has prompted many to start rethinking their supply chains.
It is not just US and EU organizations who are evaluating supply chains; many developing market manufacturing companies have long begun redesigning their global supply chain network strategies to make them more agile and less vulnerable to geopolitical risks also. To quickly offset rising costs, they are shifting their own manufacturing locations to regions where wages are lower. This shift in strategies from developing market manufacturers is all part of an effort by them to build a supply chain of the future and not simply wait for their customers to tell them what to do.
Made in India 2028
India has long been known for its thriving services sector, with IT and business process outsourcing leading the way. However, in recent years the country has also emerged as an important manufacturing destination, especially for multinational companies seeking to diversify their global supply networks for manufactured product. This has become more apparent since the start of the US-China trade war and covid pandemic. One of the major components in the transformation of Indian manufacturing in recent years has been the introduction of the “Make in India” policy of the Indian government and associated Production Linked Incentives (PLIs).
The Indian government has set an aggressive target to reach USD 1 trillion in manufacturing by 2028. Electronic, chemical, bio-pharmacy, automotive, industrial machinery, and textile industries are the leading players in the development of attaining this target. As part of the Indian government policy, they are pushing manufacturers to aggressively adopt AI and automation, and to become less reliant on selling low cost wage related options alone. At the end of 2023, the Indian government stated that 54% of businesses in India had already adopted AI and related analytic capabilities within their manufacturing plants and overall supply chain solutions.
Monday 8 AM
Many global companies had originally taken short-term actions to shield their businesses from higher costs and supply interruptions linked to global events in recent years. But industry leaders are now taking full advantage of the global trade crisis to reimagine their supply chains for the future. Three critical steps help them zero in on the issues that matter most as they start to design flexible and efficient networks for 2025 and beyond. First, senior executives meet with marketing and sales teams to understand customer expectations for the next three to five years. In particular, they determine how critical speed to market will be for customers and for the industry. Next, they sit down with operations heads to project what investments will be needed to deliver on customer expectations. Finally, these companies choose supply chain technologies, networks and partnerships to underpin a more flexible and agile global network.
Leadership teams starting down this path determine their next steps by assessing the importance of several key capabilities:
Stepping back, companies also need to evaluate geopolitical and other risks that could threaten supply chains and determine where to build redundancy into critical capabilities. Each leadership team will confront a different mix of challenges and come up with its own set of answers. But successful companies have one thing in common: They are not waiting for the next global crisis to start the journey.
