The foundations of early 21st century manufacturing network strategy are starting to look shaky. Economic, technological, and political shifts have undermined the traditional advantages of globalized supply chains, just as the definition of supply chain value is evolving. Delivering products at the right time, the right quality, and the best cost is no longer enough. Organizations now need networks with the resilience to tolerate shocks and the agility to respond to demanding customers and fast-changing markets. They also want their supply chains to support their efforts to achieve environmental and social sustainability.
Over the past decade, automation and the rising cost of energy and raw materials mean that factor-cost advantages are becoming less significant than they were. Add in the effect of new tariffs, and transport costs that have more than tripled on some major ocean routes, and the cost advantage of global production shrinks still further.
Companies are becoming more concerned about the disadvantages of globalized networks too. Long supply chains are more vulnerable to disruptions, which are already costing the average company the equivalent of 42 percent of one year’s profits every decade. Thin supply chains, where critical inputs are sourced from a single supplier and substitutions are difficult, tend to exacerbate the impact of problems and extend recovery times. Time zone differences, language barriers, and long transit times make supplier collaboration in product development and quality assurance more challenging.
The same goes for customers. Global shipping can add a month or more to delivery times that are already frustratingly long. And consumers are increasingly sensitive to the “invisible” features of a product, such as its carbon footprint or the labor conditions in its supply chain.
Long supply chains are more vulnerable to disruptions, which are already costing the average company the equivalent of 42 percent of one year’s profits every decade.
These challenges don’t mean that wholesale reshoring is going to be the best solution for every supply chain, however. Tight labor markets in many regions are making it tricky for companies to expand their operations or set up new ones. In some sectors, economies of scale or skill make it sensible to concentrate production in large plants that serve global markets.
Manufacturing’s new network models
With so many elements in play, and so much uncertainty, companies need a better way to evaluate their current and potential future network strategies. One promising approach is with sophisticated, industry-specific models based upon an expanded definition of the value delivered by the supply chain.
These models attempt to quantify the impact of all the network-related factors that affect an organization’s performance, from changing input prices to supply disruptions or the cost of carbon emissions. They allow companies to examine critical network design trade-offs, such as regionalization versus globalization or on shore versus nearshore operations, and help them understand the likely impact of key uncertainties.
The four sections that follow—“Consumer electronics: Localization is key,” “Pharmaceuticals: Scale and efficiency matter most,” “Capital medical devices: Automation helps maintain current margins,” and “Apparel: Customers’ willingness to pay matters most”—show examples of this modeling approach applied to hypothetical companies in several different sectors, with each designed to be representative of its sector. The results can be startling. For the consumer electronics example, the model predicts that a business-as-usual approach to its network will see its profit margins disappear entirely by 2030, despite the near-term productivity improvements offered by automation.
But radical reconfiguration of the company’s supply footprint could reverse this erosion of its margins. Moving some or all its supply chain to the US may boost profitability directly, while also increasing the flexibility and responsiveness of the supply chain.
Of course, it is neither technically nor financially viable to make such a shift overnight. Localized supply chains require capable local suppliers. Building new production facilities takes time and capital. Upstream industries may face similar constraints. Energy-intensive businesses such as chemicals and basic materials may need time to secure reliable sources of low-carbon power and adapt their process to use it, for example. And regionalization won’t work for every business. For a hypothetical company manufacturing active pharmaceutical ingredients (APIs), a regional production strategy only decreases its margins, suggesting that productivity and yield improvement are the best ways to beat rising costs.
(READ THE REST OF THIS ARTICLE FROM McKINSEY & Co.: https://tinyurl.com/yeyvk4f3)
