Supply Chain Year in Review: 2020
By: Durham Moten
Tags: Supply Chain, Covid-19, Business, Manufacturing, Logistics

The coronavirus (COVID-19) has accelerated the rise of emerging technologies and strategies in supply chain management. Companies with more agile supply chains were less severely impacted by the pandemic than their competitors. Though the true extent of the pandemic’s impact is still being realized, one way that it can be understood is through a ripple effect. In many retail facing markets, corporations with higher supply chain agility suffered less financial loss than their competitors during the same timeframe. Their relative market position allowed for their pandemic market response to require lower levels of job reductions, if any at all. Trade tensions between the United States and China further highlighted the importance of geographic diversity of supply. To remain competitive in a post-pandemic marketplace, companies will benefit from moving towards more agile supply chain management practices by diversifying their supply base and diffusing their manufacturing concentration on a global scale.

With its seemingly infinite number of suppliers and manufacturers, China has come to be a one-stop-shop for offshore manufacturing operations. China has even earned the nickname,“The World Factory,” yet, even before the coronavirus pandemic, many large companies were considering whether China would continue to be the home base for their offshore manufacturing. The tariffs imposed on goods imported to the U.S. from China have caused a significant increase in their costs for the majority of U.S.-based, multinational companies. The U.S.-China trade war under the Trump administration initiated the move of U.S. supply chains away from China to more cost-effective options.

Initially, in the context of tariffs imposed by the U.S. government , but also as a key component of risk mitigation strategies of the future. According to the “U.S. Reshoring Index” by Kearney, the total manufactured goods imported from China (as a percentage of U.S. manufacturing gross output), declined in 2019. This decline, the first since 2011, resulted from the reduction of Chinese imports and coincided with the ongoing U.S.-China trade war. The global COVID-19 pandemic has compounded these trends by bringing additional supply chain vulnerabilities to the surface.

Before the coronavirus pandemic, some companies were already looking outside of mainland China for not only to diversify operations, but to find lower-cost operations and avoid the tariffs imposed by President Trump on Chinese imports. Vietnam and India have been huge target destinations of the geographical shift in manufacturing capacity. As a response to this newfound opportunity in the global marketplace, the Indian government has taken steps to lure FDI into the country by improving the ease of doing business for multinational firms. In fact, India has announced several measures and incentives to attract global investment since the outbreak of the pandemic. India’s government plans to promote the manufacturing of specific products in which China holds a sizable share in the global marketplace. According to the most recent UN “World Investment Report,” the FDI inflow in China saw only a marginal increase of 2.1 percent in 2019. The FDI inflow in India rose by almost 20 percent in the same timeframe.

Although these prospects. look promising for the Indian manufacturing economy, there are two challenges India faces towards becoming a complete replacement for Chinese manufacturing. After dealing with Chinese suppliers and manufacturers for more than three decades, those relationships have become important and codependent for both the firm and its supplier. It will be a struggle for a manufacturer in a new market to build strategic supplier relationships with firms that have become accustomed to conducting business with Chinese companies. Thus, building relationships with multinational firms will be Indian manufacturers’ first big challenge. The lack of an established relationship would only exacerbate the likely issues of quality control, intellectual property concerns, and logistical delays.

Southeast Asia is not the only region primed to gain market share in the global manufacturing economy. Latin America is well-positioned to capitalize on changing market dynamics as well. According to geopolitics expert and author, Peter Zeihan,

“Mexican manufacturing capacity is both less expensive and more efficient than most manufacturing in both China and Canada. Mexico will certainly pick up a disproportionate share of whatever relocates to the North American market.”

As a manufacturing location, Mexico has several competitive advantages over Southeast Asia. When compared to goods produced in Southeast Asia, imports from Mexico can be transported in a faster, more cost-effective manner to the U.S.

Ground transport from Mexico can deliver goods cheaply in a matter of days or even hours. In contrast, the increased cost and lead time for goods coming from Southeast Asia will be huge challenges to overcome. Notably, the U.S. government offers its FAST program to help facilitate faster and easier Customs processing for U.S. trade with Mexico. FAST is a trusted traveler/trusted shipper program that allows expedited processing for commercial carriers who have completed background checks and fulfilled certain eligibility requirements. Currently, there are no programs like FAST for U.S. trade with Southeast Asia.

Another key location-related advantage that Mexico has over Southeast Asia is time zone parity. From coast to coast, Mexico operates on the same time zones as the U.S. Chinese manufacturers have taken notice of this particular geographical advantage as well. In fact, Taiwan-based electronics manufacturers are among the companies eyeing new factories in Mexico. The San Diego Union Tribune reported that companies in Tijuana are already benefiting as the U.S.-China trade war and coronavirus pandemic prompt multinational firms to reexamine their supply chains. Foxconn, the Chinese manufacturer of the iPhone, is an “active investor” in Mexico and has acknowledged that “the world factory no longer exists.” Thirty percent of Foxconn’s products are now being manufactured outside of China and that ratio could soon increase. As firms look to reposition their supply chains, the distinction between offshoring and outsourcing will prove to be an increasingly important factor in their assessments of diversification, cost, and risk appetite.

Traditionally, the benefits of offshoring manufacturing operations to China have outweighed the opportunity costs. However, the “Amazon Effect” has elevated consumers’ expectations through increased levels of customer service and satisfaction. At the start of the COVID-19 pandemic, an overreliance on supply coming from China brought the global economy to a standstill. Furthermore, stay-at-home orders catalyzed the already increasing consumer behavior of online shopping for individuals around the world. As a result, companies that have supply chains distant from their target markets record lower levels of customer service and satisfaction because they are slower to react to customer’s changing needs and demands. Big companies are beginning to react to these changes in the marketplace by moving closer to their customers.

This movement can be understood literally in terms of geographical relocation. It can also be interpreted figuratively by prioritizing “customer obsessive” behaviors. The ability to anticipate customer wants, needs, and expectations will allow for companies to be less reactionary to market changes. Being physically closer to customers adds maximum business value if it is executed well. Customer satisfaction and service levels are the manifestation of their “customer obsessive behaviors.” Another benefit of shifting manufacturing capacity from China to North America is the theft of intellectual property in the Chinese marketplace. U.S.-based multinational firms have lost substantial percentages of market share due to Chinese imitations made from stolen intellectual property.

Companies that had previously established a geographically diversified supply base were better positioned to mitigate the effects of the pandemic. When determining the right mix of geographic locations for its operations, a company might assess the commercial, operational, tax, legal, and regulatory conditions in its respective industry to find the most appropriate and effective geographic location(s) for its specific business goals. There is no single solution to network mapping, but organizations can reap many benefits when they have assessed their risk appetite and objectives effectively.

Moreover, a geographically diversified supplier base allows a business to better reflect its customers in global markets by drawing on local cultures to drive more favorable outcomes with end-users. This is because regional suppliers tend to be more conscious of their customers than large global suppliers. Big businesses can benefit greatly from this utility because it can lead to a diversity of thought in the realm of further innovation. By diversifying their geographical presence, firms also reduce risk exposure from over concentrating supply in one location. Beyond these firm-specific benefits, national economies can profit from more resilient economies, which, via intentional supply chain management, results in a more robust global economy.

The concurrent events of the COVID-19 pandemic and the U.S.-China trade war will likely change the way that multinational organizations consider supply chain management forever. As highlighted by the pandemic-related challenges impacting operations, companies will be forced to broaden and geographically diversify their supply base. In response to these pressures, entities throughout Southeast Asia and North America are taking aggressive steps towards seizing market share in the global manufacturing economy as operating dynamics shift away from “the world factory”. Whether or not these policies and incentives will lead to an effective diversification of supplier base or an overcorrection informed by present circumstances has yet to be determined.

Ultimately, the most crucial part of this conversation is that these considerations have finally come to light. As higher-level executives outside of procurement express more concern, explicitly or implicitly, for supply chain resiliency and its impact on the top and bottom lines, globally, corporations and their stakeholders are reckoning with the importance of intentionality as it relates to one’s business practices, network, and goals.