The Rise of the Decentralised Supply Chain
By: Asger S. Lauritsen
Tags: Covid 19, Decentralization, Supply Chain, Business, Manufacturing

This year’s pandemic has put global supply chains to the test.

Unprecedented disruptions have exposed the fragility, and inherent risks of single-source supplier dependency. As a result, the topic of supply chain resilience has come into sharp focus.

According to McKinsey Global Institute, 93% of supply chain leaders report that they plan to increase resilience, and 44% would pursue it even at the expense of short-term savings.

Change often waits for a catalyst, and 2020 has been just that.

But what exactly does it take to create a more resilient supply chain?

It all starts with decentralised supply.

Dependency is dangerous

Depending on a single supplier is risky. But over the past 10–15 years, supply chains have become increasingly centralised.

Low-cost labour and economies of scale have led to China becoming the world’s largest industrial manufacturer. Manufacturers across the world have offshored production to countries like China, and in doing so, centralised supply.

But what happens when that source is disrupted?

In 2020, we found out.

Change of industrial production in China from October 2019 to October 2020 compared to same month previous year. Source: statista.com

Centralised supply creates dependency. Disruptions to one source affect the entire organisation. Which is why having a decentralised supply chain is so important — it gives you options.

In the mining and cement supply chain, disruptions are the norm, so when China went into lockdown earlier this year, FLSmidth was able to switch from Chinese to Turkish and Egyptian suppliers at a moment’s notice. This was only possible because decentralisation had been embedded into our model.

Technology accelerates decentralisation

AI, automation and robotics are changing supply chains.

Production that used to be labour-intensive, can now be done by machines. As a result, labour costs — once the largest cost of manufacturing, and the primary reason for offshoring — are plummeting.

This has significant implications.

Lower labour costs have increased nearshoring (producing closer to home). After all, why manufacture offshore when you can do it nearshore at a similar price? Cheaper running costs, lower shipping costs, shorter lead times, more control, and a reduced threat of disruption make it an attractive proposition.

The more suppliers begin nearshoring, the more opportunities for decentralising.

Smaller suppliers. More options.

As technology breaks the dependency on low-cost labour, the path is cleared for regional suppliers to enter the market.

For global companies like FLSmidth, this is an asset. It allows us to source locally, to diversify the supply chain, and capitalise on faster lead times. But it’s not just good for larger companies, it also opens doors for smaller suppliers.

For a smaller manufacturer, becoming a preferred supplier for a global company could be a game-changer, providing leverage and access to opportunities on a global scale. This decentralised approach builds resilience into the supply chain for global companies, and opens opportunities for local suppliers.

One thing is certain, it’s an interesting time in the evolution of global supply chains.

Decentralisation opens up many doors. Provided we can navigate the complexities of trade barriers, tariffs and protectionism, it’s a positive step forward.