COVID, Politics and Shortening your Supply Chain
By Jon Santiago
Supply chains became the leading issue of the COVID era, and the phrase remains top of mind almost 3 years after lockdowns began in the U.S. From boardrooms to dining rooms, businesses and consumers are experiencing the effects of supply chains in disarray. Whether you are searching for a car, or your business is a supplier of key parts that go into that car, supply chains remain constrained and will continue to experience volatility. Limited commodity supply, workforce and labor issues, government policy and political action remain substantial drivers of disruption for the foreseeable future. While commodity supply and labor/workforce issues merit discussion, policy decisions and geopolitical actions are headwinds that should be top of mind for anyone building resiliency into their business for the long term – not merely a few quarters.
“Business leaders in the current global environment need to review lessons learned over the past 3 years and prepare their organizations for the future.”
- Jon Santiago
The pandemic exposed several problems in global trade. It highlighted fail points from supplier over-dependence and single-origin sourcing to a surge of supply and demand imbalances that were exacerbated by complexities within the transportation industry. Restrictive government policy led to global lockdowns of varied sizes and scales, and China’s zero-COVID policy is keeping the so-called manufacturer of the world in an ebb and flow of open and closed.
- State of North American Manufacturing, Thomasnet, March 2020
In the latest slew of lockdowns, the Taiwanese manufacturer Foxconn, a major Apple supplier with over 200,000 workers in Zhengzou, China, is managing fleeing workers due to “inhumane restrictions” that include compulsory isolation and limited food access. The situation remains in flux as workers clash with authorities and protests against COVID lockdowns are reported across China (NY Times / Bloomberg). Recalling the Shanghai lockdowns over the summer, many businesses remember the transportation scramble that shippers faced while attempting to move their goods out of areas facing stringent government lockdowns. The open and closing game of “whack-a-mole” will have lasting effects on any business that is not proactively building redundancies and diversification into its supply chain.
The anxiety-inducing possibilities caused by political action are real. Business leaders in the current global environment need to review lessons learned over the past 3 years and prepare their organizations for the future. A future where unknown events will occur, and the corresponding business impacts hinge on how well companies adapted from those past unforeseen events.
For Supply Chain professionals and business leaders looking to mitigate uncertainty and risk caused by geopolitical events and government policy actions, this means examining key business functions and implementing change. The one area that should be on every company’s radar is how they can de-risk by shortening supply chains through nearshoring, reshoring, and regionalization.
For well over 2 years, we have all had a front-row seat to the bullwhip effect in motion. With consumers at home, order volume increased exponentially, and businesses were punished for not having inventory in stock. Availability and shipping timelines become purchase decision drivers for consumers looking to buy goods primarily online. Just-in-time strategies gave way to just-in-case as 2021 saw record sales numbers in the physical goods space while many service businesses struggled.
On top of the volatility, planning and forecasting problems were further impaired when forecasting demand ran headfirst into rising inflation and a U.S. Federal Reserve Bank tightening monetary policy at a record pace. As inflation and tighter monetary policy converge, consumer habits begin to shift quickly, and once again the undulations of volatility are felt across supply chains.
So how are leaders supposed to respond? It starts with your product network.
When your product networks are closer to the customer, you can reduce the impact of market swings. For example, shortening your supply chain helps reduce margin pressure and Landed Cost of Goods (LCOGs) by decreasing transportation and storage costs, and the overall time in transit. Producing closer through regionalization and nearshoring your product network means lead times are shorter and you can map out transportation optionality across geographies and within product lines. As you slowly implement these changes, your agility increases as the period between production and distribution declines, and you free up working capital by reducing excess inventory and the amount of goods in transit over time.
One company that maximized regionalization and optimized for agility is Zara. The Spanish-based fashion retailer is known for its lean and agile supply chain focused on “proximity Sourcing” (Bloomberg). Most of their manufacturing happens in Spain and Western Europe, and raw materials are similarly sourced. This allows them to adjust to consumer demand and market volatility quickly by sourcing, manufacturing, and distributing internationally from their core region. Zara operates 4 major distribution centers in Spain that supply over 2,000 global stores. With 1,200 stores in the Euro Zone alone, Zara uses regional rail networks for intra-European distribution and air freight to supply its other 800 plus stores in North America and Asia. By being operationally lean and efficiently serving their core customer region, Europe, Zara has the logistical flexibility to distribute globally, via air, in ways other businesses cannot imagine.
It is not that nearshoring, reshoring, or regionalization are new concepts. Complacency gave way to status quo bias which ended when logistics costs became increasing proportions of capital expenditure within organizations large and small, transit times increased at an exponential pace, and billions of dollars’ worth of inventory sat stagnant in containers.
Unfortunately, transforming your supply chain or nearshoring any number of suppliers is not a quick process and the complexities and challenges depend on the size and scale of your business. But complexities aside, nearshoring and regionalization are moving up the strategic priority list of many businesses. In the 27th annual Third-Party Logistics Study, led by the Council of Supply Chain Professionals, “80% of shippers are planning to rebalance production locations toward more regional or domestic product networks” (3PLStudy). When considering the disparity in change from the pre-COVID thinking around supply chain planning until now, Thomasnet, a leading industrial sourcing platform in North America found that in March of 2020 only 54% of manufacturers surveyed were looking to add North American suppliers; however, in their 2021 annual report, 83% of manufacturers were “likely or extremely likely to reshore” (Thomasnet).
Having the right amount of product in the right place at the right time is key to keeping your business running. Long supply chains during periods of volatility create drag - on your balance sheet and your ability to meet customer needs. Meeting your customer's needs and providing value to them is what keeps your business alive. If you cannot perform that basic function because your product network is built on post-COVID complacency, the next headwind might not be so easy to overcome.
Jon Santiago a seasoned Forum Solutions Senior Consultant with 12+ years of experience in global trade & supply chain, brand development and international business risk management. He holds a Bachelor of Science in Political Science from Portland State University and a Master of Arts in Applied International Studies from the University of Washington.
Forum Solutions is a management consulting company dedicated to crafting and delivering transformational outcomes for our clients, our colleagues, and our community. With our help, clients become more agile, resilient, and connected, bringing great ideas to fruition with brilliant results. From start-ups to the Fortune 50, business leaders rely on Forum Solutions to help them form and realize their strategies. Our company is a certified Woman Owned Business that believes in developing and growing our colleagues, company, and region in a socially conscious way.