Global supply chains are under pressure. In the long run, that could be a good thing.
Supply chains are on the move. Literally.
Consider four quite different companies that bet big on China years ago. Hasbro is moving some production to India and Vietnam. Harley Davidson is at least partially on its way to Thailand. Meanwhile, Teradyne and iRobot are off, in part, to Malaysia.
Those four are not alone. Other companies are taking a close look these days at where they manufacture. And why? That’s the real supply chain sourcing question of the day, brought to you by tariffs. Looking for proof that shifts are already underway? In the first half of this year, Mexico became America’s top trading partner followed by Canada. Meanwhile, China, which had been on top since 2015, fell into the third spot.
In addition, Vietnam’s exports to the U.S. increased 33% in the first half of 2019. Other notable winners range from Japan to South Korea to Europe.
Why the shifts? There is, in all likelihood, too much activity in too short a time period for U.S. tariffs on imports to be the sole cause.
The trade spat between Japan and South Korea adds still another twist to global supply chain shifts. As does the recent Trump administration admonition to Vietnam that it’s trade balance with the U.S. is, well, out of balance. Furthermore, there are some companies that have spent the recent past shifting production to be less dependent on a single country and less vulnerable to shocks to the supply chain.
So, that changes the question to — what else is at work? Probably more than we realize. Global supply chains truly are at a crossroads. And it’s complicated.
In this month’s NextGen Interview, Rosemary Coates points out that moving production to China was fashionable 20 years ago. Low-cost labor and low-cost operations more than made up for the distance to markets. Coates, by the way, plays both sides of the China supply chain street here in her dual roles as executive director of the U.S. based Reshoring Institute and president of Blue Silk Consulting, which advises companies on manufacturing in China.
She goes on to explain how globalization has complicated supply chains beyond the low-cost, great distance equation of the past. Tariffs have become a catalyst for companies to re-examine what they produce and where. Ultimately, companies are doing what they can to ensure a stable environment to plan new production and hire people anywhere in the world.
Bill Michels agrees with Coates that the days of reducing costs are being replaced by the days of extracting value. Michels is vice president of operations for CIPS Americas. CIPS, the U.K. based Chartered Institute of Procurement & Supply, has partnered with the Association for Supply Chain Management, previously known as APICS, here in the U.S.
Michels goes on to say it no longer makes sense to have one central manufacturing country. He advocates a long-term approach to supply chain, in direct contrast to the short-term threat of tariffs.
To extract value, Michels says companies will take into consideration speed to market, length of product life cycles, supplier relationships and integrated supply chain design. Cost reductions, he adds, are part of the supply chain formula going forward, but will not dominate as they currently do.
Meanwhile, in an article published in the May/June 2019 issue of Supply Chain Management Review, Nick Vyas, executive director and co-founder of the University of California’s Marshall Center for Global Supply Chain Management, noted “The days of positioning manufacturing at the cheapest cost location are in decline. The days of making the supply chain relevant and sustainable to the local population are on the rise.” Vyas went on to say that this shift is one that he expects will dominate supply chains for the next 30 years. “We are now entering a time that will also make trade great for the local populations where goods are produced and distributed with greater emphasis on social responsibility, providence and accountability. These dimensions can introduce a new set of challenges for the supply chain.”
Clearly, there’s something much beyond tariffs going on here. And that has its own set of implications for supply chains going forward. The days of simply taking the next year or two to move production to new countries appear to be behind us. It just isn’t that easy anymore. The challenge is to figure out on a company-by-company basis what matters beyond low costs going forward. That is sure to be quite the wrestling match in most C-suites.
Gary Forger is special projects editor for Supply Chain Management Review. He can be reached at firstname.lastname@example.org.