In recent decades, the story of globalisation has been one of ever-increasing complexity for global supply chains. Producers have shifted manufacturing from one low-cost location to the next – resulting in complex global supply chain ecosystems.
More recent trends towards regional supply chains reflect increasing preferences for near-shoring and on-shoring, plus the need to improve visibility and velocity in order to drive competitive advantage.
But despite this shift towards regionalisation, heightened consumer expectations mean that while supply chains may be getting shorter, their complexity is here to stay.
Trade Growth now lagging GDP Growth
We have known for some time that the historic 2:1 ratio of trade growth relative to economic growth ground to a halt following the 2009 Global Financial Crisis (GFC).
For almost two decades prior, between 1990 and 2008, world trade consistently grew at twice the rate of GDP (Gross Domestic Product) – which averaged annual growth of 3.2 per cent.
More recently, the trade to GDP correlation has become closer to 1:1.
However, it now seems that in the current climate of slowing GDP growth in the developed world, even a 1:1 ratio will be challenging to achieve.
Amongst the many complex factors behind the latest slowdown is the lingering GFC hangover effect – throughout the developed markets – of reduced demand for consumer goods, many of which are imported via complex global supply chains.
Ironically, these complex global supply chains were themselves created by the globalisation frenzy of the last three decades, whereby out-sourcing and off-shoring initiatives fuelled the dramatic growth of manufacturing in Asia, with China notably becoming positioned as the ‘Factory of the World’.
The endless pursuit of low-cost country sourcing (LCCS) initiatives chased the lowest cost locations for labour intensive manufacturing activities. This led to the large-scale unbundling of production – in terms of both location and process – which, in turn, drove the widespread globalisation of supply chains.
This resulted in a sustained period of continuous and rapid growth in worldwide cargo movements, now recognised as a massive ‘one-off gain’ for international trade, albeit with huge benefits for international freight forwarders.
However, just about anything and everything that could be out-sourced and off-shored to Asia, has been. Hence, in recent years, we have seen only incremental growth in trade volumes.
In addition, governments across the developing world have focused on domestic infrastructure investments to drive economic growth, whilst across all markets there are increased elements of protectionism, which is a drag on global trade.
Populist protectionist sentiment has been on the rise, as witnessed for example with the Brexit and Trump electoral outcomes, increasing the use of trade-restrictive measures such as tariffs. During 2016 alone, according to Global Trade Alert, more than 800 new discriminatory trade measures were introduced worldwide, compared to just 354 liberalising measures. As summarised in BCG’s New Globalization report, bilateral agreements based on national interests are taking precedence over multilateralism.
In addition, as WTO Director General Roberto Azevêdo articulated to world leaders at the 2017 World Economic Forum in Davos: “The net positive effect of trade means nothing if you've lost your job. So we need better domestic policies to support people and get them back to work.”
Supply Chain Velocity drives competitive advantage
Supply chain velocity is an additional factor influencing the rethinking of goods flows beyond global to regional. With product life cycles continually reducing and speed-to-market a key differentiator, supply chain velocity is becoming another key component of competitive advantage.
Companies are seeking to rebalance their supply chain complexity by adopting a more regional approach, with the movement of some – but not all – production activities that can migrate ‘closer-to-home’. This reconfiguration of the manufacturing landscape will result in regional supply chains such as ‘Made in North America for America’, or ‘Made in Eastern Europe for Europe’.
However, this does not mean a mass exodus of manufacturing from Asia.
The global supply chain ecosystems that service the developed markets in America and Europe from low-cost sources in Asia are well-established, finely tuned and highly efficient; they cannot easily be replaced, plus they need to expand to serve the rapidly growing local markets across the developing world.
Global companies must not ignore or underestimate the importance of the domestic consumer markets in the emerging economies across Asia, whose potential is enormous. Indeed, ‘Made in Asia for Asia’ will gradually become a leading model for regional supply chains that serve these growth markets in the Far East.
However, to increase velocity in serving their global markets, more and more companies are exploring how they can shorten their supply chains.
Regional Supply Chains will be shorter, but will they become simpler?
Whilst supply chains greatly increased in length and complexity during the globalisation era, looking forward, many business leaders expect to see fewer links in their supply chains, according to a recent study by The Economist Intelligence Unit (EIU).
Nearly half of respondents (49%) said they expect their supply chains to shorten and become simpler during the next five years, whilst one third of respondents said they expect supply chains to lengthen and become more complex. Participants included businesses large and small, with almost half of this group having annual revenues of less than USD 500 million.
Operational improvements and innovation were seen as key factors in helping businesses reduce the length and complexity of their supply chains.
By geographic region, almost six in ten respondents in Asia Pacific (59%), said they expect to see shorter supply chains, compared to 46% in Europe and 45% in North America.
Reflecting the ever-increasing need for better compliance and governance, more than a third of respondents (36%) said they agree with the statement that a rising regulatory burden will add cost and complexity to managing their supply chains.
Supply chain visibility is confirmed as a key priority, with 54% of respondents saying that achieving complete transparency about where and how their products are made is an important or very important goal.
Whilst regional supply chains will be shorter, they are not necessarily simpler. Being closer to market enables more rapid product innovation and customisation, empowering companies to address consumer preferences for products tailored to their needs. Despite the complex challenges involved, such increased responsiveness and agility will prove to be a durable source of differentiation and competitive advantage.
A new era for supply chains
After three decades of globalisation, many companies expect their supply chains to shorten in the years ahead. But while some manufacturing processes will migrate ‘closer-to-home’, speeding the shift towards regionalisation, numerous well-established and finely tuned supply chains will remain in place, adapting to serve expanding local markets.
For businesses, supply chains may be shrinking, but the era of complex supply chain ecosystems is still far from being over.
Mark will further explore Regional Supply Chains in his keynote presentation at the Focused Annual Partnership Meeting in Kuala Lumpur next month.
To find out more about how Mark’s informative, engaging and memorable presentations will make a difference at your next event, please visit our website; to check Mark’s availability for your next corporate event, customer function, industry conference or panel discussion, contact us here.