How Companies Are Overhauling Supply Chains to Ease Bottlenecks

Introduction

If you’ve been waiting for a package for weeks, your order might be stuck at sea in a shipping container. The COVID-19 pandemic has severely disrupted global supply chains, causing massive backlogs and shortages that have prompted some companies to stockpile goods and charter private container ships. However, these are only temporary fixes. To find long-term solutions, many companies are considering significant changes to their supply chains, including shifting manufacturing closer to home. Implementing these strategies often requires retooling a complex global production network, bringing about new risks and costs.

Understanding Global Supply Chains

Modern supply chains are intricate and far-reaching. For instance, Timberland’s Pit Boss boots, sold to consumers in the U.S. and globally, are made from materials sourced from various locations, including the U.S., UK, China, Japan, South Korea, Taiwan, and Vietnam. These materials are shipped to a factory in Bangladesh for assembly, after which the boots are transported to a distribution center in Virginia before reaching retail locations and customers worldwide.

Jen Smith, a journalist at the Wall Street Journal, highlights that over the past few decades, supply chains have become increasingly global. However, with each step along the supply chain, potential disruptions exist, whether in manufacturing, transportation, or distribution. Recent disruptions have led to extensive delays and increased costs for many goods.

Strategies for Supply Chain Resilience

To protect their supply chains and bottom lines, some companies are exploring various location strategies. One approach being discussed is regionalization, which involves establishing factories in multiple regions. This strategy aims to minimize risks by enabling local operations to supply products to the nearest markets, making the supply chain more resilient to localized disruptions.

Another popular strategy is near-shoring, which refers to moving production closer to the markets where products are sold. For example, the Italian clothing company Benetton has decided to increase manufacturing in Serbia, Croatia, Turkey, Tunisia, and Egypt, closer to European markets, while planning to cut its Asia production by half over the next year.

Reshoring, a similar tactic, involves moving manufacturing that was previously moved overseas back to the company’s original country. For instance, a business may relocate some of its production back to the U.S. after facing challenges in obtaining products from abroad.

Despite the potential benefits of these strategies, moving production has its challenges. According to a 2020 report, the total combined cost for U.S. and European companies to shift manufacturing out of China may amount to about one trillion dollars over five years. This expenditure can be particularly burdensome for smaller companies, which may struggle to set up domestic manufacturing or face significant price increases, making their products less competitive.

Moreover, overhauling entire supply chains often takes several years to implement. Nevertheless, many companies believe that these strategies could provide long-term benefits and help their businesses thrive amid ongoing volatility.

Keywords

Supply Chain
Globalization
Regionalization
Near-shoring
Reshoring
COVID-19 Pandemic
Disruptions
Manufacturing

FAQ

1. What has caused the disruptions in global supply chains?
The COVID-19 pandemic has significantly disrupted global supply chains, leading to backlogs and shortages.

2. What are the strategies companies are considering to alleviate supply chain issues?
Companies are looking into regionalization, near-shoring, and reshoring their manufacturing processes to make supply chains more resilient.

3. What is the difference between near-shoring and reshoring?
Near-shoring entails moving production closer to the market where products are sold, while reshoring refers to bringing manufacturing back to the original country where it was based.

4. How expensive is it for companies to move their manufacturing out of China?
According to a 2020 report, moving manufacturing out of China could cost U.S. and European companies approximately one trillion dollars over the next five years.

5. Why might smaller companies find it challenging to relocate manufacturing?
Smaller companies may face high costs for setting up domestic manufacturing and could struggle to remain competitive with significantly higher product prices.