More Regional, More Flexible, More Expensive

Rising manufacturing costs, geopolitical tensions, regulatory concerns, and competing government incentives are forcing companies to rethink their supply chain structures. From trade wars during the Trump administration in 2016-2020, to the huge disruptions during the pandemic, to the war in Ukraine, global supply chains have undergone massive shifts over the past several years. 

Supply chains will need to rebalance from a focus on efficiency, speed, and cost, to a more risk-oriented design that is costlier but provides more buffers, flexibility, and responsiveness to policy pressures across a range of jurisdictions and stakeholders.

Global Supply Chain Restructuring

Companies are now looking for a way to make their supply chains more resilient, responsive, and secure. They are coming under pressure from governments who are much more aggressively pushing for security of supply chains in critical sectors (see semiconductors as the most extreme, but not the only, example) and pursuing a range of localization policies. Companies are also expected by a variety of stakeholders beyond governments – such as non-governmental organizations, investors, and consumers, to ensure the resilience and ethics of their supply chains, all of which require much better visibility into deeper layers of suppliers than before. 

As a result, multinationals are in a process of fundamentally re-thinking the overall structure and priorities that their supply chains are designed around. In our recent benchmarking survey of multinationals across the consumer goods, B2B, and healthcare sectors, we found that most firms would describe their strategy as regionalizing supply chains.

Regionalizing Supply Chains

This includes diversifying away from an overdependence on China, reshoring back to Europe and the US, and using additional regional locations to create more flexibility and less overexposure to any individual market. For the latter, Mexico, Vietnam (and the broader ASEAN region), and India are particularly high on the list of MNCs to explore for further manufacturing localization. It’s very clear that these markets will continue to see inbound FDI over the next several years, creating local ecosystems and boosting employment and growth. 

MNCs are also thinking about the right investments for their global supply chains. Digitalization is top priority – both to drive better visibility, faster reaction times, flexibility, and improve efficiency. The one large downside of regionalized, more distributed supply chains that companies shared in our survey, is their higher cost. More expensive, more complex supply chains may require not only automation solutions, but also greater costs that ultimately need to be pushed to end customers. This could mean longer term pressures on inflation and different economics for global supply chains over the long term more generally.

Key Takeaways

  • Supply chains are likely to dramatically evolve
  • Supply chains are set to become increasingly complex
  • Companies are expanding their supply chain investments

FrontierView’s survey, conducted in June 2023, aims to delve beyond the headlines, providing hard data on the likely future of global supply chains, companies’ key considerations when evaluating manufacturing hubs, and actual investment moves out of current manufacturing strongholds to newer shores. 

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