Kevin Keegan, principal with PwC Strategy Consulting, explains the concept and rationale behind the use of dual sourcing of manufactured goods to reduce supply-chain risk.

For decades, global manufacturers placed a premium on cost, under constant pressure from investors and customers to keep prices low. But with the coming of the U.S.-China trade war of 2019, and the COVID-19 pandemic of 2020, they have had to reconsider their priorities. Now, the risk of supply-chain disruption has become a major concern, coupled with the rising cost of manufacturing in China and the long supply lines that result from that strategy.

The answer for an increasing number of companies is dual sourcing of manufacturing. The setup might entail some production continuing to take place in China, while shifting the rest to another part of the world. Sometimes that will be a lower-cost country in Asia, such as Vietnam, while at other times it results in the shift of some plant capacity to the western hemisphere, closer to targeted consumer markets. Mexico is a particular focus at the moment, as companies seek to take advantage of the provisions of the U.S.-Mexico-Canada Agreement (USMCA). Such a move also makes it possible to sell more goods to the U.S. government, Keegan says.

Along with supplier diversification comes higher supply-chain costs, which original equipment manufacturers are looking to minimize through contractual negotiations with supplier partners. That requires “a comprehensive conversation about where supply-chain risk and alternative supply sources need to be managed,” Keegan says. Once content to let suppliers handle such concerns as scenario planning and data security, OEMs are now taking directly responsibility for overseeing those critical functions. At the same time, they’re pushing for deeper levels of supply-chain visibility that extend through multiple supplier tiers and manufacturing locations.