What does it take to get manufacturers to fundamentally rethink a decades-long trend towards complex global supply chains?
How about $28 trillion plus in losses?
That’s the estimated cost in 2020 alone of pandemic-related disruptions to supply chains worldwide, according to recent research from TealBook and Wakefield Research. And while Covid is by far the most costly and disruptive event to ever hit modern supply chains, it’s just the latest example of how natural and man-made disasters brought supply chains to their knees over the last decade. Brexit, the Japan earthquake and tsunami of 2011, and the 2015 Tianjin explosions, to name just a few more, collectively cost businesses nearly $300 billion.
That’s fed into the growing debate about the future of supply chains, with some promoting a shift to “nearshoring” in which manufacturing operations move back “closer to home.” I see a different model emerging. Manufacturers can best mitigate risk and minimize the financial losses of future disruptions by transitioning to a hub-and-spoke model consisting of a headquarters supporting multiple, regional manufacturing facilities located closer to buyers and workers (while relying heavily on automation and data).
It took supply chains decades to globalize. But the search by manufacturers and others in the ecosystem to lower production costs had an unintended consequence: the zeal to shave pennies off the cost of a widget sowed the seeds for today’s mountain of unrecoverable losses by creating hundreds if not thousands of supply chain “chokepoints,” or single points of failure that, when hit by a disruption, can bring down entire operations.
That’s why manufacturers are rightly turning their attention to one of the key metrics for supply chain operations going forward: time to recovery (TTR). TTR is the time it takes to overcome a disruption to a supply chain chokepoint, such as a distribution facility, a port or a transportation hub. In other words, the calculus is swinging rapidly from “how cheap can we make a widget?” to “how fast can we get back to full production?”
It's a positive shift in philosophy and holistic thinking that has many implications for how supply chains are built and operated moving forward. I predict regional hubs will be integral to these new models.
The increasing frequency and severity of disruptions, and their associated costs, aren’t the only macrotrends driving the reinvention of supply chains. Manufacturers and their trading partners face a litany of other challenges, including greater regulation, the imperative to operate and trade sustainably within the ecosystem, and severe labor shortages that could worsen in the years ahead, to name a few.
On the positive side, savvy manufacturers are rapidly deploying advanced technologies such as AI, machine learning and real-time visibility solutions in order to accelerate their transition to becoming hyper-automated, data-driven businesses with highly orchestrated supply chains. Digital transformation is foundational to transforming manufacturing supply chains and to shrinking TTR when future disruptions strike.
Layering on a hub-and-spoke model with multiple regional production facilities offers many additional benefits. First and perhaps most obviously, multiple production facilities give organizations far greater agility to pivot when things go wrong. There are fewer choke points that can shut down operations for weeks, months or longer. “Redundant operations” aren’t a new concept — many consumer packaged goods companies have for some time operated multiple production facilities in case one or more get shut down — but thinking more holistically, and regionally, confers even greater potential advantages.
Standing up operations closer to concentrations of regional customers — as well as partners — can translate into faster and more efficient production and shipping, reducing the likelihood of mishaps along the journey of much longer supply chains. Greater knowledge of regional markets and consumers should yield learnings that can be applied to future product innovations or customer service improvements. And consider the advantages when it comes to building your workforce. A real presence in multiple regions around the world means access to a much bigger pool of potential talent. It should also translate into an enhanced ability to motivate, train and retain that talent because of the knowledge and experience gained soaking up local customs, cultures and practices. Community relations efforts can manifest in more tangible and meaningful ways, as can efforts to achieve sustainability goals through front-line community engagement rather than top-down corporate directives.
A key early step in identifying locations for regional operations is learning the operational details of the markets that are generating the most revenue for the company today. That’s the beginning of a thorough evaluation and planning process that will need to take many factors into account, from the prevalence of local partners who share your commitment to sustainable practices, to the availability of raw materials, to the geopolitical stability of a given region. On the latter, the pandemic and the war in Ukraine are just two extreme examples of the ability of autocracies and conflicts to shut down entire regions and market sectors overnight.
The transition to regional supply chains won’t happen instantaneously and will require investments, scenario planning and new processes. But the shift needn’t be viewed as financially unrealistic or a decades-long journey. Manufacturers who are further along in the adoption of digital technologies will be able to make the transition faster — and many are in fact well on their way. And the required upfront investments will be mitigated over time as disruptions become less costly. Eventually, nearshoring may play a bigger role as well — though from my perspective it will come later to U.S. manufacturing, when the infrastructure for more sustainable domestic supply chains have been built out — such as electric vehicle charging stations for more EV-reliant shippers.
The future of manufacturing supply chains is regional. In the near-term, they will be critical to mitigating the cost of future disruptions through lower TTR. Over the longer term, they will also increasingly be a competitive advantage as manufacturers enjoy the many associated benefits of being more embedded in the markets that are driving the business.
Todd Simms is vice president of industry strategy for manufacturing at FourKites.
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