Ongoing disruption, from climate-driven events such as the Panama Canal drought, coupled with war and terrorism, are increasing volatility, cost and lead time for global supply chains. The combination of supply chain risks and geopolitical risks we face today have significantly slowed the rate of globalization.

We see this playing out across industries today, with many companies shifting or expanding their manufacturing footprint in order to be closer to their customers. According to a Gartner survey of trends in the Asia Pacific region, the top factor among respondents when considering expanding manufacturing capacity in a location is “proximity to key end markets.”

Accordingly, Gartner predicts that by 2028, 70% of companies will adopt regionally diversified supply chain models to improve network resiliency in the face of ongoing global disruptions.

Change is already underway, with 35% of supply chain leaders surveyed in Gartner’s “Balancing Sustainability and Resilience survey” indicating that their company has moved to regionalized production, with two or more suppliers or factories in different regions producing for regional consumption.

To overcome disruptions, supply chain leaders must focus on how to accelerate the diversification and regionalization of their supply chains.

The Case for Regionalization

In light of disruptive events of recent years, supply chain organizations have increasingly started to attach more weight to speed and service in their customer experience offering.

The shift to a regional rather than extended global model reduces the supply chain surface area in terms of movement and footprint. This strategy in turn cuts down on the number of high-impact supply chain disruptions. By balancing this with diversification of sites within a given region, companies can further lower the risk exposure through a multisource strategy.

Another factor in favor of regionalization is cost savings. The cost-efficiency benefits that global networks had over regional networks have eroded, at the same time as global disruption is increasing the risks associated with longer supply chains. This is one of the factors that has led to Mexico and Canada becoming the top two trade partners of the U.S. in 2023.

Countries like Mexico, India and Vietnam are working to improve local infrastructure to support manufacturing growth. Significant investments are being made to further develop current infrastructure, such as airports, railways, multimodal transportation, roads, sea and energy. But sustaining regional supply chains will require ongoing investment. Without a strong regional supply ecosystem and infrastructure, companies’ dependence their existing footprint will persist.

Shifting to a Regional Model

In a recent chief supply chain officer survey conducted by Gartner, the overwhelming majority (80%) indicated they plan to move some part of their supply chain network. A stable and predictable supply chain network presents a huge opportunity for CSCOs to deliver value for their organization. 

It’s not all about managing costs. It’s also about supporting broader objectives, such as expanding into new markets to support growth, reducing total distance to impact net-zero targets, and building resilience through dual manufacturing.

Organizations looking to make shifts to their network need to act decisively and have a clear strategy. Considerations to begin your journey should include:

• Ensuring that network design options are aligned with organizational and business objectives. Evaluate factors including contribution to business outcomes, cost, risk, sustainability and service holistically across all supply chain functions. The strategy should not be designed to hit a singular objective, but rather balance multiple objectives to avoid overexposure to near-term changes.
• Identifying collaborative partnership opportunities with suppliers, contract manufacturers, logistic third-party providers and technology vendors to assess the feasibility of operating regional networks. Strategic partnerships enable sharing investment burdens as well as risk mitigation costs across the supply chain.
• Making informed network decisions by quantifying total cost impacts across the entire supply chain, including supplier, manufacturing, logistic and inventory costs, while evaluating regional versus global networks.
• Using scenario planning to test viability of regional networks by evaluating trade-offs of shorter supply chains and sensitivity of key uncertainties, such as availability of local supply ecosystem.

Globalization strategies need to be reevaluated to create future competitive advantage. By taking steps now to evaluate different approaches and reshape strategy, business leaders can derisk their supply chains from current challenges and prepare for future risk and uncertainty.

Ronak Gohel is a director analyst in the Gartner Supply Chain Practice.