Nearshoring, Friendshoring, Reshoring Carry Risks and Opportunities
Any doubt that free trade has lost favor in political circles? Last week’s sweeping tariffs on everything from Chinese steel to electric vehicles should end that conversation.
I have been saying it for years. Global supply chains that heavily rely on China are undergoing a seismic shift. Your enterprise’s path to future competitive advantage has changed.
Trade wars seem permanent. Shooting wars don’t seem to be going away. Consumers are paying more attention to where their goods originate. Such disruptions compel companies to rethink and redesign their global operations.
This is not just a trend but a necessity.
Such redesigns must not go from one single source to another single source – the pandemic revealed those risks. Supply chain operations must deploy optionality in sourcing, production, suppliers, distribution, going beyond your current network.
Of course, the new strategic paradigms of nearshoring, reshoring and friendshoring can skyrocket costs. So, let’s examine how supply chain innovations can help companies stay ahead of this perpetual disruption.
The Growing Risks of Relying on China
For decades, China has been the world’s factory.
Low labor costs, massive production capacity and a vast domestic market made it an attractive hub for global operations. That worked for decades. But recent years have made that bet riskier.
Trade wars and tariffs have made sourcing from China more expensive. And while single-source supply chains were great for lower costs, they were horrible for supply chain resilience – as we all discovered in 2020.
Companies now realize the need to develop optionality to diversify their supply chains. They are looking at other countries in Asia, like Vietnam and India. They are examining nearshoring options in Central and South America and Eastern Europe.
In other words, they are deglobalizing away from China – moving toward a less-integrated world. Yet in other locations, they are globalizing – moving toward more integrated economies.
This yin and yang of globalization and deglobalization carries cost and risks. But the right moves carry opportunity, the ability to add agility, flexibility and resilience. The right moves will help you respond quickly to changes in demand, supply chain disruptions and new market opportunities.
Redesigning global supply chain networks is complex. But that is the only long-term option in this world where disruption is the new normal.
Optionality Can Add Supply Chain Agility
Optionality is the new mantra in global supply chain circles.
It’s about spreading the risk and not putting all your incoming inventory into one basket. This means sourcing from multiple countries, working with a variety of suppliers and having backup plans in place.
Optionality diversifies your risk and can take many forms:
- Geographic optionality: Sourcing from different countries or regions.
- Supplier optionality: Working with multiple suppliers for the same product or component.
- Product optionality: Offering a range of products to cater to different market segments.
- Channel optionality: Selling through multiple channels, both online and offline.
But optionality is not just about risk management. It’s also about the ability to identify potential opportunities – and seize them. Emerging markets offer growth potential, new suppliers bring innovation and new channels reach different customer segments.
In the end, optionality is about building a resilient and agile supply chain. One that can withstand shocks, adapt to changes and seize opportunities. It’s the new supply chain mantra for new ways of matching supply and demand.
Nearshoring, Reshoring and Friendshoring Bring (Some) of It Back Home
Nearshoring involves moving operations closer to home, but not necessarily within the home country. Reshoring, on the other hand, brings operations back to the home country.
Adding friendshoring is wise in a world of perpetual disruption. Friendshoring can go beyond sourcing in friendly, stable countries to sourcing with geopolitical allies. After all, you just don’t know which country will invade a neighbor next. You don’t know when new tariffs and trade barriers will pop up.
No, not every product or raw material will come from a nearby source. But more will.
Today, 38% of all companies buy most key items from regional suppliers. By 2026, 65% of all companies intend to buy most key items from regional suppliers.
Today, 43% of companies produce and sell most of their products in the same region. By 2026, 85% of companies plan to produce and sell most of their products in the same region.
In the Western Hemisphere, such shifts point toward the need for a new supply chain hub, a location with the land and labor to expand port facilities, handle massive transshipment volumes, add value through light manufacturing and support eCommerce flows to a large segment of the U.S. population.
In my view, the Dominican Republic fits the bill. And the country’s political and business leadership is moving forward.
These strategies improve your supply chain by driving down risks. Risks associated with long supply chains, geopolitical tensions and unpredictable events. By bringing operations closer to home, or at least into friendly countries, companies can have more control and flexibility.
Going beyond risk reduction, nearshoring, reshoring and friendshoring can reduce lead time and increase responsiveness. They can help companies respond faster to market changes, meet customer demands for faster delivery and reduce transportation costs.
This speed and agility can add even more optionality. This adds extra importance in a world where speed and agility are becoming more critical.
Supply Chain Innovation is the Key to Resilience
Innovation is no longer a luxury for those who can “afford” supply chain technology. Innovation is a necessity. The changing landscape of global trade demands new ways of thinking and doing. Perpetual disruption demands perpetual supply chain innovation.
Innovation can take many forms in the supply chain. You can adopt new technologies, like AI and blockchain. You can implement new strategies, like optionality and nearshoring. Or you can create new business models, like circular economy and platform-based solutions.
Here are some areas where innovation can make a big difference:
- Technology adoption: Using AI for digital supply chain networks, demand forecasting and more; blockchain for transparency; IoT for visibility within your four walls.
- Strategy implementation: Diversifying supply sources; nearshoring, reshoring or friendshoring operations; adopting a multi-local approach.
- Business model creation: Embracing circular economy principles, leveraging platform-based solutions, integrating sales and operations planning.
Innovation is the key to building resilient supply chains, innovation helps your organization anticipate and adapt to disruptions.
Innovation creates value not just for the company, but for all stakeholders in the supply chain. A true key to end-to-end supply chain resilience.
Technology’s Role in Redesigning Global Operations
Technology is a game-changer in global operations. Today’s technology is reshaping how companies manage their supply chains. These innovations enable your enterprise to become more efficient, flexible and transparent.
Take AI, for example.
AI, machine learning and cloud computing are table stakes for plugging into a digital supply chain network. Beyond forecasting demand more accurately, such networks help you harness the power of visibility, insightfulness and actionability.
All these can save costs and improve customer satisfaction.
Then there’s blockchain. Blockchain technology can provide a secure and transparent way to track goods from source to destination. The tech can help prevent fraud and counterfeiting. Blockchain can give consumers the assurance they need about the products they buy.
In short, technology is not just a tool for global operations. Technology is a strategic asset, a source of competitive advantage and a catalyst for global supply chain redesign.
The Impact of Trade Wars and Pandemics on Supply Chains
Trade wars and pandemics have shown us the fragility of global supply chains. They’ve exposed the risks of overreliance on a single country or region. And they’ve forced companies to rethink their supply chain strategies.
Governments are conducting trade wars through tariffs, export restrictions, subsidies, import quotas and regulatory barriers. All this has made products more expensive, disrupted the flow of goods and made business more difficult.
Pandemics have shut down factories, disrupted transportation networks and created huge demand-supply imbalances.
In response, companies are having to redesign their supply chains. They’re diversifying their supplier base. They’re investing in technology to improve visibility and control. And they’re building more resilient, sustainable and flexible supply chains that can withstand future shocks.
Sustainability Is the Heart of Future Supply Chains
Sustainability is no longer a nice-to-have, sustainability is a must-have in the redesign of global supply chains. Consumers are demanding it. And regulations are enforcing it.
Companies are now looking at the full life cycle of their products. They’re considering the environmental impact of their raw materials. They’re looking at the energy used in production. And they’re thinking about the waste generated at the end of a product’s life.
This shift toward sustainability is driving innovation. Companies are developing new materials and processes. They are looking to use renewable energy when possible. And they are encouraging the adoption of circular economy principles.
In the future, successful companies will be those who align their supply chain strategies with sustainability goals. They’ll be the ones that can turn sustainability into a competitive advantage.
Companies That Are Leading the Way
Let’s look at some companies that are leading the way in global supply chain redesign. They’re showing us that it’s possible to adapt and thrive in this new environment.
Take Apple, for example. In recent years, Apple’s suppliers have spent an estimated $16 billion diversifying away from China. Moving some production to India and Vietnam has made their end-to-end supply chain more resilient.
For its part, Unilever has touted its drive toward a sustainable supply chain for a while. The consumer products company is sourcing raw materials responsibly, reducing waste and emissions across their operations.
Despite progress, the company has critics. But many believe the company is making headway.
These companies are setting the standard for the future of global supply chains.
Embracing the New Supply Chain Reality
The era of free trade as we know it is changing. Companies are being forced to rethink global operations. They’re redesigning their supply chains to be more resilient, diversified and sustainable.
This optionality is a necessity, not a fad. The companies that adapt will be the ones that thrive in this new reality. They’ll be the ones that can weather any storm – trade wars, pandemics, demand shifts or all of the above.
So, let’s connect and embrace this new reality. Let’s innovate, adapt and redesign. The future of global supply chains depends your next moves.
Related Reading
- Innovation Trifecta Can Deliver Supply Chain Resiliency
- From 1 Factory for the World to the World Is Your Factory
- How 5Ls Make a Western Hemisphere Logistics Hub
- Adam Smith Wants You to Redesign Your Supply Chains
Jim Tompkins, Chairman of Tompkins Ventures, is an international authority on designing and implementing end-to-end supply chains. Over five decades, he has designed countless industrial facilities and supply chain solutions, enhancing the growth of numerous companies. He previously built Tompkins International from a backyard startup into an international consulting and implementation firm. Jim earned his B.S., M.S. and Ph.D. in Industrial Engineering from Purdue University.