From 1 Factory for the World to the World Is Your Factory

Sure, Trade with China Is Growing. But Supply Chain Sourcing Is Looking Anywhere Else

In 2020, China was the factory of the world. Just-in-time was the way to optimize operations.

In 2020-2021, organizations started edging away from China. We called it China+1 – source in China but deploy limited optionality by adding another country. Pandemic shutdowns had companies stockpiling inventory, moving from just-in-time (JIT) to just-in-case (JIC).

Now, as 2024 kicks off, organizations are frantically looking at ABC – anywhere but China. Supply chain leaders are also aiming to avoid just-in-case, which stuck organizations with too much inventory in 2022.

These tidal waves of change force supply chain leaders to deal with simultaneous globalization and deglobalization. We are looking to disengage with potential trouble spots (deglobalization) and increase engagement in other regions (globalization).

So how did we go from one factory for the world to the world as our factory? And if not JIT or JIC, what do we do?

For the second question, I recommend IAD – it all depends. For the first question, three statistics below, combined with a review of 2020-2023, explain the evolution to 2024.

So, this blog is about how we moved from one factory for the world to the world as your factory. In part 2 of this blog, I examine the why. (Hint: It’s all because Adam Smith said we should.)

Make the World Your Factory

Companies Are Looking to Nearshore and Friendshore

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.
Since 2020, U.S. freight flows with both Canada and Mexico have both outpaced China, according to Bureau of Transportation Statistics.

Why this move to nearshoring and friendshoring, away from single sourcing in China?

Perpetual supply chain disruption combined with the fact that China has huge issues. Wall Street Journal report after report after report tells the story of the headwinds China is facing.

Economic data show signs of weakness, with investment and consumer spending expanding slower than expected. A property bubble, weak consumer confidence, weaker manufacturing and service sectors, banking and retail issues are contributing to lower growth in China.

Those issues have been exacerbated by China’s crackdown on Western enterprises doing business in the country. Government officials have raided companies, closed offices, detained staff and fined businesses, CNN reported.

Despite those problems, predicting the death of U.S.-China trade is a mistake. U.S. trade with China continues to grow, setting records in 2022. But trade with other countries is growing faster.

The only disruption that would end Western trade with China? A Chinese blockade or invasion of Taiwan. Or maybe a shooting war with the Philippines over the South China Sea.

The Price of Low Costs? No Supply Chain Resiliency

The 2020 pandemic shut down the factory of the world for months. (For an in-depth analysis, see chapter 5 of my latest book, Insightful Leadership.)

Meanwhile, pandemic demand, particularly in eCommerce, soared. China shutting down made feeding that demand difficult. Brands worldwide were caught by surprise.

CEOs finally started to bring supply chain leaders into the C-suite. (Although boards still aren’t listening.) Companies transitioned to China+1 – sourcing people should buy from China but add an alternative.

Putting all your eggs (or tomato juice, widgets, parts) into a single-source supply chain was great from a cost perspective. Not so great from a supply chain resiliency perspective.

Resilience, unfortunately, has huge cost implications.

Just In Case Leaves You with Too Many Cases …

Simultaneously, many companies scrapped just in time for just in case.

Just-in-time manufacturing aligns material orders with production schedules. Raw materials arrive as needed. The philosophy minimizes inventory, waste and costs.

Just-in-case manufacturing produces goods in advance and on a large scale. This reduces the risk of stockouts. It also cuts the risk that supply chain snags will disrupt production.

However, by the 2022 holiday season, just-in-case left many brands with excess stock on hand, skyrocketing inventory costs and slicing or eliminating profit margins.

The ABCs of Supply Chain Redesign

Now, companies are reacting to years of political and consumer turmoil. In the past few months, I’ve talked to a number of brands who are looking to source ABC – anywhere but China.

As noted above, China is not going anywhere. And barring a shooting war, I expect robust U.S.-China trade to continue.

But more companies are waking up to the fact that optionality requires multiple sourcing for key products, parts and raw materials. China could shut down again. War and drought could block key shipping lanes.

Heaven forbid we have another pandemic.

But you can’t just turn that switch. Entire supply chains, not just your final assembly, are China-centric. China often controls raw materials and parts.

So even if you make washing machines in Brazil, that compressor likely came from China. Sure, you can start making shirts in Honduras. But if the material and buttons come from China, you still have a single-source supply chain.

It All Depends: A Supply Chain Sourcing Example

If you want to make children’s clothing elsewhere, you have to holistically examine your entire supply chain, from final assembly to when that product reaches your customers.

Redesigning your entire supply chain is a major disruption. When boards mandate that you reduce dependency on China by 50%, they rarely understand what they’re saying.

Such a plan, for example, needs to show the migration of everything from China to Bangladesh. Then from Bangladesh into Africa. Then to different parts of Africa, all with a timeline of, say, three years.

Why Africa? Well, that goes back to IAD – it all depends. Africa can be a source of high-quality cotton.

But you know what? Central America exports a lot of apparel to North America. And more textiles investment is pouring into that region.

So, it could all depend upon whether you are exporting textiles to North America or Europe. If both, then true optionality might require supply chains in both regions.

Make the World Your Factory

Where Does Your Supply Chain Redesign Go? Let’s Talk

Decisions were a lot easier back when we just looked at labor costs. $4 an hour there? $5 an hour elsewhere? Well, makes things there, obviously.

Now, supply chain leaders must face a series of tradeoffs between cost and supply chain resilience. You must consider lead time, inventory, labor, material costs, transportation, storage – everything. Nearshoring, friendshoring and even reshoring could all be part of your mix.

And leaders must recognize that the world no longer has one factory (China). Instead, you have an entire world to choose from. And I would love to discuss those choices with you.

Where will you go?

It just all depends.

Part 2 on why this transition is happening. It’s all based on recommendations from Adam Smith, author of The Wealth of Nations.