Blog post written by Nick Wildgoose BA (Hons) FCA FCIPS
Date: 19 January 2021 | Time to read: 7 mins
A recent HSBC survey of 10,000 businesses in 39 countries showed 93% currently have concerns over their supply chains. We have certainly seen during the COVID-19 pandemic a significant number of challenges for global supply chains. These have arisen principally from three areas:
- Coping with significant variations in demand as several industry sectors have been impacted by the moves in and out of various lockdowns.
- Supply chain disruptions caused by lockdowns and logistical challenges, particularly in respect of lower tier suppliers.
- Ongoing financial challenges as many businesses have faced cashflow issues, driven largely by the two areas above.
These together with geopolitical issues like Brexit and trade tariff negotiations, have led many businesses, and their procurement teams, to press the reset button on procurement and supply chain activities. They have realised that supply chain agility and resilience will be key to competitive advantage and survival in the new business environment. The key aspect to driving any of these changes is having access to the appropriate actionable data that provides forward looking insights.
As part of these changes, nearshoring of supply chain activities is being considered as a better approach. This may be simply defined as the transfer of business processes to companies in the country location of your own production site or that of a nearby country.
Why Nearshoring?
There are several potential supply chain nearshoring or regionalisation benefits, if we consider how best to combine a digital first approach with process flexibility, several benefits stand out:
- Implemented appropriately, it improves supply chain resilience and reduces costs associated with supply chain disruptions and improving business performance. According to a recent McKinsey Global Institute report, supply chains will face disruptions lasting a month or longer, every four years.
- Enhancing delivering for your customer on time, the most common key performance indicator across different industry sectors.
- It can help from a carbon footprint and corporate social responsibility perspective, including reputational exposure.
- Reduced logistical costs and increased flexibility, may need to balance this off against potential unit cost increases.
- Reducing regulatory and compliance challenges, for instance, nearshoring is based in a location like the EU.
- Procurement teams are increasingly expected to have digital risk solutions to help them add value and automate key aspects of their strategic sourcing and supplier management processes. These reduce staff costs and improve retention. For example, monitoring 30 risk factors across your suppliers, quickly becomes impossible without appropriate data and technology.
- By ensuring this is part of a move to a digital twin of your critical supply chain together with the supporting supplier data, you can start to carry out some basic scenario planning and stress testing. Looking for examples of the implications a critical supplier factory no longer being available brings, and what are the supplier alternatives.
The appropriate adoption of nearshoring provides you with the required agility and speedy response for customers can be of great help. Inditex, has become one of the most successful fashion retailers in the world, based on a nearshoring strategy, allowing it to quickly respond to customer needs. Inditex works with its suppliers to provide fashion products that meet all its relevant due diligence requirements including demanding sustainability and health and safety standards, built on respect and promotion of human rights and transparency.
Levi’s have also recently nearshored production for jeans using fully automated distressing, by using lasers, to replace substantial manual efforts in low-cost countries, also providing the required customer service agility.
Pegatron, the Taiwanese consumer electronic producer among others, has relocated its China operations to the Czech Republic. They were driven by developments such as offshore wage escalations and fluctuating costs of goods sold, weak far-shore intellectual property and technology protection, trade wars and tariff increases, trends towards customised, next-day delivery, and evolving societal pressure for sustainability.
In October 2020, a survey from Alvarez & Marsal states that around 7 in 10 major European retailers have reviewed their supply chain due to the weaknesses revealed by the pandemic and 14% have started onshoring trade, while almost a quarter have started nearshoring.
We have also seen a spreading of supply chain risk concentration with elements of production being moved from China to Vietnam, for example, in recent years. This occurred initially in garments and shoes but has moved to high tech, with Samsung now accounting for around 25% of Vietnam’s exports and Intel placing its biggest global chip manufacturing in the country.
Where do the risks lie?
In driving improvements in supply chain resilience, including nearshoring, you need to be aware of the following:
- You have top management support to ensure that the appropriate prioritised cross functional approach, together with associated objectives and measurements are established.
- You have the right risk skills, supplier and supply chain data and software solutions to support your decision making.
- Ensuring you have a pool of pre-qualified suppliers, that meet your CSR, health and safety, regulatory requirements to drive the agility you will need.
- Understand your geographic footprint, having the right diversity within the supply base including the various tiers of your critical supply chains.
- Building within an overall segmentation of your supply base, when appropriate, a collaborative supplier relationship based on a win/win approach where you are the customer of choice.
Ask yourself the question, do you have the relevant supplier data to hand to understand the changes in your risk picture and quickly identify alternative suppliers of the relevant product? Just because you nearshore an activity does not mean that you have automatically reduced the risk within your supply chain. If you are considering nearshoring, these several aspects should be taken into account:
- The supplier or the suppliers’ production site maybe risky, for example, the supplier is close to financial failure or they have poor health and safety practices.
- By nearshoring several of your suppliers, you are creating a new accumulation risk e.g., dependence on one port or a region. Ensure appropriate geographic spread.
- Have you now got sufficient supplier capacity? Ensure you have a back-up of appropriately qualified suppliers.
- You could be developing a new supplier relationship and it is important you understand this within a comprehensive supplier due diligence exercise.
One of the key areas for risk mitigation is having data available to understand the changes in the risk picture and facilitate the required proactive agility, both from a supplier sourcing and management perspective.
