How can companies protect themselves against global supply chain disruptions? Should they stop outsourcing business activities to low-cost countries?
In the past four years, supply chain issues across the globe have worsened in the context of several events. Whether due to price increases caused by the US-China trade war or supply shortages caused by the COVID pandemic, we all experience the impact of global supply chain disruptions these days: consumers experience product shortages on shelves and price level increases while organizations have to contend with supply shortages and miss out on potential revenues.
So, how can companies protect themselves against supply chain disruptions on a global level? Is it time to stop outsourcing business activities and perform them closer to home again? And if so, how will businesses benefit from that?
The best lessons are often drawn from history, so let's take a quick trip down memory lane. Back in the nineties, strategies such as outsourcing and offshoring quickly gained popularity as developments in transportation and communication made the world a smaller place and allowed companies to outsource manufacturing overseas.
The main reason for adopting such strategies: cost-effectiveness. Organizations found that moving manufacturing offshore allowed for lower labor costs and higher profitability. At the same time, offshore manufacturing ensured they were near upcoming markets in offshore regions such as Asia.
Today, offshoring and outsourcing are more common than ever. But in the past 15-or-so years, the other side of the coin has become painfully clear: moving your manufacturing processes overseas makes them extremely vulnerable to disruptive events across the supply chain. We‘ve seen epidemics (such as SARS in 2003) and natural disasters (like the 2011 tsunami in Japan) disrupt global supply chains — although their impact was limited compared to more recent developments.
In the past four years there have been events — such as the trade war between the U.S. and China, the COVID-19 pandemic, and the war in Ukraine — that have radically affected global supply chains and impacted economies on a global scale. Consumers have had to deal with (half-)empty shelves, price increases, and long delivery times while companies have seen potential revenues slip through their fingers.
One potential solution is reshoring, which means a company moves its operations back to the country they were originally relocated from. This allows organizations to be more in control of their supply chain, as it’s easier to find solutions for potential disruptions locally. Obviously, there is a downside to this: labor costs are higher than overseas.
Alternatively, companies can opt for nearshoring. In that case, they'll move operations to a low labor cost country close to home (the country they were originally relocated from). Labor costs will still not be as low as overseas, but they’ll be lower than in your home country and you will achieve better control over the reliability of your supply chain.
Ultimately, reshoring or nearshoring should result in increased reliability, faster delivery times, enhanced quality, more flexibility (as you can respond to customer needs and complaints more swiftly), and, most importantly, a more robust supply chain (one that is less vulnerable to global disruptive events).
So, can we expect reshoring to take a giant leap in the next couple of years? Today’s numbers don’t really indicate that. Statistics from the United States International Trade Commission only show a small decrease in the U.S. manufacturing import ratio in 2019. This effect most likely resulted from increased import tariffs on products from China that were imposed at the start of the US-China trade war. This confirms that the price benefit achieved in low-cost countries is a relevant driver in decisions on reshoring manufacturing processes.
In other words, there are no major signs of reshoring activities yet. But who knows what other disruptions we’ll face in the near future? Let’s keep in mind that low labor costs were the main reason why businesses have opted for offshoring, and these are less and less relevant thanks to the automation of services and rising wages in low-cost countries. Therefore, it might just be a matter of time before this trend takes off. In this context, another realistic scenario is that businesses will opt for reshoring part of their manufacturing processes. That way, they can mitigate the risk of supply chain disruptions while still partially benefiting from low-cost production abroad.