Recent disruptions, including a trade war, pandemic, material constraints and geopolitical turbulence, have created successive shocks to the global supply chain system and exposed several areas of vulnerability. For decades, countless companies relied on a seemingly well-oiled, intricate framework of global partners that favored production hubs focused on optimizing efficiency and achieving the lowest possible unit cost. In many cases, these same companies leveraged manufacturing sites and suppliers that were solely located in countries halfway around the world from their most important markets and customers.
This traditional low-cost supply chain approach is currently facing scrutiny from investors, corporate boards, and customers after witnessing how disruptions wreaked havoc on the global economy, threatening companies’ ongoing business continuity and resiliency. The additional pressure of increasing cyberattacks, calls for climate action and evolving customer buying behaviors have spurred many forward-thinking businesses to consider new ways to mitigate risk, while enhancing sustainability and improving customer satisfaction without sacrificing economics in the process.
This rebalancing effort, which is arguably a crucial next step in the evolution of globalization, requires a more nuanced strategy. Specifically, we have seen companies successfully adopt regionalization, which organizes the supply chain into more agile, regional hubs by moving sourcing, manufacturing, and fulfillment closer to customers and end markets. The numbers support this shift: construction of U.S. factories has increased by 116% in just the past year. However, implementing a successful regionalization strategy that complements, or replaces the existing supply chain ecosystem, comes with risk and requires thoughtful planning, capital investment and resource allocation.
Is it worth the effort and cost?
In many cases, the answer is a resounding yes. By adopting a regionalization strategy, companies can reap benefits that go far beyond higher reliability and resiliency. When done right, rebalancing the supply chain ecosystem can also provide companies with lower total costs, an improved customer experience and significant progress towards their long-term sustainability goals.
Regionalization: Consideration and tradeoffs
A July 2020 McKinsey & Co. report found that about three-quarters of supply chain leaders had experienced problems with suppliers, production and distribution, and 93% of respondents planned to focus on supply chain resilience, with steps including dual-sourcing materials, nearshoring and increasing their supplier base, while shifting toward regionalization.
Businesses may have been hesitant in the past to adopt regional supply chain hubs due to the emphasis on unit cost. But as we shift away from legacy modes of doing business out of necessity, we have seen that a well-executed regionalization strategy can use a specific catalyst for change—such as improving resilience or responding to tariffs—as a springboard to improve sustainability, customer experience and total cost.
Take the case of a premium consumer electronics company that was experiencing double-digit annual growth when it was hit hard by government mandated COVID-19 shutdowns in Malaysia. In response, the company leveraged existing external capacity and capability to quickly establish new production hubs in China and in Mexico. This solution created a more resilient manufacturing base and a more responsive fulfillment model by creating new production hubs closer to their largest end markets.
In another example, a Fortune 100 company in the communications sector needed a solution to address tariff hikes on products shipping from China to the United States. The company weighed its options and determined that establishing a production footprint in Mexico, although slightly higher in manufacturing cost, resulted in lower total cost because of the reduced freight and tariff impacts. Moreover, the company saw faster time-to-market given it was near its largest market in the United States. In this case, the company lowered total cost and improved customer experience, all in the same move.
Both examples demonstrate how rebalancing the supply chain ecosystem can use a single catalyst for change to deliver more holistic improvement.
Not one-size fits all: The different routes to regionalization
Once the decision is made to regionalize production, there is more than one way to strategically rebalance the supply chain ecosystem. The best path forward is different for each company and dependent on unique business goals and operational models. There are several options:
Organic. Large global businesses with strong financials, a pool of available resources and an extended time horizon may choose to establish a regional supply chain hub internally if they don’t have pressure to lower costs, or if they don’t see a better use of working capital.
Divesture. The disruption of recent years could prompt some businesses to move toward a leaner business model, divesting certain products and facilities in regions with too much concentration, while improving their balance sheets and lowering fixed costs.
Outsourcing. New partnerships with companies that already operate at scale in every major theater of operation with a comprehensive suite of services covering design, manufacturing and aftermarket services can help a company quickly, reliably and affordably break into new markets, customers and product categories. The challenge, of course, is in finding the right partner.
Finding balance: Regionalization is not a zero-sum game
Though regionalization can bring production closer to a company’s biggest markets, the optimal supply chain doesn’t always involve a completely regional approach.
For example, it can be impractical or impossible to localize all materials if the availability of raw materials or components are limited to certain parts of the world. In other cases, a manufacturing workforce with the necessary technical skills may be in short supply in some regions. And for some products, price will remain the most important consideration for end consumers.
Of course, the costs and resources that go into duplicating operations and scaling them for a region, along with other factors, such as projecting the amount of costs customers will be willing to absorb, must also be weighed within the overall regionalization strategy.
The key is in striking the right balance by using more holistic evaluation criteria to guide the decision-making process.
The path forward
The supply chain disruptions of the past few years have demonstrated that rebalancing supply chain ecosystems is the best path forward for companies that wish to remain resilient and competitive in the long-term. And in this rebalancing effort, if companies choose the right regionalization strategy and partner, they will also open the door to improvements in customer experience, sustainability and total cost.