Denice R. Preston
Supply chain issues have prompted local and global businesses to think about logistics networks. Here’s how the global economy can be more substantial and robust.
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Zachary has a vast knowledge of financial models, analysis fundamentals, and valuation. He’s completed the sale of a small-sized business, advised on early-stage financing rounds, and served as interim CFO to start-up businesses. He holds a master’s degree in economics from the London School of Economics and Political Science.
Since the last several years, disruptions to the supply chain on a global scale have been prominent in news around the globe. The escalating shortages of products have impacted everyone, from large industries to consumers, who are faced with the now-common appearance of shelves empty in stores. The short-term impacts of disruptions to supply chains have had a devastating effect on all kinds of businesses across the world. However, I believe that the global economy is expected to be able to come through this crisis more potent than it was before.
As a highly experienced financial professional who holds a master’s degree in economics, I’ve observed this crisis unfold from the front and have also considered the issue from a historical perspective and am convinced it will represent a significant shift in how we think about and conduct business.
From at least the Industrial Revolution onward, accelerating as well as the growing scope, international trade companies of all sizes have been relentlessly optimizing their processes for effectiveness. The drive to improve efficiency has grown more intense over the last couple of decades, with companies in a quest to eliminate any apparent redundant or wasteful operations.
While these strategies have produced significant cost savings over a long period, the systems based on these have proven to be fragile and vulnerable to catastrophic failure under pressure. The trading wars with America and China, which began in 2018, the COVID-19 pandemic in 2020, and the conflict that will be fought between Russia and Ukraine in 2022 brought massive shocks to the global economy that left business leaders by surprise and unprepared.
The disruptions to supply chains across the globe in recent years underscore the interdependence in our global economy today and numerous weaknesses in how we conduct business.
Multi-sourcing: Reshoring, Nearshoring, and China +N
On a more fundamental, practical basis, the supply chain in the world has been impacted by the widely-reported issues related to imbalances in the trade of containers and inadequate shipping and port staffing during the outbreak. The only way to address these issues, which predominantly affect shipping over long distances and shipping, is to search for alternatives to supply. After years of shifting production and manufacturing to nations with lower labor costs, companies have changed their minds. They are now attempting to diversify their supply chains and move production closer to home. According to a poll of Kearney’s management consulting firm’s 2021 Reshoring Index report, 78 percent of CEOs have relocated or are looking to do this.
The delivery times of suppliers have been slowed significantly since the outbreak of the COVID-19 epidemic in 2020.
Three commonly used methods that can be classified under the broad category under the umbrella of “multi-sourcing” are reshoring, nearshoring, and China + N. Reshoring is the process of reviving manufacturing in the domestic market by moving production or production from the business’s country of origin. Nearshoring reduces supply chains using facilities in the company’s area but not their country of origin. Also, China +N (or +) acknowledges the importance of China in industrial production at an affordable cost across various industries. However, it tries to secure other suppliers as a way to safeguard. In contrast to nearshoring or the reshoring process, China +N is focused on diversifying supply without necessarily decreasing the length of the shipping path.
These strategies are often politically risky when they require the transfer of large amounts of labor and capital across international boundaries. However, if we leave this issue aside, the fundamental strategy is the trade-off between short-term outcomes and long-term viability. The move of production to the home market generally means paying more wages. This can increase the cost of production, cutting margins and diminishing short-term profits. However, the current financial crisis has re-awakened the business community of a crucial aspect: higher profit margins aren’t much of a benefit when you’re unable to run a business.
Based on my case study,mid-sized and small businesses could apply similar strategies on a regional or local scale. Reshoring locally is to invest in the production or resource-gathering processes further in the supply chain. Closeshoring and China +N could be used as analogies at both the regional and local levels by diversifying the suppliers, even if it requires more expenditure for more expensive supplies.
Transitioning From Just-in-time to Just-in-case Manufacturing
The consequences of failures in transportation or production can affect all of the supply chains if any component of the supply chain relies on a shaky delivery plan. The adverse effects are averted by employing an efficient inventory plan.
Just-in-time is the term used to describe the practice of having minimal components in inventory rather than depending on suppliers to supply the essential elements “just in time” to be seamlessly integrated into the manufacturing process. JIT was created through Toyota during the 70s to improve the supply chain and manufacturing efficacy. Still, its roots are in innovations for assembly lines made by Ford and others in the 20th century. Utilizing technology from the containers revolution, JIT took the world by storm over the following years, revolutionizing industries as diverse as microchips and supermarkets.
Although JIT significantly increased efficiency by reducing production costs, it is innately vulnerable to backups in the supply chain. Without storing components and resources that JIT has discarded, any downstream issues can slow production. Retail store shelves could be quickly emptied of stock if JIT deliveries are temporarily interrupted.
As a result of these challenges, The pendulum has started to shift around in the opposite direction, increasing the number of companies that adopt this “just in case” (JIC) manufacturing method. It refers to the fact that JIC recognizes the potential for disruptions in supply chain operations and seeks to reduce the risk by ensuring a certain amount of inventory. JIC can be retrogressive in a few ways but is more of a return to the method by which lists were handled before the advent of the JIT strategies. This can result in higher expenses because it requires stockpiling critical parts or supplies that need additional storage spaces and employees. However, a JIT manufacturing facility is forced to shut down operations if an order doesn’t arrive, and a JIC facility is taken on its insurance against failures. Production can continue to run until warehoused resources are exhausted. This shouldn’t occur before the regular supply is replenished. Because too much stockpiling can be wasteful–particularly for help with limited life spans–finding the right balance is crucial.
