Reshoring: The risks of swinging the pendulum too far

From the decades before the turn of the century until the global pandemic, great economic growth spread across the world, driving historic demand in commodities and consumer goods. But this economic growth, coupled with stringent labor laws, drove up labor costs.

By sourcing materials and labor from countries with lower labor and manufacturing costs, businesses were able to capitalize on the economic boom, produce more goods and services, and minimize their costs. Today, businesses continue to look for ways to reduce costs and increase efficiency, and offshore suppliers still minimize costs in most instances for North American and European companies.

However, now we see how brittle these global supply chains are. A perfect storm of disease, war, technological innovation, overspecialization, unchecked climate change and geopolitical tensions have shattered global supply chains and had a significant impact on the global economy.

The total cost of the current supply chain issues caused by the pandemic, labor shortages and the war in Ukraine is difficult to estimate, as the situation is constantly evolving. However, a 2022 report by the World Bank estimated that the global economy could lose up to USD 1.2 trillion in 2023 because of these disruptions. The report also found that disruptions to the global supply chain are likely to have a significant impact on developing countries, as these countries are more reliant on imported goods and services. The report estimates that developing countries could lose up to USD 426 billion in 2023 because of these disruptions.

Deglobalization can build a more resilient supply chain

Deglobalization is an idea gaining traction among organizations worldwide as they cope with disruption. A deglobalized supply chain relies on manufacturing, labor and industries that are either local to the business or in a neighboring state or country.

With a local supply chain, organizations have better control and shorter lead times. Companies can manufacture products closer to the consumer, reducing the risk of disruption caused by natural disasters and geopolitical instability. Deglobalization also offers better transparency into where and how goods are being made and expedites the transportation of good to customers.

Investment into local infrastructure strengthens national economies, and when everything is done within the same legal jurisdiction, it reduces the risk of legal disputes and improves regulatory compliance.

Organizations like Apple, Nike and Tesla have been working to deglobalize their supply chains to gain more control and transparency and to reduce reliance on distant suppliers. Governments are passing legislation to incentivize local production as well.

In 2022, the United States Congress passed the CHIPS Act, which provides roughly USD 280 billion in new funding to boost domestic research and manufacturing of semiconductors in the United States. The European Union and China are investing trillions in their economies to rebuild local industries and create a less risk-prone supply chain.

A new model embraces local and global suppliers

Many industries have almost disappeared from North America and Europe, due to the inability to compete with the low cost of offshore suppliers. As companies look to source their product locally, they are finding that many products are not available or cannot be made without significant capital investments. In general, deglobalization will lead to higher costs for businesses in these geographies because it requires them or their suppliers to invest in processing and manufacturing facilities and pay higher wages to local workers. That cost passes to the consumer and will be reflected in a higher price of goods, so it is likely that only products with low price elasticity will be able to sustain local supply chains. And the quality of goods might suffer as local businesses learn what distant counterparts learned through trial and error long ago.

It’s likely the model that will win out will be a supply chain that contains built-in redundancies, using both local and global suppliers in concert with one another. In this model, if there’s danger of global goods being delayed or unavailable, businesses can reach out to their local suppliers for product. A hybrid supply chain provides flexibility and agility, allowing businesses to quickly adapt to changing market conditions and customer demands. By striking the balance between local and global suppliers, companies can achieve a renewed resilience, effective cost optimization and enhanced customer satisfaction, which ensures the stability and sustainability of their supply chain in the long run.

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