More companies consider relocating their production and purchasing activities outside China
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One-third of the supply chain actors have already brought their purchasing and production activities out of China or plan to do so in the coming years. However, the reason for the relocation is not only the coronavirus pandemic – according to a survey conducted by Gartner among 260 companies in February and March.
The results of the Gartner survey show that the COVID-19 pandemic aggravated the regionalisation trend, but these processes were already underway. 33% of those surveyed in charge of the supply chain said they had already moved their manufacturing and purchasing activities outside China or would like to do so in the next 2-3 years.
Global supply chains were being disrupted long before COVID-19 emerged. Already in 2018 and 2019, the U.S.-China trade war made supply chain leaders aware of the weaknesses of their globalized supply chains and question the logic of heavily outsourced, concentrated and interdependent networks. As a result, a new focus on network resilience and the idea of more regional manufacturing emerged,” said Kamala Raman, senior director analyst with the Gartner Supply Chain Practice.
Tariff costs are the problem
For decades, China has been a key source of supply for almost all major industries including retail and pharmaceutical. However, Gartner research showed that the margin between those companies planning to add jobs in China versus taking them away narrowed sharply in 2019. The primary reason is the increase in tariff costs.
We have found that tariffs imposed by the U.S. and Chinese governments during the past years have increased supply chain costs by up to 10% for more than 40% of organizations. For just over one-quarter of respondents, the impact has been even higher. Popular alternative locations are Vietnam, India, and Mexico. The second main reason for moving business out of China is that supply chain leaders want to make their networks more resilient,” explains Raman.
Resilience comes at a price
Only 21% of survey respondents believe that they have a highly resilient network today – meaning that they have good visibility and the agility to shift sourcing, manufacturing and distribution activities around quickly. However, 55% expect to have a highly resilient network in the next two to three years. However, resilience has a price. and survey respondents are aware of this. 58% of them agree that more resilience also results in additional structural costs to the network.
We are at a crossroads in the evaluation of global supply chains that pits just-in-time systems designed to improve operational efficiency against just-in-case plans that emphasize planning and preparing for a range of plausible scenarios. To find balance, supply chain leaders must engage in risk management to assess their organization’s willingness to take risk onboard and decide how to quantify that risk against other network objectives such as cost effectiveness,” says Raman.
Various options possible
One-quarter of survey respondents stated that they have already regionalized or localized manufacturing to be closer to demand. Despite higher costs, regional supply chains can ease delays and shortages in times of disruption.
Many Western organizations will have to explore new forms of automation on the factory floor to decrease the costs of near- or onshore production. Some also favor a partial option, such as manufacturing in Asia and moving only the final assembly closer to the customer,” concludes the expert.