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Supply chain network reconfiguration for resilience

Three years of uncertainty have stretched temporary supply chain fixes to their limits. For 2023 and beyond, leaders must make their supply chain networks more flexible and responsive.
Didier Chenneveau

Leads digital supply-chain work and the IoT Taipei hub; advises clients across regions on digital supply-chain and operational transformations with a focus on consumer-electronics, high-tech, and retail sectors

Eric Cheung headshot

From the Hong Kong office, Eric advises on a wide range of logistics and supply-chain issues in sectors including retail, apparel, consumer durables, and telecoms.

Xiaorui Shi headshot

Based in Shenzhen, Xiaorui focuses his expertise on the Internet of Things, including applications in consumer packaged goods, industrial electronics, and logistics.

Supply chain disruption is no longer an occasional event for those with global operations. It has become part of daily life. At the time of writing, COVID-19 lockdowns in China are still causing logistical issues and will continue to impact growth next year. Port congestion and ocean rates are improving but have yet to return to 2019 levels. Given surging inflation and interest rates—together with geopolitical tensions—businesses face an urgent imperative for a robust supply-chain response if operations are going to remain profitable, or even sustainable.

Supply chain woes are not unique to 2022. But this time around, many leaders, boards, and decision makers admit that they must make new and larger moves. Incremental improvements are no longer sufficient to build resilience amid the current volatility and persistent constraints. Semiconductors, for example, account for only 10 percent of global trade, but products depending on semiconductors account for an estimated 65 percent of all goods exports—magnifying the impact of supply disruptions. Some leaders may need to reinvent their network footprint strategies (and practices) from the ground up—a challenge few will have faced before.

Reengineering business models on a global scale is hard—not only technically, in understanding the risks and opportunities through time, but even more importantly in human terms. In the interests of focusing on the “how” as well as the “why”, here are some of the things you’ll need to get right along the way.

Identify a list of potential countries and rank their competitiveness

To reinvent or reimagine your network footprint, you’ll need an objective measurement and a common framework to compare the competitiveness of different countries. This will include major factors affecting supply chain costs and stability, such as labor costs, duty and tax rates, geopolitical and regulatory concerns, sustainability, infrastructure quality, suppliers’ availability and capacity, and supply chain maturity (Exhibit 1).

Assessing a country's manufacturing competitiveness requires balancing a wide range of dimensions.
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At a major apparel manufacturer, leaders focused on detailed component costs and production-step costs, the impact of trade agreements, potential for job creation, and required investment to promote long-term viability for alternative locations. The resulting nearshoring strategy reduced lead times by more than one-third, while strengthening the company’s operational flexibility to respond to market dynamics.

Build an 80/20 landed cost model

Having an estimated landed cost1 at an early stage helps narrow a target country list for implementation later (Exhibit 2). It is the relative benefit and cost comparison between different countries that matter the most, rather than the absolute figures.

A landed cost assessment helps narrow the list of target countries
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In most cases, an index approach against cost elements serves best. Companies can break down cost into major components, such as materials, labor, overhead, tariffs, and freight cost. Within each component, the next task is to index the main cost drivers, which themselves may be subject to change over time—as is currently the case with tariffs and sea freight costs.

This type of detail is critical across an entire product portfolio. One global consumer-packaged-goods manufacturer, for example, analyzed more than 15,000 SKUs under production-planning scenarios ranging from highly cost-focused to regionalization-centric. The resulting comparison identified potential savings in manufacturing costs of more than 6 percent, together with lead-time reductions of almost 10 percent.

Initial supplier scouting and screening

Yet even a country-level competitiveness study is not sufficient to address industry-specific situations—or the unique situation of your business and brand. After competitive countries are identified, a long list of suppliers should be generated via research in each country, using a pre-aligned set of metrics, such as suppliers’ key product categories, key customers, revenue, and capacity.

Before reaching out to each supplier for engagement, initial due diligence can be conducted via digital solutions that improve risk transparency for suppliers at tier 2 and beyond. Assessing a company’s financial and structural stability, its data security, its regulatory, operational, and reputational risk, and its organizational maturity can reveal critical weaknesses, further narrowing the list of viable suppliers.

We have found that companies from carmakers to chemicals manufacturers can dramatically reduce their exposure to supply-chain risk through a careful reassessment of supply chain vulnerabilities. Adjusting transportation modes, routes, and distribution footprints in the dynamic context of trade tensions, tariffs, and possible customs-clearance issues can also lower transportation costs by some 25 percent.

A central and continuous task

With a clearer picture of alternative network options, supply chain leaders can revisit their network footprint aspirations and ask themselves whether they have set realistic targets, and to what extent their supply chain risks can be addressed. From there, they have a solid base on which to start building out a wider vision and gaining a consensus on their company’s network footprint redesign over the next 3-5 years.

In a world with ever-changing challenges, reassessing and redesigning supply chain network footprints is an ever more central task to defend and maintain your company’s competitive advantage.

1 Total cost of a product delivered to the customer at the destination of consumption (comprising factory cost, transportation from factory to port of import, import duties and taxes, and last-mile transportation to the customer).

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