Diversifying Global Supply Chains for Resilience

After decades of globalization, it seems that the pendulum is swinging back. Trade disruptions and the COVID-19 pandemic are prompting economies to dial back on global integration and focus on themselves and their neighbors.

When making a decision, first determine what you are trying to protect — a product line, government contract or market access.

Supply chain leaders are exploring if they have to follow suit. Many manufacturers have been trying to reduce their reliance on China as the fragility of their supply chain networks has been exposed, be it due to tariffs, factory lockdowns or logistics disruptions. However, the retooling of global networks has to be pursued carefully, without severing critical relationships.

“Decoupling the U.S and Chinese economies is not the same as diversifying for resilience,” says Kamala Raman, Senior Director Analyst, Gartner. “The first is seen as a binary ‘all or nothing’ act, which can be expensive or impossible to execute given the depth of integration between these economies. Improving resilience, on the other hand, is an excellent idea.”

Improving resilience is still likely to be expensive, challenging and time-consuming, and a single approach will not work for all industries. To choose the right diversification strategy, supply chain leaders must consider the following six factors to determine their network’s optimal level of resilience.

Risk appetite

Risk appetites are unique to each organization, determining the level of risk an organization can absorb. Risk appetite varies depending on market position and profitability, the product or service offering, competitive situations, the supplier ecosystem and regulatory imperatives.

Read more: Define Your Risk Appetite to Create a Resilient Supply Chain

Critical partners

While a large, global organization might have the resources to invest in a diversified network, its critical suppliers might not. Supply chain leaders should look beyond their own capabilities, and evaluate if their partners are weakened by the current conditions and not able to support a diversification strategy. If this is the case, consider supportive actions, slowing down or looking for more capable partners.

What are we protecting?

“When making a decision, first determine what you are trying to protect — a product line, government contract or market access,” Raman says. “And then consider what you’re trying to protect against: sole-sourcing risks, increasing labor costs, tariffs, lead times or regulatory burdens. The answers to those questions will give you a notion of how much resilience and diversification your network really needs.

Learn more: Building an Agile Supply Chain

Trade-off decisions

It’s less expensive and time-consuming to establish resilience right at the decision point for a new product or a new network setup. Diversifying an already existing network is much harder to execute and requires significant resources. It might be a better decision to maintain the status quo for existing product lines and pursue diversification for upcoming product introductions.

If an organization is on the cusp of a technology shift such as the shift to 5G, however, the opportunity cost of missing out on the upside might be too great, and it’s best to view the reduction of global dependencies as the cost of doing business.

Learn more: Weather the Storm: Supply Chain Resilience in an Age of Disruption

Who will pay for it?

More resilience is an investment that needs to be paid for. “Like every investment, it’s a balancing act,” Raman says. “An organization can opt to absorb the costs, share them with upstream suppliers or raise prices for customers. Equally, the costs of not investing in resilience might also be high. Downsides might include tariffs, increasing costs, longer lead times, decreased customer satisfaction or negative impact to the brand.”

National or trading bloc policies and incentives

Many governments and trading blocs now offer incentives to organizations that move manufacturing back or closer to the end customer. For example, U.S. lawmakers are considering investments of tens of billions of dollars in America’s semiconductor industry over the next five to 10 years through the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act.

Read more: 6 Strategies for a More Resilient Supply Chain

On the other side, China has steadily invested in its manufacturing clusters, automation and digital technology to counter some of the effects of rising labor costs in the country. The country also is trying to decouple itself from U.S. technology, notably in semiconductors.

Diversification activities do not have to be an all-or-nothing effort. Supply chain executives should consider options ranging from incremental efforts (“no regrets acts”) to transformational ones (“big bets”). The need for supply chain diversification today is real, but as always, organizations must balance it against other goals, such as cost-efficiency, given the realities of their market position and broader industry conditions.