We need to talk about globalization: It’s simply not what it was.
The dream of untrammeled global growth and trade has been cut short by supply chain snags that are now familiar to CEOs and everyday consumers alike.
These disruptions are a problem not only structurally, but also strategically. Decades spent building global supply chains tuned for just-in-time performance have left companies vulnerable to shortages, geopolitical uncertainty and faster shifts in consumer demand.
For two years and counting, supply chain leaders and workers have made extraordinary efforts to flex and adapt. But it’s increasingly clear that what’s needed is a deeper, longer-term rethink. In this context, CEOs and their leadership teams are reimagining their supply chains — from regionalization and dual sourcing to digital innovation backed by skilled talent to usher in a new era of supply chain management.
So, what might these changes mean for CEOs and supply chain professionals, and what practical steps can they take to help?
The historic scale of these challenges is prompting genuine reflection about redesigning supply chains, including bringing manufacturing processes, suppliers and workforces closer to customers.
From a U.S. perspective, supply chain constraints have extended delivery times in many sectors, from cars to consumer electronics, potentially creating a long tail to catch up and fill inventory. The average industrial part spends 4-6 weeks on the water in shipping — longer in the current climate, where shippers have seen a 16 percent reduction in container availability.
With customer demand continuing to evolve, and even industrial organizations demanding Amazon-esque service levels, eliminating lead time can generate significant market-share gains — or raise the consequences if you’re slower than your competitors. Add the once-in-a-generation inflation we’ve experienced in the last six months and the equation — and conversation — of regional versus global is shifting almost daily.
It’s increasingly clear that supply chain disruptions — everything from regulations to severe weather events stemming from climate change and global pandemics — can be costly. An average company can expect to lose six months’ EBITDA every decade due to disruptions. Therefore it’s no surprise that when global political and corporate leaders meet, the words “deglobalization,” “reshoring,” “nearshoring” and even “friend shoring” resonate ever more powerfully.
Restructuring a supply chain does not come without risk — and managing risk is already top of mind. A 2021 survey revealed that 59 percent of supply chain leaders implemented new risk management practices, but only 2 percent believed they had an adequate picture of their suppliers, especially those beyond the second tier.
And complex moves can spell greater challenges. To do it right, a solid financial and operational plan must be aligned at all levels of the organization, with detailed actions and clear responsibility across stakeholders. That remit falls to CEOs who can get their organizations onto the front foot of building a new operations agenda.
There are many levers to pull, depending on each business and its situation, some of which will improve productivity as well as mitigate disruption: setting up an in-house supply chain nerve center, for example, or leveraging or building digital twin capabilities, scenario planning and sharing data (where possible) with suppliers. It’s also advisable to ring-fence part of the supply chain team to work on developing and enhancing the team’s own capabilities for this period of change and opportunity — while the rest of the organization focuses on running the business.
The best approaches are often those which see relocation and reshoring as part of an (often overdue) project to transform and modernize the company in the best sense; a chance to update processes, technology, people and culture for the next phase of the digital age and stay in lockstep with ever-evolving demands of customers. A good deal of old-fashioned people management is also necessary for any such project to succeed — inspiring, persuading and explaining why things now can be done very differently.
For some, the new supply chain is already here. In the 2021 survey, most supply chain managers reported they had increased inventories for critical products. Some 55 percent said they implemented dual sourcing of raw materials, up from 53 percent that said they were planning to implement these actions in 2020. Trade tensions, COVID-19 lockdowns and the closure of the Suez Canal have all amplified the requirements to build more resiliency into their supply chains.
More broadly, if any economic model is to succeed — sustainably — it must succeed locally as well as globally. This is why many emerging markets are building capabilities to produce local goods through networks that rely less on global trade. It makes them more resilient and more independent, and who in the long term wouldn’t want that? “Local-for-local” production will certainly become a bigger feature over the next phase of trade development.
It’s important to say that all this is very hard. Supply chain leaders have certainly stepped up, shipping more product than at any time in history. The effort has been Herculean. The question is how we can make it less Herculean day-to-day going forward because we know the disruptions are going to continue.
And globalists need not despair. Global growth and trade still make sense in many situations and will continue in new forms and guises, just with a bit more pragmatism and an eyes-wide-open view of the risks involved. Businesses and their leaders need to get used to this, and course correct accordingly.
Daniel Swan is a senior partner at McKinsey & Company.