Did you know that electronic products like smartphones can involve components sourced from many countries across the world?
Target audience: Decision makers (CXOs/Directors) of manufacturing & allied firms, management consultants, business strategists, innovators, and curious people.
Reading time: 5-10 min.
A global supply chain can be defined as a worldwide system used by an organisation to produce products and services. The focus of this system is to lower the direct costs (labour, raw materials, etc.) and indirect costs (administration, rents, utilities, etc.), and to develop hubs of specialists through ‘economies of scale’. For instance, a few such hubs developed in Asia are India—IT & BPM, Taiwan—semiconductors, China—manufacturing, Vietnam—footwear, and Bangladesh—apparel.
The supply chains across the world before 1900 were predominantly local and regional. Agriculture contributed to a major part of most economies in the world—employed many people, and provided necessities of life (food, clothing). Trade between countries and regions involved products that have a long shelf life (tea, spices) or strong intrinsic value (silk, cotton).
Technological advancements after World War II led to the development of efficient logistics and transportation systems. For example, standardisation (pallets, containers), fuel-efficient engines (trains, ships, trucks), refrigerated containers, long-haul trucks, expressways, computerised ERP systems, barcode scanning systems, etc.
Current & Future Trends:
As per Markets and Markets, the global Supply Chain Management Market was valued at $23.2 billion in 2020. This value is expected to reach $41.7 billion by 2026, at a CAGR of 10.3% over this forecast period (2021—2026). The largest and the fastest growing region is North America.
The key drivers for growth are policies by most nations (post-COVID world) that specify a greater visibility and transparency in the supply chain processes. This involves use of—existing technologies in hardware (sensors, IoTs, etc.), products (3D printing, robots, GPS monitoring), software (ERP, purchase & inventory management), and emerging technologies (AI, ML, SaaS, PaaS, cloud computing, block chains). These technologies help a person accurately verify the source of raw materials, production batches, and obtain real-time tracking for high-value goods.
As per Grand View Research, the global Supply Chain Analytics Market was valued at $4.55 billion in 2020. This value is expected to reach $16.07 billion by 2028, at a CAGR of 17.3% over this forecast period (2021—2028). The largest and the fastest growing region is North America (39.3%, 2020).
The key growth drivers are swift rise of business data collection across industries (low cost of data collection and storage). Businesses are keen to adopt analytics solutions to obtain meaningful insights from this raw data (proactive approach to SCM shocks). The manufacturing sector has the highest market share (above 20%, 2020) of supply chain analytics usage. This is driven by a strong requirement to ensure timely delivery of products, to avoid shortages (unabated surge demand in North America, Europe), while retaining their profit margins.
Other reasons for growth are expansion of e-commerce industry in India and China (shopping via smartphones), enhanced use of big data in retail sector in the U.S. (high competition, need for differentiation).
Post-pandemic Challenges: Global Supply Chains
The macroeconomic shocks caused by the COVID-19 pandemic—sudden scarcity of products—forced policymakers and businesses to re-evaluate the robustness of Global Supply Chain systems. In the pre-pandemic world, low cost of goods, and availability of large volumes were the main drivers to choose global supply chains.
In the post-pandemic world, global supply chains are under scrutiny due to:
- A lack of transparency (forced labour, child labour, unhealthy work conditions).
- Large carbon footprints (coal-based power, untreated effluents).
- Financial risks (pandemic induced shutdowns, trade wars, climate changes like droughts & floods).
Other factors that impact today’s global supply chains are:
- Rise of environmental consciousness (consumer behaviour).
- Mass customisation as a key differentiator (user experience).
- Lifestyle changes (work from home, change in vacation preferences).
- Visibility & Sustainability: In the past decade (2010-2020), many incidents and reports have thrown light on the horrible work conditions in Asian factories. This has led to policy changes by many developed countries to ensure a clear transparency mechanism is in place for all public companies. These firms must confirm (due diligence, annual reports) that their supply chain network (including subcontractors) provide reasonable work conditions (as per local laws). The recent supply chain shocks (container shortage, chip shortage, China floods, Delta Variant) have exposed the vulnerabilities of global supply chains. Apart from this, many governments, and citizens prefer a lower carbon footprint by large corporations (COP26). In this regard, regional supply chains would be a sensible option to meet consumer expectations of clear traceability and sustainable practices.
- Agility: Disruptive solutions have been a challenge for many firms in the recent past—sustainable solutions—plant-based textiles or recycled footwear. To understand consumer preferences better, it would be wise to have factories or assembly units near the destination, rather than to manufacture large batches in Asia. This solution (hybrid supply chain) would help firms be agile. That is, source key components (high volume) from Asia, and manufacture (destination countries/regions) in medium batches as per the market pull (low inventory). By employing workers in the destination countries or regions, these firms would clearly meet or exceed statutory requirements too.
- Customisation: A challenge faced by many firms today is ‘mass customisation’. That is, many customers prefer to make a product his or her own by adding a bit of individuality to it. They would be willing to pay a small premium to obtain this service too. This service has become popular in the footwear and apparel markets. To enter this sub-premium market, a practical solution would be to have the final production tasks (or assembly of products) near the destination. Such hybrid supply chains would reduce shipping time and costs when compared to a fully global or regional supply chain system.
Potential Challenges for Regional Supply Chains:
- Increased Costs & Lower Volumes: One of the biggest challenges to manufacture in the western countries (North America, Europe) is the high labour costs, and associated overheads (health insurance, litigation expenses). This implies, having a factory near the destination would increase the product price by 10-20% or more. Apart from that, many firms would prefer to reduce inventory (compensate for high costs), and manufacture in small batches (adjust for seasonality). These practices could increase the lead time for many products. Use of industrial robots, and emerging technologies (AI, ML, RPA, cloud computing, data analytics) can help these firms reduce labour costs and increase efficiencies. Regional supply chains could also be a key differentiator (marketing strategy), given the customers’ desire for sustainable practices, supply chain traceability, and local employment.
- Increased Investments (R&D, Factories, Specialised Labour, Resources): In the U.S., the automotive industry (3% of GDP), and aviation industry (2% of GDP) employ millions of people (direct & indirect labour). In comparison, the electronics industry (1.6% of GDP) also employs a significant number of people (5.3 million, direct and indirect labour). However, the effect of ‘chip crunch’ which has caused havoc for automobile industry worldwide could not be alleviated within a few quarters. Reason being production of electronic components is a long-term project. Chip manufacturing (semiconductor fabs) requires huge investments ($4 billion), time to build factories (2 years), and about 2-3 years to obtain production efficiencies (90% yield). Another major challenge is to obtain a set of skilled labour (engineers, technicians) who have industry expertise (10-15 years). The R&D investments (percentage of worldwide industry sales) for the semiconductor industry is about 14.2% (2020). Apart from this, these factories consume huge amounts of water (60 litres per layer), which adds a lot of stress to the local ecosystems. Therefore, many factors need to be evaluated with a long-term view, to set up a regional supply chain of critical components.
On a concluding note, the choice of a regional, global, or hybrid supply chain system depends on the type of products manufactured and the key market segments they cater to. Firstly, B2C products like apparel (fast fashion) and footwear could benefit from hybrid supply chain systems to reduce costs, increase market response (agility), and provide ‘mass customisation’. Secondly, for critical components like automobile chips, regional supply chains would be a good choice to avoid situations like ‘chip crunch’ in the future. Finally, for high volume B2C and B2B products which require low customisation and/or long lead time (electronic gadgets, durable goods, industrial and machined components) global supply chains would be a good option.