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The dream of unbridled growth and flawless production, facilitated by highly efficient, global supply chains, has begun to crumble. Globalization offered manufacturers the chance to minimize waste, streamline production and inventory, and source from all over the globe to reduce costs. But the events of the past two years and even longer have amply demonstrated the flaw of running on such small margins.
In recent years, complicated and lengthy value chains not calibrated to risk exposure, have proven problematic. Systems built globally for efficiency rather than resilience were more suited to a world in which disruptions were the exception, not the rule. Today, the global economy finds itself in the midst of multiple major disruption events – from the Ukraine war to the closing of the Suez Canal to the semiconductor shortage. What worked in the 1990s is not working today.
Perhaps it’s time to rethink globalization.
Whereas the word of the day twenty years ago was “globalization,” today, we are hearing far more about regionalization, reshoring, and nearshoring. And it’s easy to understand why the shift in thinking.
On average, supply chain disruptions lasting at least a month now occur every 3.7 years. This substantially changes the focus from efficiency to risk mitigation. A supply chain disruption on this scale can be a huge financial blow for a company if they are not prepared. And new events like this are announced seemingly every week.
Yet globalization is still currently the norm. Since 2000, global trade in intermediate goods has tripled. Lengthy supply chains supply most major manufacturers today. But this represents a substantial risk, depending on the shock exposure a manufacturer may have.
This is particularly acute in a marketplace where consumers expect products to arrive next day or to be available when the need arises. Shipping delays of 4-6 weeks can cripple a company. What was intended to maximize profit by minimizing marginal costs like inventory is now reducing market share and hurting long-term company viability.
CEOs today are realizing the priority should be on resilience. Efficiency is still important, but the ability to weather major disruptions will be the real differentiator in the current decade.
Globalization prevailed in a pre-Amazon world. Before next-day and same-day shipping, sourcing materials and parts in Asia made sense for North American manufacturers. Fuel costs were down; transportation across the Pacific was a small price to pay for the low cost of Chinese labor and lower inventories.
But now, proximity to the consumer is paramount. Already, companies are maintaining higher inventories of key products and parts. The ability to consistently respond to changing consumer demand and fulfill orders within hours or days rather than weeks is critical to business success. Container shortages and spiking fuel costs be damned. The manufacturer of tomorrow must adapt to these and other crises to maintain market share.
Enter the rise of nearshoring.
Prior to 2020, the manufacturing world was already beginning to shift to reshoring supply chains and manufacturing processes. US companies have been bringing manufacturing back to Canada, Mexico, and the United States in increasing numbers for the past decade.
But now, the urgency of reshoring or nearshoring is more apparent. For all the reasons globalization has cost companies in the past few years, nearshoring can help them.
Indeed, if an economic model is to succeed, it must be sustainable. And nearshoring is that locally sustainable option. Many emerging markets are now turning their focus to the capability to foster networks of interconnected local suppliers, sourcing local goods rather than global. This independence from global trade makes these local markets more resilient, much faster delivering to market, and far more flexible to global problems.
Whatever the future holds – from more inflation to natural catastrophes to trade wars and geopolitical friction – bringing supply chains closer to home gives the manufacturer more control over the process. To an extent, globalization still works in many situations and industries. And it will likely continue in new forms.
But it should no longer be the dominant paradigm. In fact, regionalization can offer many industries comparable efficiency and lower costs. But it will require rethinking the way we do business. Nearshoring will involve creative thinking and an eye to the future.
Nearshoring should be viewed as an overdue transformation in the manufacturing business model. In this way, it is an opportunity to transform and modernize our companies. It is time to update our processes, our systems, and our culture. In order to remain in touch with customer demand and adapt to the digital age, we must think outside the box and inspire those around us to better our companies.
If you would like help nearshoring your supply chain to North America, we can help. Contact us now for a free consultation.