It was great to see a recent article on Supply Chain Dive on 6 reasons why global supply chains are shifting because the unending list of disruptions, cost pressures, and geopolitical tensions are only going to get worse.
According to the article, the following factors are influencing the decisions — and the doctor encourages you to read the article as he’s not going in depth into anything already written, especially when it was written very well, but instead wants to emphasize why the global outsourcing craze (that he has been rallying against and complaining about for over 15 years, since he saw the business case begin to crumble in the late 2000s) was, and is, fundamentally wrong (and emphasize even more factors you may not be considering yet).
Landed Costs
Items have become more expensive as supply constraints on certain raw materials and food stuffs have significantly increased prices across the board, tariffs and taxes from protectionist policies have heightened prices further, and then the skyrocketing logistics costs during the pandemic and now due to canal crises (Red Sea, Panama, etc.) and the lengthened shipping routes around the Capes (Horn and Agulhas) they are introducing make farshore sourcing very expensive.
Nearshoring from Mexico or Central America can take two weeks off of delivery time and reduce landed cost by up to 20% from the average. On the flip-side, sourcing from China with “trade war” tariffs (that Trump is threatening to increase) can increase landed cost by 20% (as section 301 tariffs targeting China added a 25% duty on hundreds of products).
Tariffs And Subsidies
These trade penalties and incentives are flying fast and furious both in populist-run democracies/republics/parliamentarian systems with Our-Country-First policies and communist/dictatorship countries with protectionist policies or tit-for-tat trade-war tariff and incentive policies. This makes “neutral” countries the best choices for outsourcing. See the article for a great breakdown of import value trends as a result of these changes in tariffs and incentives.
Geopolitical risk
The trade-wars were just the start. Now we have the Russia-Ukraine War, the Israeli-Palestine conflict, the war in Sudan, increasing tensions between China and Taiwan, and so on. All of these have, and will, disrupt global sourcing. The global political trade risk in multiple countries is now significantly high.
Existing Supply Networks
Even though, for North America, China came at the cost of Mexico, the trade networks still exist, and are easy to ramp up again. Similarly, multinationals already have hubs in multiple countries they sell (a lot) in and re-orienting around those hubs is easier than finding new hubs half a world away. Moreover, reducing routes increases FTL/utilization of key routes, and allows for logistics optimization.
Agility
Extended supply chains mean extended ocean shipping times, congestion at ports and warehouses, increasing labour disruptions (which is the biggest supply chain threat right now), can create lead times that stretch into months when we want to operate in a near JIT (just in time) manner, and get restocks in days (or weeks at most). Nearshoring can often allow that. Offshoring (unless it’s very small components you only need a small number of that can fit in a cargo plane and where the cost is so high you can afford the high air transit prices) can not!
ESG Goals
Shipping takes fuel. LOTS of fuel. LOTS of dirty petroleum-based fuel. Hard to make your ESG targets when ocean shipping is one of the dirtiest industries on the planet when there are still container ships on the ocean that, in one year, emit the same amount of cancer and asthma-causing chemicals as 50 MILLION cars. (Link) Remember that 6 of the worst polluting container ships can pollute more than ALL of passenger vehicles in the US in a year. (And don’t tell me that electric cars will fix all that when the production of a single battery pack, which often requires burning dirty coal or oil, for an electric car can produce up to 16 metric tons of CO2 [Link] and charging that battery from a dirty coal power plant can result in the indirect burning of 950g of CO2 per kWH, meaning you could be producing 78kg of CO2 every time you fully charge your battery pack for a Tesla 3. This means that, in the worst case scenario where the battery and frame production was as dirty as possible, you would have to drive 1,000,000 kms for that clean car to become carbon neutral!)
And while these are most of the major reasons to consider nearshoring and onshoring (but not “friend”-shoring, but that’s a different article), there are others. And we will discuss them in Part 2.