A bigger opportunity to redesign supply chains!
Rapidly changing customer expectations
According to the report of Bain & Co by Jared Lapin, Gerry Mattios, Raymond Tsang and Jason Lee say, ‘beyond trade wars, the real reason you need to reinvent your supply chain! Rapidly changing customer expectations make the case for greater flexibility!’
The US-China trade dispute has been a wake-up call in boardrooms around the world. As companies scramble to avert short-term cost pressures from a trade war, many are now considering a bigger opportunity-the chance to redesign their supply chains for the future. Building a more flexible operations network can help companies adapt to rapidly shifting customer expectations and protect against future geopolitical risk.
The impact of tariffs is a serious concern, of course-some $70 billion in added cost for Chinese imports to the US and $20 billion in higher costs for US imports to China. Electronics products account for a quarter of the goods affected by tariffs, and industrial manufacturers make up 20%.
A recent Bain survey shows 60% of US multinationals with suppliers or operations in China expect a negative impact from tariffs. Of those, nearly 40% anticipate a cost increase of more than 5%, and another 40% expect a rise of 3% to 4%. Importantly, 50% of all respondents said a more flexible supply chain could have helped mitigate the impact of the tariffs.
Short-term tactical moves can help limit potential damage. Leadership teams can seek new raw material suppliers and hedge those costs, shift contract manufacturing to a different region or rebalance manufacturing around the world. In a recent Bain survey, 25% of corporate executives said they were redirecting investments out of China and 42% said they expect to get materials from a different region in the next year, among those moving some or all of their production from China to other regions: camera-maker Olympus and toy company Hasbro.
But the long-term strategic challenge is getting supply chains right for the future. That’s a complicated balancing act. Wage levels in China today are 20 times higher than they were in 1992; pushing low-cost manufacturing to other developing countries and making automated assembly lines more compelling than in the past. China is also starting to manufacture higher value products and services, and its labor productivity has increased by 16% annually over the last 10 years.
At the same time, rapid changes in consumer preferences are making far-flung supply chains costly, cumbersome and vulnerable to a growing number of risks. Consumers want more customized products, and more variations. Those preferences are increasing product portfolios. Global manufacturers are starting to realize that producing customized products closer to market demand is smarter and can be more cost effective. Importantly, it allows them to allocate production in tandem with shifting demand, instead of months in advance.
Broad macroeconomic shifts also are transforming global markets. Manufacturing cost is still important, but agility and speed to market are becoming increasingly vital to competitiveness. Companies that fail to adapt to rapid changes in market demand risk producing the wrong products.
Leadership teams starting down this path determine their next steps by assessing the importance of several key capabilities, 1: the use of supply chain data to more accurately predict local demand; 2: sourcing goods from diverse geographical areas; 3: the flexibility to outsource production of products.
4: digital manufacturing and warehousing; and 5: artificial intelligence-enabled route optimization and pick-and-pack technology.
Stepping back, companies also need to evaluate geopolitical risks that could threaten supply chains and determine where to build redundancy into critical capabilities. Each leadership team will confront a different mix of challenges and come up with its own set of answers. But successful companies have one thing in common: They are not waiting for the next crisis to start the journey.
