Sometimes Bigger is Better

By Wade McDaniel | August 12, 2022 | 0 Comments

Supply ChainBeyond Supply ChainSupply Chain Strategy, Leadership and Governance

One would think there should be significant supply chain network changes underway with all the constraints, political upheaval and climate-related issues that have cropped up over the past two years. And one would be right to a point … and that point is 74%. The vast majority of those responding to a recent survey are making changes. But what those 74% are doing varies from tiny to significant.

If we believe what the press has to say on the topic of globalization and supply chain networks, we might draw the conclusion that countries are striving to make their supply chains more secure by regionalizing. This is true, but regionalization doesn’t mean shrinking. When we look deeper into Gartner’s recently published research, we find that while companies are modifying their supply chain networks, some of the reasons, and their rankings, may surprise you.

No. 3 SUSTAINABILITY — Surprise! If I were a skeptic — and I am — I would want to know when the survey was taken and the geographic breakdown. The answer to the first question is April 19 through June 2. The answer to the second is 34% of those surveyed were in Europe, 40% in North America, and 26% in Asia-Pacific. An equitable representation that makes it clear that companies are taking their climate and ESG initiatives very seriously. This same group said that meeting sustainability objectives was the No. 1 driver of changes to their current network. These changes are significant, with 43% saying it will affect between 20% to 50% of their revenue, and 56% saying that it will affect more that 20% of their spend.

No. 2 COST — OK, this result isn’t very surprising. Driven by the overall inflationary environment, supply chain leaders continue to pursue what is at the heart of supply chain: cost reductions. How companies go about this differs. Many approach this challenge by expanding their supply and partner network without changing their manufacturing footprint. But even with the emphasis on cost reduction, a significant number of respondents have added to their overall number of locations during the past two years. This approach also supports the next driver for network changes.

No. 1 RESILIENCE — There is no clear winning model for achieving resilience, but the creation of regional diversified models are emerging as an important approach. This means that there are two or more suppliers/factories in different locations for most products. Segments such as asset-heavy industries tend to drive solutions that are more suitable for themselves. Having multiple chemical plants or semiconductor foundries in region may not be practical but that does amplify risks for more static models. To offset these risks, companies are increasing buffer capacity along with diversifying their supplier base.

After years of outsourcing and loosening of policy, the ship seems to be turning the other direction. Achieving more control is back on the menu. While most are prioritizing policies that allow for better operational control, many are acquiring strategic control of intellectual property and vertical integration. Optimizing SKUs has also made a showing on the top list. This was a necessity during the start of the pandemic, and it proves to be a solid tactic to increase resilience. Many drifted away from the practice over the past 18 months but it seems to be gaining traction once again.

Companies will continue to adapt their supply chain network strategies in the coming years, and those strategies will call for tactics that may be difficult to implement. Dependencies on raw materials or supply clusters will result in added complexities and potentially costs. Regionalization can offer some security that governments strive for, but it looks like networks will continue to expand and build redundancies in capacity, suppliers and inventory to become more resilient.

Is bigger better?

Sometimes it is.

Wade L. McDaniel
Distinguished VP Advisor
Gartner Supply Chain
Wade.Mcdaniel@gartner.com

 

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