The high impact of supply chain diversification
The trend is clear: diversification will significantly impact globalized supply chain networks in the next five to ten years. What does this mean for supply chain management and the logistics industry as a whole? The short answer is more resilience.
A new path of resilience
Who says globalization is dead? According to UNCTAD’s Global Trade Update, global trade hit a record high of $28.5 trillion in 2021. That’s ten times higher than in 1980. Hidden behind that number are globalized supply chain networks – the critical logistics infrastructure that has been the backbone of globalization for decades.
So, what’s the catch? Well, supply chains may be globalized, but many organizations have relied on a single supplier for certain things, such as components or labor. They chose streamlined supply chains and economies of scale over more complex options like multisourcing or multishoring – a strategy that worked like a charm, more often than not, until recently.
We don’t need to rehash the relentless series of crises that have revived the debate about globalization in recent years. The prospects for future trade growth are surprisingly upbeat, despite the recent shockwaves caused by a global pandemic, geopolitical crises, natural disasters, and patterns of protectionism. What’s more, these events have put pressure on the business world to reimagine supply chains – to take a new path of resilience rather than receding from the global stage.
That path is now one of the high-impact trends we see in logistics today: supply chain diversification.
The trend of supply chain diversification
The definition of supply chain diversification is not straightforward. Some might say a diversified supply chain is simply a variety of supply and manufacturing channels to meet business needs. But it’s much more than that. It’s the heart of supply chain resilience.
Supply chain diversification means developing flexibility and redundancy to minimize risk and increase agility. Working with multiple suppliers is one way to achieve it. Another way is to expand and reimagine manufacturing and distribution networks. And yet another is using redundant and multimodal logistics solutions.
Many companies across a broad range of industries have already begun to realign their sourcing strategy, manufacturing footprints, and distribution networks. A recent study by Ernst and Young shows that, in the next two years, 77% of businesses surveyed expect to increase the total number of suppliers, and 55% expect to make significant changes to their supplier base. The goal is to become more responsive, agile, and competitive. The trend will highly impact logistics operations, from connecting new regions upstream to shifting existing modes of transport.
But these changes won’t happen overnight. Companies looking to create resilient supply chains need to understand both their options and the logistics behind them.
Most industrial companies want supply chain resilience
Changes to global supply chains in the last two years
have made significant changes to their supplier base
have established new operations in one or more additional countries
have near- or re-shored operations
Source: Ernst & Young
The logistics of supply chain diversification
What does this all mean for the logistics industry and supply chain management? As logistics providers, we will be at the center of this change. So let’s look at three ways supply chain diversification will impact logistics.
Most of us know the saying: “don’t put all your eggs in one basket.” It’s a classic pearl of wisdom that applies to any situation involving risk management. Unfortunately, many companies and even countries don’t adhere to it.
Multisourcing is the standard go-to solution for many supply chain managers. This often involves adding new domestic or regional suppliers who service the same supply line. Although this does add a certain degree of resilience against local events, such as flooding, it is less effective against larger regional conflicts or natural disasters. For example, a staff shortage may affect only one supplier, but a severe weather event could affect all suppliers in the region.
Multishoring, on the other hand, expands the geographic pool of suppliers and takes supply chain resiliency to the next level. However, it requires more complex logistics planning and supply chain management than multisourcing. For example, the recent supply chain disruptions have led many businesses across multiple industries to adopt a “China Plus One” strategy. This means they simultaneously source components and other resources from China and one additional country, such as Mexico or India.
We’re seeing this firsthand as more and more companies turn to us to for their complex supply chain management needs. As a Lead Logistics Partner, we leverage our expertise to oversee entire supply chains and provide end-to-end inbound-to-manufacturing solutions.
How inbound to manufacturing works
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Global technology, local manufacturing
An ABB survey in 2022 found that 70% of US businesses were looking to bring production closer to home, with 43% saying they would use automation and robotics to build supply chain resilience. In Europe, many textile companies are exploring production sites around the continent and in the Middle East and North Africa. These are just two examples of the reshoring or nearshoring underway to address recent supply chain issues.
Advances in automation and robotics technology have boosted this trend, enabling facilities in customer markets to compete with low-cost manual labor overseas. This usually requires a high initial investment, but some task-specific robots have proven to deliver a return on the investment in less than two years.
Looking further into the future, the continued innovation of 3D printing has the potential to create efficient hyperlocal manufacturing where products are right in your neighborhood.
In the next five to ten years, we expect to see many manufacturers consider production closer to home in order to benefit from greater resilience and faster time-to-market. That said, businesses with established supply chains are more likely to supplement rather than entirely replace existing production sites. And because raw materials may still need to be sourced overseas, supply chain managers and logistics providers must continuously monitor upstream supply risk. That’s where companies like Everstream Analytics, a DHL partner, come in handy. Everstream has developed state-of-the-art analytics to assess the risk to global supply chains in real-time.
How lead logistics partnership works
Redundant freight lanes and carriers
In addition to creating supplier and manufacturing redundancies, another supply chain diversification tactic involves diversifying the links in the supply chain – the freight lanes and carriers used to transport goods. Some companies partner with multiple same-mode carriers to spread the risk along a single route. For example, they use several trucking companies to deliver products from a supplier to a manufacturing facility. But like multisourcing, the increase in supply chain resilience is often modest at best. Multiple same-mode carriers would still be affected by disruptions like a closed border or fuel shortage.
Multimodal solutions are much more resilient. In this case, goods are shipped along one freight lane by at least two modes of transport. Multimodal has the added benefit of opening up new opportunities. Consider this scenario: a retailer normally ships bulk spare parts from India to the Netherlands via ocean freight. In response to ocean lane bottlenecks and to maintain delivery schedules, the retailer begins making parallel shipments via rail. At the same time, the retailer discovers a market for emergency spare parts in the Netherlands and quickly taps into the network of its logistics partner to take advantage of same-day air freight services.
Utilizing the available logistics solutions allows companies to benefit from the advantages each has to offer. Building a solid multimodal network is an important step toward diversification and essential for supply chain resilience. But these steps are not without hurdles.
The outlook for supply chain diversification & globalization
The DHL Trend Research Team identified supply chain diversification as a high-impact trend in the latest Logistics Trend Radar 6.0. We update the Radar every two years, which is how we monitor the key social, business, and technology trends in the logistics industry.
We believe supply chain diversification will become increasingly relevant in the next five to ten years as more and more companies shift from a cost-driven strategy to one more focused on supply chain resilience. This will require more sophisticated supply chain management, which is why we are following it closely.
Supply chains are in for some radical changes. We believe the result will be more and not less globalization.
Published: November 2022