Global vs. Regional Supply Chains

You are currently viewing Global vs. Regional Supply Chains

Did you know that electronic products like smartphones can involve components sourced from many countries across the world?

Sudhanshu Vuppuluri
Founder & CEO, VSEC

A global supply chain can be defined as a worldwide system used by an organisation to produce products and services. The focus of this system is to lower direct costs (labour, raw materials, etc) and indirect costs (administration, rent, utilities, etc) and to developed hubs of specialists through ‘economies of scale’. For instance, a few such hubs developed in Asia are India – IT & BPM, China – manufacturing, Vietnam – footwear, and Bangladesh – apparel.

History

The supply chains across the world before 1900 were predominantly local and regional. Agriculture contributed to a major part of
most economies in the world – employed many people, and provided necessities of life (tea, spices) or strong intrinsic value (silk, cotton).

Technology advancements after World War II led to the development of efficient logistics and transportation systems.

For example, standardisation (pallets, containers), fuel-efficient engines (trains, ships, trucks), refrigerated containers, long-haul
trucks, expressways, computerised ERP systems, barcode scanning systems, etc

Current & Future Trends

As per Markets and Markets, the global Supply Chain Management Market was valued at $23.2 billion in 2020. This value is
expected to reach $41.7 billion by 2026, at CAGR of 10.3% over this forecast period (2021 – 2026). The largest and the fastest
growing region is North America.

The key drivers for growth are policies by most nations (post Covid world) that specify a greater visibility and transperancy in the supply chain processes. This involves use of – existing technologies in hardware (sensors, IoTs, etc), products (3D printing, robots, GPS monitoring), software (ERP, purchase & inventory management), and emerging technologies (AI, ML, SaaS, PaaS, Cloud Computing, Block Chains). These technologies help a person accurately verify the source of raw materials, production batches, and obtain real-time tracking for high-value goods.

As per Grand View Research, the global Supply Chain Analytics Market was valued $4.55 billion in 2020. This value is expected to reach $16.07 billion by 2028, at a CAGR of 17.3% over this forecast period (2021-2028). The largest and the fastest growing region is North American (39.3%, 2020).

The key growth drivers are swift rise of business data collection across industries (low cost of data collection and storage). Business are keen to adopt analytics solutions to obtain meaningful insights from this raw data (proactive approach to SCM shocks). The manufacturing sector has the highest market share (above 20%, 2020) of supply chain analytics usage. This is driven by a strong requirement to ensure timely delivery of products, to avoid shortages (unabated surge demand in North America, Europe), while retaining their profit margins.

Other reasons for growth are expansion of e-commerce industry in India and China (shopping via smartphones), enhanced use of big data in retail sector in the U.S (high competition, need for differentiation).

Post-pandemic Challenges: Global Supply Chain

The macroeconomic shocks caused by the COVID-19 pandemic – sudden scarcity of products, forced policy makers and businesses to re-evaluate the robustness of Global Supply Chain systems. In the prepandemic world, low cost of goods, and availability of large volumes were the main drivers to choose global supply chains.

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In the post-pandemic world, global supply chains are under scrutiny due to: • A lack of transparency (forced labour, child labour, unhealthy work conditions). Current & Future Trends • Large carbon footprints (coal-based power, untreated effluents.) • Financial risks (pandemic induced shutdowns, trade wars, climate changes like droughts and floods). Other factors that impact today’s global supply chains are: • Rise of environmental consciousness (consumer behaviour). • Mass customisation as a key differentiator (user experience). • Lifestyle changes (work from home, change in vacation preferences) Key Advantages of Regional Supply Chains:Visibility & Sustainability: In the past decade (2010-2020), many incidents and reports have thrown light on the horrible work conditions in Asian factories. This has led to policy changes by many developed countries to ensure a clear transparency mechanism is in place for all public companies. These firms must confirm (due diligence, annual reports) that their supply chain network (including subcontractors) provide reason work conditions (as per local laws). The recent supply chain shocks (container shortage, chip shortage, China floods, Delta Variant) have exposed the vulnerabilities of global supply chains. Apart from this, many governments, and citizens prefer a lower carbon footprint by large corporation (COP26). • Agility: Disruptive solutions have been a challenge for many firms in the recent past, sustainable solutions, plant-based textiles or recycled footwear. To understand consumer preferences, better, it would be wise to have factories or assembly units near the destination, rather than to manufacture large batches in Asia. • Customisation: A challenge faced by many firms today is ‘mass customisation’. That is, many customers prefer to make a product his or her own by adding a bit of individuality to it. They would be willing to pay a small premium to obtain this services too. This service has become popular in the footwear and apparel markets. Potential Challenges for Regional Supply Chains: Increased Costs & Lower Volumes: One of the biggest challenges to manufacture in the western countries (North American, Europe) is the high labour costs, and associated overheads (health insurance, litigation expenses). This implies, having a factory near the destination would increase the product price by 10-20% or more. Apart from that, many firms would prefer to reduce inventory (compensate for high costs), and manufacture in small batches (adjust for seasonality). These practices could increase the lead time for many products. • Increased Investments (R&D, Factories, Specialised Labour, Resources): In the U.S, the automotive industry (3& of GDP), and aviation industry (5.2% of GDP) employ millions of people (direct & indirect labour). In comparison, the electronics industry (1.6% of GDP) also employs a significant number of people (5.3 million, direct and indirect labour). However, the effect of ‘chip crunch’ which has caused havoc for automobile industry worldwide could not be alleviated within a few quarters. Reason being production of electronic components is a long-term project. Chip manufacturing (semiconductor fabs) requires huge investments ($4 billion), time to build factories ( 2 years), and about 2-3 years to obtain production efficiencies (90% yield). Another major challenge is to obtain a set of skilled labour (engineers, technicians) who have industry expertise (10-15 years). The R&D investments (percentage of worldwide industry sales) for the semiconductors industry is about 14.2% (2020). Apart from this, theses factories consume huge amounts of water (60 litres per layer), which adds a lot of stress to the local ecosystem.