New Gartner survey takes deep dive into global sourcing and supply chain resiliency

A new survey released this week by global research and advisory company Gartner examines how the trend of moving sourcing and manufacturing operations out of China is on the rise, for global supply chain leaders.

Entitled “Weathering the Storm: Supply Chain Resilience in an Age of Disruption,” the survey is based on feedback from 260 global supply chain leaders, whom were polled over February and March.

One of the survey’s chief findings showed that 33% of respondents had moved sourcing and manufacturing activities out of China or they intend to do so over the next two-to-three years. What’s more, Gartner added that the survey shows that global supply chains have been dealing with disruption, in advance of the COVID-19 pandemic, due, in large part, to the United States-China trade war, which have highlighted how global supply chain leaders became aware of the weakness of their globalized supply chains and also question the logic of heavily outsourced, concentrated, and interdependent networks, according to Kamala Raman, senior director analyst with the Gartner Supply Chain Practice.

Raman added that this has brought about a new focus on network resilience, coupled with a focus on regional manufacturing emerging, but that comes with a caveat, in the form of increased costs.

What’s more, Gartner found that tariffs imposed by the U.S. and Chinese governments in recent years have driven up supply chain costs by 10% for more than 40% of the surveyed organizations, with cost increases higher for more than 25% of respondents. This is leading to shippers looking to alternative locations like Vietnam, India, and Mexico, coupled with shippers looking to exit China as a manufacturing and sourcing hub in order to make networks more resilient.

And more resilient networks are needed, with a mere 21% of respondents indicating they are currently highly resilient, with good visibility and the ability to quickly shift sourcing, manufacturing, and distribution activities. It added that 55% plan to have a highly resilient network over the next two-to-three years, in order to be able to better react to unforeseen circumstances like COVID-19, Brexit, and the U.S.-China trade war.

When asked in what ways, or approaches, should supply chain leaders engage in risk management to assess their organization's willingness to take risk onboard and decide how to quantify that risk against other network objectives like cost effectiveness, Gartner’s Raman said that supply chain leaders should have an ongoing risk management program that helps evaluate the tradeoffs of resilience versus other objectives for the company, most commonly cost efficiency.

“They should consider their financial position (is even viable for us?) and the answer may vary based on market position (market leaders versus followers), the nature of the product (specialty versus commodity), competitive situation (substitutability of their product and strength of competitors), profitability (high margin products versus those on razor thin margins), the supplier ecosystem (where critical raw materials are mined or manufactured) and regulatory imperatives,” she said. “Finally they should also look at the ability of critical partners (key suppliers or contract manufacturing partners or logistics providers) to support with resiliency. Logistics partners especially can help with postponement (where a logistics facility is used for light assembly or kitting the final product close to the customer).”

The concept of regionalizing, or localizing, manufacturing, for shippers to be closer to demand to gain speed and control, was endorsed by 25% of the survey’s respondents. Gartner added that while adding more players to the ecosystem and increasing overall network complexity requires increased costs, a regional supply chain can take steps to ease delays and shortages amid periods of disruption, should the model be what it called economically viable.

“Larger shippers may look to a regionalized network where they may have three sites for example (one each for Asia, the Americas and EMEA) for the three largest markets,” said Raman. “Sometimes the demand for resilience comes from the big customers of smaller firms who insist on a node to serve each large market. Smaller firms in particular can utilize the footprint of large partners to create the diversity that would be prohibitively expensive for them to create on their own to grow with low barriers (due to the availability of data on cross border sales for example) and without a lot of sunk costs. These large partners may find it easier to scale up existing sites in multiple countries around the world much faster than a shipper could set something up on their own, further they could also help with compliance questions (rules of origin, using FTZs etc).  However, you have to weigh the clout the larger partner might have in this equation.”

With relatively few shippers accepting that enhancing resilience in the face of major disruptions might involve dialing back on resiliency, Raman said there are a few key factors behind this.

“The whole world has been set up for seamless global trade and cost efficiency using just-in-time systems for sourcing, manufacturing and distribution,” she said. “Regional networks may mean more suppliers or more distribution hubs which means giving up some of that cost efficiency. Same thing with buffers - if you hold inventory (for resilience) or keep spare capacity in production or warehousing, you are giving up some of that cost efficiency. The benefits of low cost sourcing are not always weighted against long lead times, high distribution costs and inflexible inventory policies.”

The fear, in that case, Raman said, is that if a shipper spends on resilience and its competitor does not, it leads to a question of what will the customer value.

“Will they pay me more because I am more resilient or will they go buy the cheapest product out there? This is probably the single largest reason,” she said. “It is awfully hard to quantify resiliency. How much do we need? How do you put a $ value on it? This is where having a risk management process really helps, where scenarios are created and reviewed periodically (not just once) so that we get better at planning for uncertainty, accepting our biases (where we think optimistically or only plan for the last disruption that happened) and coming up with holistic plans that look at tradeoffs while keeping the focus on profitability. We could also flip it around and ask the question ‘how much am I willing to spend to mitigate the possibility of disruption at this node’ so you can determine “your budget” and determine mitigative actions accordingly.”