The past couple of years have been, and continue to be, turbulent. We all hoped supply chains would normalise during 2022, but the war in Ukraine means that it’s unlikely. However, the supply chain mentally has changed from ‘just in time’ to ‘just in case’, and the trend is moving away from manufacturing products at one end of the world and selling them at the other. The current supply chain thinking focuses on regionalisation, so let’s take a closer look at how we got there and what the system has to offer.
The downfall of offshoring
The seeds for offshoring were arguably sewn when Deng Xiaoping opened China up to the free market in 1979. Access to the world’s largest and youngest workforce and loosened regulations converted China into a manufacturing paradise. Globalisation was born. Then, as the world embraced digital technologies, so did China, adapting its capabilities to include electronics and PCB manufacturing. Shenzhen, a city of 17.56 million in 2020, was purposefully created to manufacture electronic products rapidly.
However, since the eve of the millennium, globalisation has taken its fair share of hits: the “Battle of Seattle” protests in 1999, September 11, 2001, the Global Financial Crisis, and then Donald J. Trump. But, in 2020, China (and globalisation by default) was knocked out with the perfect combination: geopolitical strife, high tariffs, and COVID-19. 2020 saw the beginning of the end of China’s global manufacturing lordship.
In some parts of the West, the end of globalisation was cheered on by Millenials. This generation, largely believed to be the first generation in recorded history projected to be worse off than their parents, has a new approach to the environment and the globe. The generation is questioning the wisdom of buying products in Europe made on the other side of the world. For the first time, consumers, as well as price, began to affect supply chains.
In short, a whole host of factors merged to challenge the global order.
Reshoring to the rescue?
Reshoring, also known as backshoring, onshoring, or inshoring is when product manufacturing returns to the country where the company is located. It has been touted by some as a panacea for supply chain problems and heralded for its abilities to strengthen local economies, reduce unemployment, and create jobs.
However, the reality is never quite so simple. While there are certainly benefits of reshoring (read this blog for a balanced analysis of the pros and cons of reshoring), the strategy does not ‘fix’ the supply chain. There are many examples of companies getting it wrong by hugely underestimating the costs of reshoring and not considering the myriad logistical complexities—disastrous results ensue.
Reshoring the manufacturing of certain parts or products can be an excellent strategy, but it should not be seen as an all-or-nothing option. The problems we have seen as a result of globalisation is not that products are made in China; the issues stem from having manufacturing highly concentrated in one geography. Completely reshoring manufacturing would most probably be committing the same mistake in reverse.
What can regionalisation offer?
Regionalisation involves reorganising manufacturing into smaller blocks belonging to more localized economies. The three main global blocks are North America, Asia-Pacific, and Europe. The main feature of the strategy is to move production closer to where products are sold.
Petteri Jokital, in an interview with EMSNOW, claims that his customers (Original Equipment Manufacturers) want to be close to their key markets. For example, if the key market is Europe, then they want to be somewhere in East Europe. In the same interview, Dieter Weiss of Weiss Engineering stated that the new generation has a novel approach—they are more environmentally friendly. They are not as prepared to accept products that are sold in Europe but manufactured in China and then shipped all around the world. He mused that this change in mentality will be beneficial for the European electronics industry. Potential benefits could include building and strengthening new regions and creating a faster and more seamless supply chain by simplifying it.
How regionalisation has been helped by technology
Regionalisation in the manufacturing industry is being spurred on by Industry 4.0, which uses the integration of digitalised machinery combined with cyber data streams. Smart factories can create a communication channel between operators and machines. For example, at the glance of a screen, operators can see real-time data that is crucial to the successful management of their facilities, such as machine faults, blockages, efficiency levels, and rejected products. Using IoT technology and data analytics, manufacturers can design intelligent supply chains to make processes more efficient.
The result of Industry 4.0 and smart factories means that management, tracking, and modelling can be refined and risks can be identified before they turn into problems. Optimising operations and improving efficiency results in savings—both in terms of materials and labour costs.
Additionally, supply chain efficiency can be complemented with the use of robotics in factories, which can lead to key benefits in the manufacturing process, including increased flexibility, increased production, and an improved ROI. Read this blog for 7 reasons manufacturers are investing in robotics in 2022.
What are the results of regionalisation?
Moving production closer to the end consumer means companies are able to move quickly when they are met with market changes or changes in demand.
Moreover, the three main global blocks need different products to meet local demand; therefore, as they mature, regionalised supply chains will expand. To succeed, each block will need a balance of resources and expertise as part of its supply chain. However, increasing regional manufacturing is likely to lead to a faster, simpler, and more flexible supply chain.
Potential benefits are likely to come from the following areas:
- Increased control over supply chains by being able to forecast increases in demand.
- Improved supply chain visibility as time and distance become less significant.
- Better relationships with suppliers as they will be more ‘local’.
Remaining local in a globalised world
Regionalisation is not something you can just do. The world has been globalised for the past 40 years, and that can’t be undone overnight. However, the trend is moving towards suppliers and manufacturers establishing new relationships involving smart, regional supply chains in an attempt to save money and reduce time to market.
Regionalisation will almost certainly be part of manufacturers’ overall strategy to reduce and mitigate supply chain risk. However, we still live in a globalised world and all regions are not made the same. For example, most of the world’s semiconductor chips are manufactured in the U.S.A. while many of the raw materials used in electronics manufacturing are made in China, which, over the past 40 years, has developed advanced supplier networks. This is the global reality, and regionalisation will have to work with this global order and not against it.
The key to future manufacturing success is probably focusing on the local in a globalised world. Electronics Manufacturing Service (EMS) providers with a global operation that concentrates on building regional relationships and supplying a regional market will most likely be able to provide customers with the best service. They can respond quickly to local markets but continue to be connected globally.
We are always trying to achieve the perfect supply chain; however, no one model works as a theriac. Diversification is the key. For manufacturers, reshoring is one way of diversifying—even having a footprint in several countries within a region makes sense as you can diversify supply chains or run parallel supply chains. Reduced distance, time, and the chance to form long-lasting relationships with suppliers and customers make sense—especially for those EMS providers that have invested in the tech to make supply chains and production efficient.
However, no form of manufacturing autarky is a sensible move. Relying on multiple suppliers, at home, in your region, and on the far side of the Earth is beneficial for your business as this allows you to reduce disruptions, increase agility, and spread risk. We should rightly be focusing on regions, but some products are best left offshore, particularly those native to other regions.