01 Aug Will Regional Supply Chains Replace Global Supply Chains?

Regional supply chains proposed in some recent business-resilience plans are now becoming a reality. As the trend gains steam, there is a growing interest in this topic among the supply chain, operations, finance, logistics, and freight transportation professionals we serve at SSI.

Yet, amid all the news about regionalization, global supply chains are still humming, which has many people wondering, “Will regional supply chains really replace global supply chains?”

In this blog post we explain to you the benefits and challenges of regional and global supply chains. We also reveal where regionalization is most prevalent and we share a compelling success story. In addition, you’ll learn details on the surprising news that right now, global trade volume has never been higher.

So, is there a disconnect between the rhetoric and reality of the shift from global to regional supply chains? Read this blog post to find out!

SUPPLY CHAIN SAVVY: SSI IS THE SMART CHOICE FOR FREIGHT AUDIT, FREIGHT PAYMENT SERVICES

Before diving in, we want you to know SSI provides exceptional freight audits. With a typical 8:1 ROI, we maximize your savings with a multimodal freight audit process designed to meet your current needs and that easily scales as your business needs evolve in the future.

After we complete your freight audit and recover your savings, you can also benefit from SSI freight payment services. We process freight bills from multiple languages and pay them in all of the world’s currencies (excluding those sanctioned by the US Department of the Treasury), at favorable exchange rates.

So, whether you primarily utilize regional or global supply chains, SSI can provide your company with big savings. Want to learn more? Let’s talk.

SUPPLY CHAIN RESILIENCE PLANNING KICK-STARTED AN EMERGING TREND

For decades, supply chain managers have relied on global supply chains to lower their production and labor costs.

However, the Covid pandemic and its aftershocks upended supply chain norms. Suddenly, without warning, far-away factories shut down, transportation costs exploded, shipping delays proliferated, product availability evaporated, inflation ran rampant, and inventory replenishment shifted from just-in-time to who-knows-when.

What a mess! However, even as supply chains recovered from the pandemic turmoil, there has been a growing understanding that the world in which global supply chains operate is full of uncertainty and risk.

That’s why supply chain resilience planning has been a hot topic in recent years. In order to enhance sourcing reliability and predictability, many businesses supply chains are shifting away from globalization to localization.¹

Familiar terms such as reshoring and nearshoring are related to localization. However, for multinational companies, the term “regional supply chains” is appropriate. For example, a global enterprise may choose to set up one supply chain in North America, another in Asia, and another in Europe, with each region serving the needs of customers nearby.

GLOBAL RISKS ARE PROMPTING A SHIFT TO REGIONAL SUPPLY CHAINS

Since the pandemic crisis began in 2020, business leaders have become increasingly aware of the many external risks that may impact their global supply chains.

• Geopolitical issues such as wars, territory disputes, and changes in government leadership.
• Costly trade tariffs of indefinite duration.
• Shipping and port terminal bottlenecks, which may cause inventory disruptions and production delays.
• Rising transportation costs which impact product pricing and business profitability.
• Natural disasters, which are more common everywhere than in previous decades.
• Rising labor costs across global supply chains.
• A new global pandemic. (Yikes! Let’s hope not, but as the expression goes, “hope is not a strategy”.)

For these and other reasons, enterprises of all sizes are considering a more regionalized supply chain approach.

BENEFITS OF REGIONAL SUPPLY CHAINS

Regional supply chains located close to customers can limit the risks mentioned above and increase the likelihood of a business receiving a steady flow of essential components and products. Some key benefits include the following.

• Improved supply chain resiliency – Business resilience is a top-of-mind concern among C-level executives.
• New government incentives – Financial support in the US, Europe, and Asia are attracting billions of dollars in new investments.
• Reduced transportation costs – Shorter travel distances may dramatically cut freight bills, fuel costs.
• Improved business operations – Enhanced communication, collaboration, and responsiveness may occur by eliminating drastic time-zone differences.
• Better cost controls – You may reduce wasteful spending by ordering the right products at the right time to meet current customer demand. Further, you may eliminate the risk of costly shipping delays, container-shipping rate increases and government tariffs.
• Improved customer satisfaction – Moving production closer to your customers may accelerate delivery times and  reduce their inventory stockout risk.

As you can see, the benefits of regional supply chains are compelling.^{2, 3, 4} So what are the challenges?

CHALLENGES OF REGIONAL SUPPLY CHAINS

• High upfront expenses – New factories are expensive to build. Today’s high interest rates add to the cost.
• Finding qualified workers – The skills, productivity, and availability of the local labor pool may not match your needs.
• More stringent regulations – North America and Europe may have more business regulations than where you currently source products.
• NIMBYism – The common “not in my backyard” (NIMBY) mentality of citizens in North America and Europe may restrict your ability to build today or expand in the future.
• Supply chain complexity – The components of many products can cross multiple borders before getting to the customer. You may find that difficult to overcome. Further, geographic knowledge clusters exist and moving away from the people with technical, intellectual and commercial knowledge may be detrimental to your business.
• Replication – Global businesses that set up multiple regional supply chains may find it difficult to maintain consistent quality across all regions.
• Change is hard. You can’t simply turn off one supply chain faucet and turn on another. Many global supply chains, in spite of their many risks, are typically efficient, reliable, cost-effective, and time-proven.

SUPPLY CHAIN TRENDS: REGIONALIZATION IS MOST EVIDENT IN NORTH AMERICA

Logistics Management recently reported on the 35^th Annual State of Logistics Report which was published this year by the Council of Supply Chain Management Professionals (CSCMP).

Per the report, in North America, “reshoring and nearshoring continue to gain broader acceptance, with U.S. imports from 14 Asian low-cost countries and regions declining by approximately 14% from 2022 to 2023. Last year, Mexico surpassed mainland China as the largest exporter to the United States.”⁵

In a recent article published by The Loadstar, a shipping expert noted that the US government is keen to facilitate manufacturing growth at home. The wave of regionalization in North America, and to a lesser extent in Europe, is likely to impact some global trade patterns.⁶

Affordable freight rates are another reason that many US companies may be looking to move suppliers and operations closer to home. Truckload rates have remained flat for the past year, per the recently published TD Cowen/AFS Freight Index.⁷

In fact, the entire US transportation industry has been mired in a “freight recession” for more than two years, a topic covered in a recent SSI post entitled, Trucking Freight News & Trends.

Further, ocean shipping spot rates on Southeast Asia routes have surged 300% in the past six months.⁸ If these high maritime rates remain elevated, or climb further, even more US & European enterprises may transition to regional supply chains.

NEWSWORTHY: A REGIONAL SUPPLY CHAIN SUCCESS STORY

Recently, The Wall Street Journal interviewed Marcia Brey, the VP of Logistics at GE Appliances. We recommend you read the article, in which Brey explains how the company doubled its revenue by revamping supply chains.

This transformation was years in the making – GE Appliances began restructuring its supply chain in 2017.

Moving production from Asia to the US was pivotal to the company’s recent success. (Of note, GE Appliances is a subsidiary of China-based Haier Smart Home).⁹

Here are a few key points from the article.

• 4,000 US manufacturing jobs across 9 US plants were added.
• US production increases cut the global shipping costs of bulky appliances.
• Products are manufactured in response to customer orders (rather than based on a forecast of future demand).
• Inventory turns have improved by about 50%.

What a fantastic supply chain success story!

Will moving production closer to your customers provide similar benefits? It worth investigating!

SUPPLY CHAIN TRENDS: GLOBAL DEMAND FOR CONTAINER SHIPPING HAS NEVER BEEN HIGHER

The regional supply chain trend is real and growing, especially in North America.

However, global supply chains are alive and well. In May, a record 16 million 20-foot equivalents (TEUs) were transported via ocean shipping. The previous high was 15.7 million TEUs in May of 2021, during peak-Covid demand.¹⁰

This high demand explains why ocean spot rates are up 300% on key routes in the past six months!

Of note, these 3 factors are contributing to the record numbers of TEUs at sea.

• The Red Sea crisis has put more ships on the water for longer periods of time as they sail around Africa, rather than via the Suez Canal.
• To ensure adequate stock for the 2024 holiday season, many shippers placed their orders earlier than normal. Peak season started in the Spring.
• Many Asian ports are congested. Ships that would typically be unloaded are awaiting berths as they idle nearby.

DHL recently released their 2024 Global Connectedness Report. Of interest, their data indicates the shift from global to regional supply chains has not yet come to fruition outside of North America.¹¹

As mentioned earlier, Mexico is now the largest trading partner of the US, supplanting China. Volume between the US & China has declined by 25% since 2016. Yet, the US and China are still connected by larger shipment flows than almost any other pair of countries.

Per the DHL report, “Global connectedness reached a record high in 2022 and remained close to that level in 2023. The resilience and growth of international flows of trade, capital, information, and people in the face of recent crises strongly rebuts the notion that globalization has gone into reverse.

Now that’s interesting! So, perhaps in a growing global economy, regional supply chains can proliferate in the years ahead even while well-ingrained global supply chains continue to be invaluable.

REGIONAL SUPPLY CHAINS: RHETORIC VS REALITY

The World Economic Forum (WEC), in partnership with the Kearney Supply Chain Institute, shared relevant insights earlier this year regarding why “the re-wiring of global value chains is moving less quickly than originally anticipated.”¹²

More than 300 senior global operations executives were surveyed. In a WEC post entitled, 5 trends set to shape the next generation of global value chains, this is what they discovered.

• Organizational inertia and the short-term economic focus of many businesses are creating a gap between what operations executives are saying versus what they are actually doing.
• An impressive 92% say they are regionalizing their manufacturing footprint.
• But only 28% aim to have nearly all “in-region-for-region” operations completed by 2030.

This data helps to explain why there are some clear signs that regional supply chains are being developed even while global supply chains remain robust.

Clearly, talking about regional supply chains is much easier than implementing the changes necessary to make it a reality.

WILL REGIONAL SUPPLY CHAINS REPLACE GLOBAL SUPPLY CHAINS?

So, let’s return to our original question: Will regional supply chains replace global supply chains?

Based on the WEC data, it’s fair to say it won’t happen at scale in this decade. However, if business resilience remains a C-suite priority, it seems likely regional supply chains will become much more prevalent in the future.

For now, many global supply chains are well-oiled machines that have served business needs for decades. It’s hard to imagine most of these will simply vanish.

Perhaps a more likely scenario is that regional and global supply chains will coexist. Regional supply chains are likely to thrive in industries when supply chain resiliency is paramount. However, in many industries in which low-cost sourcing is a top priority, or where one nation has a clear edge in knowledge, technology, or natural resources, global supply chains will continue to thrive.

ABOUT SSI

No matter how your supply chain is organized today or will change to in the future, SSI can protect you from wasting money on your shipments with our best-in-class freight audit solutions.

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• Fintech platform pays freight invoices in 100+ currencies, at favorable exchange rates.
• Actionable business intelligence supports your supply chain optimization efforts.
• Cutting-edge data visualization facilitates your analysis of data and trends.

Want to learn more? Our team is eager to help you save money. Contact SSI.

Footnotes:
1, 2. Leah Grout Garris, “The Great Supply Chain Shift: From Globalization to Localization”. Note: this web page is currently unavailable. May 30, 2024, as published by American Express.
3. PWC publications, “Reshoring and foreign inbounding: A goldilocks moment for US manufacturing?“. As published by PWC.
4, 5. John D. Schulz, “State of Logistics 2024: Waiting for the tide to turn“. July 8, 2024, as published by Logistics Management.
6. Alexander Whiteman, “‘Fundamental remodelling of trade’ in the US as globalisation fractures“. July 1, 2024, as published by The Loadstar.
7. TD Cowen & AFS, “Q3 TD Cowen/AFS Freight Index”. July, 2024, as published by AFS Logistics.
8. Eloisa Tovee, Xeneta, “What will stop ocean freight container spot rates reaching pandemic levels?“. July 15, 2024, as published by The Loadstar.
9. Liz Young, “GE Appliances Spins Stronger Sales from Supply Chain Overhaul“. July 3, 2024, as published by The Wall Street Journal.
10. Charlotte Goldstone, “New container volume high provokes major concerns over peak season“. July 11, 2024, as published by The Loadstar.
11. Steven A. Altman and Caroline R. Bastian at the at the New York University Stern School of Business, “DHL Global Connectedness Report 2024“. As published by DHL.
12. Kiva Allgood, World Economic Forum and Kristian Hong, Kearney, “5 trends set to shape the next generation of global value chains“. January 9, 2024, as published by World Economic Forum.

SSI blog post entitled: Will regional supply chains replace global supply chains?