Geopolitics Driving Supply Chain Changes
Geopolitics have been driving significant changes in supply chains. Although this has always been true, it has heightened in importance and visibility with the Russian invasion of Ukraine. Europe started cutting back on energy purchases from Russia. The recent trade deal with Europe increases the momentum as Europe can trade Russian purchases by ramping up U.S. purchases. The Middle East conflict (Iran-backed Hamas attacking Israel) further ramped up supply chain impacts as Iran-backed Houthi rebels also started attacking ships in the Suez Canal, a major waterway and supply chain chokepoint connecting the Mediterranean Sea to the Red Sea. And, probably most serious as they dominate global manufacturing, is the risks associated with China. They cut off the world’s supply of rare earths used in electronics, defense and artificial intelligence in addition to threatening Taiwan, the Philippines, and other countries.
Stemming from the China threat, GM has just announced that it wants parts makers to pull supply chains from China. GM has been on the leading edge of reducing its geopolitical risk. For example, American auto companies have relied on China for magnets, which are essential for making everything from electric motors to headlights and windshield wipers as China made sure that its low price meant that no company could compete. However, instead of relying on China, just after the pandemic, GM decided to invest in rare-earth magnet production in the U.S. As the threat and risk continues to worsen, GM decided to take it a step further as their executives have reportedly been telling suppliers that that they should find alternatives to China for their raw materials and parts, with the goal of eventually moving the supply chain fully out of China. Some suppliers have received 2027 as the goal to extract from China.
Impacts of Evolving Supply Chains
As supply chains evolve, it creates an expansive effect. For example, as one manufacturer like GM asks suppliers to mitigate risk in China, it creates cascading impacts in that supplier’s supply chain. It probably no longer makes sense to produce inputs to the supplier’s component or raw material in close proximity to the old supplier’s location (such as China). Instead, it is preferable to locate close to the new supplier’s location (such as Mexico or the U.S.). In manufacturing, it is common to have clusters of manufacturers and suppliers in a local area/ region with common industry expertise to increase efficiencies, reduce costs and enhance customer value (speed, quality with increased collaboration, etc.). In the automobile industry, Detroit has been a historical cluster, expanding to Canada’s side of the border as well. In more recent years, the south has become a cluster for automobile manufacturing due to the lower cost base.
In addition, if you are moving supply chains due to geopolitical risk, you will evaluate the risks of moving to countries that could be impacted by the same geopolitical risk you are escaping or new ones. For example, if you move from China to the Philippines or Vietnam, you must evaluate the risk of China’s threat to these countries. With that said, it might make sense to diversify supply to these low-cost countries with trade agreements with the U.S. so long as you have additional sources of supply that could ramp up if disruptions occur.
Supply Chain Network Evaluations
As companies evaluate supply chain network changes, there are many items to take into account. For example, a few that pop to mind include:
- Likelihood & potential impact of geopolitical risks: As we discussed, geopolitical events can have a profound impact on disruptions and risks to your business. Research before you invest.
- Likelihood & potential impact of supply chain risks: If there is a strong likelihood of a weather event such as a hurricane, these impacts must be evaluated. For example, a healthcare products manufacturing facility located in a 100 year flood zone put several preventative and contingent actions such as shoring up the building to mitigate water damage, ordering additional inventory prior to hurricane season and beefing up its alternate facility prior to the season. In addition, if your facility is in a hurricane zone such as Puerto Rico, you will have to plan in these additional costs and risks. Additionally, if your business is dependent on the ports, you should plan on what you’ll do as contract negotiations come up as strikes are likely to occur.
- Tax incentives: Take into account manufacturing and tax incentives such as the manufacturing benefits of the One Big Beautiful Bill and state level tax incentives such the incentives compelling manufacturers to move to Texas.
- Access to & cost of natural resources: Most manufacturers are dependent on energy and water. Ensure your facility will have affordable access and/or has a plan to address whatever resources are vital for your manufacturing process. For example, data centers rely on energy. Thus, you wouldn’t open a data center in California as brown outs and black outs are common with the current usage and electricity costs are the highest in the nation after Hawaii. Water is also scarce in many countries and in specific U.S. states.
- Availability of talent: Manufacturing and high-skilled talent will be integral to success, and so moving to a rural town with low costs might seem attractive, but if you cannot attract the appropriate resources, it will outweigh the savings to fulfill customer needs. Think creatively as it also depends on what you invest in the community with training and technical programs.
- Site location basics: And, of course, you should evaluate site location basics such as the total cost of service (inclusive of product, freight, corporate support, IP and security, etc.), support of the community, access to suppliers, capital investment requirements etc.
The bottom line is that we are in a period of time with a more complex web of supply chain impacts and effects. Our best clients are getting ahead of these needs by rolling out a SIOP (Sales Inventory Operations Planning) process as it naturally highlights risks and opportunities in your manufacturing operations (internal and external sources) and extended supply chain. In addition, this process transforms reactive resiliency into proactive strategic plans as it illustrates the impacts of changing customer and business conditions and provides predictive insights and proposed options and impacts for the path forward. To learn more about how to roll out SIOP, download our complimentary eBook, SIOP: Creating Predictable Revenue and EBITDA Growth.
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