“The reports of my death are greatly exaggerated.” – Mark Twain
Every year, as part of Gartner’s Supply Chain Top 25 research, we identify three mega-trends driven by the most leading supply chains in the world. Amid recent press proclaiming globalism as dead or dying, I recalled one of the key trends that I penned for our 2012 report:
“A Shift Toward Multilocal Operations. Manufacturers and retailers have long sought ways to balance the trade-off in their supply network designs between global economies of scale and the demand for local responsiveness. Leading companies are reassessing their sourcing and manufacturing networks and rebalancing their supply network strategies in favor of multilocal design, supply and support. More specifically, they are shifting from a centralized model, where these functions support global markets, to a regionalized approach, where capabilities are placed locally, but architected globally.”
A Confluence of Factors Driving a Multilocal Approach
So much has happened since 2012: escalating wage rates in traditional low-cost source countries, rising nationalism/trade protectionism and, of course, the numerous supply disruptions wrought by our COVID-19 pandemic. All of these are wind in the sails of a multilocal approach to network design.
Let’s delve into a few of the drivers pertinent to today’s environment that point to multi-localism as a growing trend:
Geopolitics and a push for nationalized supply chains. Speaking to heads of supply chains in high tech and pharmaceuticals, for instance, many have mentioned an increase in active nationalism in 2020. Governments, from countries such as the United States, are requesting that the entire supply network supporting their direct demand be located and controlled within national boundaries. Other countries, including Brazil and India, have had local content requirements for years, as a mechanism to build a local industrial base and support their domestic workforces and economies. The elephant (or perhaps, panda?) in the room, for many Western supply chain heads, is China. Its aspirational shift from “workshop of the world” to dominant global player in sectors such as information and communications technology is nearly impossible to disentangle from its geopolitical ambitions. Some supply chain executives we speak to are placing ceilings on the amount of materials or finished goods sourced out of China. The reasons are myriad, but it is important to note that the shift is toward multi-local sourcing versus an abandonment of China, particularly as a source for its large domestic market.
An increased appetite for operational resilience. The dictionary defines resilience as “the ability of something to return to its original shape after it has been pulled, stretched, pressed, bent, etc.” Given the magnitude and continuing waves of disruption rolling through supply chains today, returning to a pre-pandemic state is not realistic or even desired by many. Before COVID-19, corporate boards of directors would field strategic reviews after significant operational disruptions, but typically the appetite for buying expensive “insurance policies,” as a future hedge was low. In today’s environment, building an adaptable and sustainable business is a precondition for the license to operate and there is greater recognition that this requires investment. This shift has coincided with a larger rethink of the axiom “leaner is better.” Leaders from some of the most advanced global supply chains have shared that, at times, they were caught flat-footed by the lack of buffer in their networks to adapt to the demand swings and supply constraints of recent months. A company with a more distributed network shared a story about shifting production from China to Mexico and then back to China as the center of the pandemic shifted geographies over time. This is an excellent side-benefit of running a global “virtual factory” across multilocal nodes.
Agility to support local markets. Agility is another concept seeing a resurgence of interest in the supply chain community. In a previous blog post, I shared key takeaways from a global chief supply chain officer event that Gartner held on this topic. Beyond the resilience that multilocal networks afford during times of disruption, the need for agility to support volatile local demand and evolving local product and packaging requirements is another driver behind this trend. Even asset-intensive industries are using late-stage postponement capabilities to balance greater agility with the amount of investment required in each locality. Beyond the supply side of the equation, many companies have also established regional customer service centers. This approach allows them to tailor support to the unique needs of local markets in a way that is integrated with nearby supply.
2020 is only half over, and who knows where we are headed from here, but one thing is certain, the shift toward multilocal supply chains has significant room to run.
Globalism is dead! Long live multi-localism!
VP Distinguished Advisor,
Gartner Supply Chain