The China-US trade dispute has become a wake-up call for companies around the world. While companies try to avoid short-term price pressures caused by the trade war, many are considering a broader opportunity – redesigning the supply chain of the future. Building more flexible operating networks can help companies adapt to rapidly changing customer expectations and protect against future geopolitical risks.
Short-term tactical moves can help limit potential losses. Executives can find new suppliers of raw materials and hedge those costs, shift contract manufacturing to other regions, or rebalance global production. According to a recent Bain survey, 25% of business executives said they were pulling investments out of China, and 42% said they expected to source materials from other regions in the next year. Companies shifting some or all of their production out of China include camera maker Olympus and toy maker Hasbro.
But the long-term strategic challenge is to prepare supply chains for the future. It’s a difficult balancing act. Wages in China today are 20 times higher than they were in 1992, which has shifted low-cost manufacturing to other developing countries and made automated assembly lines more attractive than in the past. China has also begun to produce higher-value products and services, and its labor productivity has increased by 16% annually over the past 10 years.
At the same time, rapidly changing consumer preferences make vast supply chains expensive, cumbersome, and vulnerable to growing risks. Consumers want more personalized products and greater variety. These preferences are expanding the product portfolio. Manufacturers around the world are beginning to realize that it makes more sense and more economic sense to produce customized products that more closely match market needs. Importantly, this allows them to schedule production based on changing demand, rather than spreading it out over several months.
Broad macroeconomic changes are also transforming global markets. Production costs remain important, but flexibility and speed to market are increasingly important for competitiveness. Companies that cannot adapt to rapidly changing market demands may end up producing the wrong products.
Leading manufacturers are using new technologies to transform their supply chains to cope with an era of rapid change and uncertainty. For example, digital technologies that enable Industry 4.0 can help companies improve manufacturing efficiency through intelligent digital supply chains. Workstations equipped with augmented reality software to manage workers increase productivity and enable sophisticated work processes. If a worker picks up the wrong bolt, the system immediately recognizes the error and tells the worker which bolt to use.
As these advances make labor in the United States and other high-wage markets more efficient, low wages matter less than they did two decades ago, when big companies rushed to invest in China. Take, for example, a global consumer goods company that recently began rethinking its decades-long strategy of concentrating factories in a few low-cost locations. The company’s management realized that its vast supply chain was limiting its flexibility and slowing the speed at which it could bring new innovations to market. Executives also worried about geopolitical implications, including higher tariffs and other potential taxes.
To better respond to changing market needs and develop more locally adapted products, the company began moving some of its production closer to key markets. The company’s new production site is smaller but has a more flexible layout. The good news: digital solutions help offset the costs of local production and increase profits by more than 6%.
By contracting with suppliers who provide capacity in multiple countries, companies can shift purchasing or production if geopolitical risks or other factors threaten supplies. A global tech company has made its supply chain more resilient by working with component suppliers and contract manufacturers to build capacity outside of China. At the same time, management is looking for opportunities within its existing network to balance production and take advantage of free trade zones.
In 2015, the Chinese government launched a policy plan called “Made in China 2025” aimed at achieving global dominance in high-tech manufacturing. For Chinese manufacturing companies, the plan means increased sophistication and a greater focus on intellectual property. This shift, coupled with the U.S.-China trade dispute, has prompted many companies to rethink their supply chains.
A Chinese tech company has begun redesigning its global supply chain strategy to make it more flexible and less vulnerable to geopolitical risks. To quickly offset rising costs, the company is moving some production from the East Coast to inland areas where wages are lower. As part of its efforts to build the supply chain of the future, the leadership team is conducting a strategic assessment of demand and supply chain opportunities in emerging markets such as Southeast Asia, Eastern Europe, and Latin America.
Many multinational companies have taken short-term measures to protect their businesses from rising costs and supply disruptions caused by the U.S.-China trade dispute. But industry leaders are using the trade crisis to rethink their supply chains for the future.
As they begin to design flexible, efficient networks for 2025 and beyond, three key steps can help them focus on solving the most important problems. First, senior leaders meet with marketing and sales to understand what customers expect in the next three to five years. Specifically, they determine how important speed to market is to customers and the industry. Then, they meet with operations leaders to forecast the investments that will be needed to meet customer expectations. Finally, these companies select supply chain technologies, networks, and partnerships to support more flexible and dynamic global networks.
Leadership teams embarking on this journey determine next steps by assessing the importance of several key capabilities:
Taking a step back, companies also need to assess the geopolitical risks that could threaten their supply chains and determine which key capabilities need to be backed up. Every leadership team faces different challenges and has its own set of responses. But successful businesses have one thing in common: They don’t wait for the next crisis to start anew.
Jared Lapin is an expert leader in Bain & Company’s Productivity Improvement practice, based in the firm’s Chicago office. Jerry Matthios is an expert vice president in Bain & Company’s Productivity Improvement and Advanced Manufacturing and Services practices, based in Singapore. Raymond Tsang is a partner in Bain & Company’s Productivity Improvement practice, based in Shanghai. Jason Lee is a principal in Bain & Company’s Global Advanced Analytics group, based in Bain & Company’s Los Angeles office.
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Post time: Dec-26-2024