Not Diversifying Your Supply Chain Fast Enough: A Fatal Mistake of International Business

PRA GLOBAL │WHITE PAPER SEPTEMBER 2020

Introduction

Businesses everywhere are relying more and more on global supply chains to fulfill their customers’ needs. Our ever-increasing dependency on these foreign supply chains is not necessarily a bad thing, as it has allowed companies to manufacture goods more cost-effectively and provides consumers with a wider array of products. However, it does leave our supply chains, which we have become so dependent on, highly vulnerable to external factors, such as international policy and internal political or social conflict.

Recent, ongoing events in just the past few years have highlighted significant vulnerabilities in our global supply chains.

US-China Trade War (2018)

In 2018 President Trump began imposing tariffs on goods manufactured in China, ultimately impacting over 100 product categories with an additional 25-30% tariff placed on each selected product. This put a substantial cost burden on US importers of these Chinese goods, causing a massive disruption to the long-standing, established US-China supply chain.

As a response, we saw US companies scramble to exit China.  Companies with suppliers located elsewhere were able to adjust their supply chains almost overnight. Companies that did not have suppliers elsewhere raced against one another to get a spot in the next best alternative location – Vietnam. Thanks to Vietnam’s similar technologies and low-cost production, Vietnam was a no-brainer for many of the companies hit hardest by tariffs (automotive and similar) looking to make a quick shift. However, with Vietnam’s limited size and manufacturing resources, only relatively few companies were able to make the transition, leaving many US companies to continue paying high tariffs and waiting out the trade war.

COVID-19 Pandemic (2020)

In early 2020, COVID-19 became a global pandemic, putting strain on supply chains across the board, from food processing and toilet paper production right down to the capability to transport goods. Most notably and devastatingly, supply chains directly related to the efficiency of country health responses were affected.

The entire globe relied on just two countries for the majority of supplies needed to help tackle the virus: China – one of the biggest producers of masks and other PPE – and Italy – home to one of two manufacturers of cotton swabs used for testing. Both countries underwent tight lockdowns almost simultaneously. This ultimately put country responses on every continent around the globe on hold as much-needed equipment and supplies were non-existent. Testing kit companies, labs, hospitals, health facilities, individuals, and governments had no choice but to wait while other companies built up the capabilities needed to manufacture and provide masks, PPE, and testing swabs.

Working to Diversify Your Supply Chain

Understanding your supply chain’s level of risk is key to a healthy supply chain. It is important to evaluate your current products sourced and the associated supplier(s) locations in order to determine if you need to diversify your current supply chain.

In Conclusion

The best defense to sudden global changes that we are seeing in an increasingly volatile world is a highly diversified supply chain. Today, it is a trade war with China and a COVID-19 pandemic, but tomorrow can and will bring different challenges. Investment in diversification on the front end in anticipation of the next inevitable global shift will mitigate the risk to your operation and prepare you for future disruptions.