Shifting Supply Chain Patterns & Their Likely Implications| Barita Insights | April 25, 2022

Introduction
In the past two decades before the pandemic, China has undeniably had a major impact on the global supply chain and continues to exert an outsized influence. China has grown to become the world’s central manufacturing hub. The strength of China’s impact on the global supply chain is evidenced by the nearly 29% of global manufacturing that they had accounted for in 2019. As China has grown to become the world’s manufacturing capital, several industries with a global footprint have grown to become heavily reliant on China. The current global supply chain model, despite a long history of relative stability, has revealed its vulnerabilities as a result of the pandemic. Some of these vulnerabilities have been ignored over the years and have now been brought back into focus. The health of the global supply chain affects us all and as such, shifting patterns require careful analysis.

China’s Selling Point
China’s rise as a dominant player in global manufacturing and export has been driven by its ability to carry out lean manufacturing processes which have enabled its ability to compete effectively globally. China’s competitive advantage lies in its ability to operate with a low cost of labour, accommodative manufacturing regulation, low taxes , competitive currency practices and their large population which provides them with a significant labour force. All of these factors have enabled China to effectively produce goods for a broad range of industrial processes at far cheaper rates. Over the last three decades, this has led to a shift in manufacturing from several countries to China and other eastern countries with similar conditions, as companies seek to capitalize on lower costs to improve their margins and profitability.

Vulnerabilities With The Current Supply Chain Framework
Before the start of the pandemic, several vulnerabilities existed within the global supply chain framework that has been overlooked, especially by western countries. One of the main vulnerabilities that have been identified is that of supply chain concentration. This concentration places several global retail and industrial processes at great risk in the event of a manufacturing fallout in China. This was made evident by the pandemic, as the implementation of Covid containment measures led to an interruption in manufacturing processes and ultimately exports. The second vulnerability that exists in the current operating paradigm is that of the lead time between China and the West. It takes on average two weeks by sea to get from China to the US east coast and then the ship must anchor at the harbour for the next week. This protracted lead time between the manufacturers and consumers can make a recovery from shortages difficult. The third vulnerability within the model lies in geopolitics, as many countries run the risk of their supply chains being affected should they develop geopolitical tensions with China as their political system is far different from that of the west. These vulnerabilities no doubt pose a great risk to the stability of supply enjoyed pre-Covid.

Supply Chain of The Future
However, given the vulnerabilities listed above and using data gathered from surveys conducted with global supply chain managers, it is evident that there will be change. Data gathered from technological research firm, Gartner, has shown that 30% of supply chain managers that were interviewed indicated that they have begun changing their supply chain model. The changes that they have begun undertaking involve shifting from reliance on a global supply chain model to that of a regional supply chain model. This means that instead of having their manufacturing operation located in China, they have begun looking to bring their manufacturing closer to their end markets. Also, 63% of companies interviewed indicated that they have begun switching to multi-sourcing of materials to widen their supply base.

Likely Impact
One of the main benefits that had prompted companies to pivot to China for manufacturing has been its ability to offer lower costs and this has served as one of the most attractive features. However, if the supply chain apparatus were to shift closer to higher cost end markets, this could result in retailers facing increased costs which will ultimately be borne by consumers.

Conclusion
In conclusion, despite its ability to offer competitive costs of manufacturing, the attractiveness of China as a manufacturing hub is being re-evaluated by many companies, as we emerge from the pandemic. Already, there has been a shift in supply chain operation by some entities. While it’s still early, the new supply chain paradigm could very well result in upward cost pressures with a shift away from China as companies seek to reduce lead times and diversify their supplier relations to more efficiently keep up with demand and maximize customer satisfaction.