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Many nations around the world have built vast industrial empires that together manufacture over a quarter of the world’s products. When we think of making goods, one particular country comes to mind: China. Take a look at your clothing tag, the engraving on your mobile devices, or your dinnerware’s imprint. You’re likely to see the words “Made in China” looking right back at you a memorial to their manufacturing capacity etched in silk, ceramic, and steel covering the entire globe.
In fact, China alone accounted for 28 percent of the manufactured products in the world in 2018. China has become the world’s manufacturing hub for a number of reasons, some of which are low labor rates, low taxes, lack of legislation, business innovation, and plain and simple hard work. Countries and businesses have recently begun to rethink their globalized approach to manufacturing, and we are seeing a slight revival in companies and governments relocating their supply chain in some cases.
Why is China not as appealing as before?
The low labor costs were the original advantage of exporting output to countries like China, but as economic development continues, so will the demand for higher wages. In Shanghai, for instance, the monthly minimum wage is 2480 CNY, compared to 690 CNY in 2007. That is a leap of 72 percent in just 13 years.
But not being able to produce the goods as easily as before is not the only reason why businesses and policymakers are trying to return manufacturing to their local markets, there is also a drive to minimize environmental effects, reduce product delivery delays, and recently, increased consumer interest in locally sourced products. Such variables are among those that have led to the shift of supply chains to more local regions and markets.
The climate and its effect on globalized chains of supply
Over the past decade, the environmental effect of a global supply chain has been addressed at a rising frequency. Although the expense of manufacturing products in a low-cost labor market could be advantageous to the bottom line of the business, the environmental effect of globalized procurement does not reflect well on the brand of a company.
In general, carrying goods from abroad takes more energy than domestic manufacturing, and more than 3 percent of global carbon dioxide emissions are due to the shipping industry. Ocean shipping emits the least quantity of carbon dioxide of any form of logistics. Nevertheless, it could be argued that a regional supply chain would also minimize emissions of carbon dioxide as businesses rely solely on domestic logistics and negate the need for ocean shipping.
Responding and juggling the supply with demand
People get what they want now today, and not later. Localized supply chains allow businesses to adapt more quickly to shifts in demand because they do not have to rely on products and services that take time to arrive from several thousand miles away.
When responding to consumer demand, a globalized supply chain will generate extra risks. Next, lead time increases. It can reduce costs by relying on shipping parts or goods from China to the United States, but shipping overseas may take months. Furthermore, due to incorrect paperwork, the import costs need to be considered as well as the possible risk of goods being kept at the border or port. Misidentified items can cause significant delays as well.
In order to respond to unexpected shifts in demand, these risks can be mitigated by storing required goods in local warehouses. However, warehousing comes with added costs and there is still a possible chance of the demand surpassing the storage of the warehouse. If this occurs, a delay in product distribution to consumers is the only consequence. Warehousing requirements are minimized in a regional supply chain because the supply chain length can be shortened by weeks and months to allow companies and businesses to handle costs efficiently and adapt to changes in demand from their consumer base.
Local Demand for Local Product
Consumers are finally increasing their appetite for local products. On the television, on the radio, and in your neighborhood, you’ve probably heard the expression ‘Buy Local’ or “Be Vocal for Local.” Locally, the drive to the source is mostly addressed when talking about food, but there is also an interest in items produced locally.
Local purchasing ensures that the money remains in the community and encourages employment, local growth, and increases local residents’ future buying power. It makes people feel good to think that by purchasing locally sourced products, they help their communities. That feeling is an amazing marketing instrument that increases demand and growth, so if a supply chain is localized, it adds more to the brand recognition of a business.
Thoughts in Conclusion
It is a difficult decision to globalize or localize a supply chain because it depends heavily on the industry. Many other considerations, including tax consequences, free trade deals or tariffs, and the political environment of the day, may also affect one’s decision to localize a supply chain. The aim is to realize that focusing on local is equally important as globalized Supply Chains.