Navigating Supply Chain Risk in a Globalized World

In a rapidly changing global landscape, managing supply chain risk is crucial. This article explores risk mitigation strategies such as diversification, reshoring, and nearshoring, and examines the impact of legislation and technology on supply chain management.

Diversification: The COVID-19 pandemic underscored the vulnerabilities associated with concentrated supply chains. Companies heavily reliant on Chinese manufacturing faced severe disruptions when China imposed strict lockdown measures. Samsung’s strategy of diversifying its smartphone production beyond China allowed it to manage these disruptions better than competitors like Apple, which depended more heavily on Chinese manufacturing. This case highlights the strategic advantage of a diversified supply chain in reducing risk and maintaining supply continuity during unexpected crises.

Reshoring and Nearshoring: Diversifying production across multiple countries helps mitigate risk but introduces complexities such as expertise, raw material availability, infrastructure, and distribution costs. Reshoring, bringing production back to the U.S., offers benefits like reduced transportation costs and quicker market response but can increase production expenses. Nearshoring, relocating production to nearby countries like Mexico or Canada, balances risk and cost.

The best approach often involves a portfolio strategy, strategically spreading production across various countries to reduce exposure to volatility and risk, similar to diversifying an investment portfolio.

Legislative Landscape: The U.S. government is increasingly focused on strengthening domestic manufacturing and enhancing supply chain resilience. Numerous bills are being proposed to incentivize reshoring and nearshoring. Some legislation aims to identify critical supply chain vulnerabilities, while others offer financial incentives such as tax breaks and funding for relocation and workforce development. However, the evolving nature of these regulations can be challenging for businesses to navigate. The effectiveness of some measures remains uncertain, and the volume of legislation can make it difficult to stay informed and compliant.

Holistic Approach: Managing supply chain risk effectively requires a comprehensive approach that goes beyond merely relocating production or distribution facilities. Key considerations include:

• Physical Flow: Understanding how the movement of products and materials will be affected by changes in production locations.
• Information Flow: Managing how information flows within the supply chain and identifying key decision-makers.
• Collaboration: Facilitating collaboration with new partners in different countries.
• Working Capital Management: Managing cash flow and working capital across borders.
• Synchronization: Ensuring that supply and demand are balanced across a geographically dispersed network.

Neglecting these factors can undermine the benefits of diversification, reshoring, or nearshoring efforts.

Technology’s Role: Emerging technologies are increasingly crucial in managing supply chain risk. Automation, robotics, artificial intelligence, computer vision, and RFID technology are being integrated into production and distribution systems. These advancements can significantly enhance efficiency, reduce errors, and provide greater visibility and control over complex global supply chains.

Conclusion: In today’s interconnected world, managing supply chain risk demands a strategic and adaptable approach. Diversification, reshoring, and nearshoring offer valuable solutions but come with their own complexities and costs. Staying informed about legislative developments and leveraging technological advancements are vital for businesses aiming to build resilient and responsive supply chains capable of navigating future disruptions effectively.

Episode Transcript

Dr. Matt Waller (00:10):
Welcome to the Matt Waller podcast, where we
look at success at theintersection of technology,
logistics, supply chain, retailand CPG, also known as the
retail value chain.
I want to clarify that thispodcast is distinct from my
responsibilities as a professorin the Sam M Walton College of
Business.
Nonetheless, it aligns with myaspiration to provide practical

(00:31):
insights to professionals andbusiness by showcasing companies
and people that can enhanceyour ability to manage, lead and
strategize and marketeffectively in the retail value
chain.
Today we're going to talk aboutsupply chain risk and how to
reduce supply chain risk, andalso we're going to talk a

(00:53):
little bit about efforts throughlegislation and through
strategy to diversify supplychains and also to reshore,
meaning move production back tothe United States or nearshore,

(01:13):
like moving production to theWestern Hemisphere, mexico,
canada, south America, centralAmerica, etc.
There is a lot of legislationright now moving in that
direction.
But what's really interesting,if you look at a company like a
smartphone manufacturer likeSamsung, back in 2008, samsung

(01:36):
had all of their smartphoneproduction in China and they
started diversifying it rapidly.
And they started diversifyingit rapidly and they have done a
very good job of de-risking thatsupply chain.
They've moved a lot ofproduction to places like India,

(01:59):
vietnam and other places.
And so when the problemsassociated with COVID hit
companies, some of theircompetitors like Apple, were
more impacted than Samsung,because Samsung had diversified
greatly.
And you might think, well, okay, why was China a bigger problem
?
And the reason is because oftheir COVID restrictions.

(02:22):
Because of their COVIDrestrictions, they took really
strict measures that causedproduction and distribution to
shut down in lots of China andso consequently having for firms
.
So if you have two firms andone firm is highly concentrated

(02:42):
in China during that time andone's very diversified away from
China, then the other firm hasa competitive advantage in being
able to meet demand.
And that happened with Samsungand iPhone.
I mean Apple.
Since then, apple hasdiversified quite a bit too.
When the tariffs hit, when theUnited States levied heavy

(03:06):
tariffs on China, again having adiversified supply chain was
really important.
Samsung, I believe, has thelargest market share now of any
of the suppliers of smartphonesin India, of any of the
suppliers of smartphones inIndia, and Apple has made a

(03:32):
commitment to grow it in India.
But Apple's also moved, youknow, to having suppliers in the
United States produce some oftheir components for some of
their products, meaningreshoring and, you know, moving
to India and Vietnam andIndonesia and Pakistan, et
cetera.
You can't call that nearshoring,but you can view it as a way of

(03:55):
diversification.
So, as companies make thesedecisions, there's lots of
things you've got to consider.
For one, do these othercountries that you're
considering going to have theexpertise to be able to make
what you want to make?
That's a big problem and it'sone of the reasons why there's

(04:17):
still a lot of production thatwill always continue in China
for a very long time, even ifcompanies wanted to move away
from it.
They have become amanufacturing powerhouse.
But you also have to look at,you know, raw materials,
inventory, availability ofmaterials, availability of

(04:39):
production technology and thecost of distribution.
You know, some countries mayhave a lot of people, but they
don't have efficient highways orrail infrastructures to get raw
materials to where it needs togo to be produced and to get
finished product out of thecountry.

(04:59):
So there's a lot of legislation, hundreds and hundreds of bills
are being proposed to increasethe amount of reshoring and to
increase the amount ofnearshoring.
Both, and a lot of thelegislation that I've read.
It's not clear to me how it'sgoing to work, but I think, as

(05:23):
an individual firm you have toalways be looking at.
If you were to reshoreeverything to the United States,
well then you've also exposedyourself to a new kind of risk.
Everything is here.
If it's spread out over lots ofcountries, your risk is
diversified.
But when you diversify yoursupply chain because of risk,

(05:45):
it's possible and quite likelythat production costs can
increase inventory holding costs, inbound and outbound
transportation costs.
But it can also guard againstproblems like natural disasters
and earthquake or, you know,also against things like tariffs

(06:05):
or regime changes, civil unrest, et cetera, et cetera.
When you look at what happenedduring the pandemic, you know we
saw at first there was a deepwhat looked to be a slowdown in
the economy because peopleweren't purchasing very much.
But then the governmentstimulated the economy and

(06:28):
people got checks in the mailfrom the government and they
started spending again.
How they spent the moneychanged.
So instead of maybe going outto eat as much, they started
buying things for home.
Instead of doing recreationoutside, they started renovating
their homes, buying toys thatcould be used around their home,

(06:52):
these kinds of things.
So then there was a huge spikein demand and people started
buying cars.
Some people that couldn't evenafford cars necessarily would
take their check and use it as adown payment so they could get
a loan to buy a car.
All of these caused problemsbecause a lot of people said,

(07:13):
well, the supply chain is broken.
But actually the supply chainreally wasn't broken per se, it
was just that demand spiked inways that was completely
unexpected.
And this gets back to this ideaof you know, making sure you

(07:34):
manage risk appropriately in thesupply chain.
But that has to be balancedwith the additional costs that
are going to be incurred as aresult.
So one of the challenges thatthe government has, again, if
you look at a lot of legislationthat's coming out encouraging
reshoring and nearshoring, it'snot really looking at it from a

(07:56):
risk perspective as much as itis from, you know, in some cases
a security perspective or insome cases for economic reasons,
to bring quote jobs back thatkind of a thing for economic
reasons, to bring quote jobsback that kind of a thing.
But firms still have toconsider the costs and the risks

(08:21):
.
And it's very complicated.
There's so much legislationit's hard to keep up with it.
Around this there's alsolegislation saying that a new I
read one that was talking abouta new agency, or maybe not
agency, maybe bureau needs to becreated to analyze the supply
chain and figure out which partsof the supply chain are most at

(08:44):
risk, which kinds of productsyou know?
Should we be producing in theUnited States this kind of thing
?
And the problem is that whowould you hire to figure this
out?
That would be a big problembecause I think bureaucrats
aren't very good at knowingwhich products we should make
and which ones we shouldn't.
It's very hard for any human tofigure that out.

(09:09):
Very complicated, as the supplychains are de-risked, that is,
you create more of a portfolio.
Think of it like a portfolio.
It's like you know you don'twant to invest in just one stock
.
You want a whole bunch ofdifferent stocks to reduce the
exposure to volatility and risk.

(09:31):
But as you do that, purchasingbecomes more complicated because
you have to have components andsub-assemblies and these kinds
of things and raw materialsdelivered to different countries
, not just the same country youmay be.
You know your productionplanning gets more complicated

(09:54):
because if you've got productionfacilities making the same
thing in multiple countries,that has to be coordinated
somehow.
The more inventory you, themore production you have and
distribution in other locations,the more you have to
proliferate cycle stock andsafety stock throughout the

(10:18):
supply chain.
The more warehousing you have,the more variety of material
handling you have.
The different types ofpackaging you have access to,
and even how you plandistribution can vary quite a
bit from country to country.

(10:38):
The type of transportation thatyou have available, All of
these kinds of things vary whenyou go to new countries, and
this increases complexity.
Complexity leads to costs,right and errors, so this is why

(11:00):
this decision is so complicated.
You may have financialincentives to focus on one
country for your production andor distribution, but there's so
many complexities that comeabout with producing and
distributing in a variety ofdifferent countries.

(11:24):
When you start de-risking thesupply chain and moving
countries that house productionand or distribution, then you
have to think about the physicalmovement of the products and
materials.
How is that going to change?
How are we going to enable thischange?

(11:46):
The information is going toflow differently.
How is that going to be enabled?
Who are the decision makers onthe information flow?
Who do we need to collaboratewith?
There's going to be differentfirms involved than there were
before.
How do we manage the flow ofworking capital, cash?

(12:10):
How do we synchronize supplyand demand.
All of these processes start tochange as you de-risk or if you
don't de-risk and you simplymove to another country.
All of those things have tochange.
It's not enough to justphysically move the production

(12:30):
facility or the distributioncenter.
I think this is one of thereasons why near-shoring,
near-shoring, a reshoring andde-risking fail many times or
appear to fail many times.
There's not enough focus on thebroad set of supply chain flows
, not just the physical flow.

(12:51):
If you step back and thinkabout it, the goal of supply
chain management is to make thesupply chain as efficient and
effective as possible.
Unfortunately, there's lots oftrade-offs between efficiency
and effectiveness.
So, for example, if you de-riskthe supply chain and you are

(13:14):
located in lots of differentcountries for production and
distribution, then the costs areprobably going to go up.
In the short run, the risksmight be reduced so that when
problems happen like a tariffthat's really focused on one
country well now the cost mightbe lower, at least for that time

(13:35):
period or a natural disaster.
So there is an amount ofde-risking that needs to occur,
but it can't go too far.
It's got to be managed properlyand this really is a key part
of the challenge by havingproduction in the United States.

(14:00):
So if you look at the idea ofreshoring, if you have
production in the United States,in many cases this isn't true
in every case, but in many casesyou're actually closer to the
market.
And if you're closer to themarket, then you have fewer
outbound transportation costs.
Your outbound transportationcosts are lower.
If you also reshore yoursupplier base, then your inbound

(14:27):
transportation costs are lower.
But the problem is yourproduction costs will most
likely be higher.
Your supply costs will mostlikely be higher.
Your supply costs will mostlikely be higher.
So you have to trade off thetransportation costs savings

(14:53):
with the production costs andsupply costs increase.
But there's also other benefitsto being close to the market.
If your production is close tothe market, a lot of times you
can respond more quickly tochanges in the market.
Let me give you just twoexamples of some of the
legislation that's beenintroduced on these topics.
The first one that I have herewas introduced June 22nd of 2023

(15:20):
by Representative Brown andit's been introduced, and it
establishes a nationalcommission on critical supply
chains to identify andinvestigate the dependencies,
limitations and risks associatedwith critical supply chains.
This is HR 4279.

(15:44):
The Commission may holdhearings as appropriate to
obtain relevant informationdirectly from federal, state and
local government bodies asneeded.
The Commission must annuallyreport its findings, conclusions
and recommendations for actionsto mitigate the risks of future
American supply chaindisruptions.

(16:04):
So that's an example of somelegislation that's occurring
that I had mentioned earlier.
I'll give you another example.
There's lots of them.
This particular one is HR 7935,and it's been introduced.

(16:33):
This is the summary from thecongressional website you can go
to.
If you go to congressgov forwardslash bill, you can go and find
some of these.
But this bill providesassistance to eligible companies
relocating manufacturing fromChina to a qualifying Latin

(16:57):
American or Caribbean country.
So this is more nearshoring,Generally a country in the
region that has a free tradeagreement with the United States
and is not a foreign adversary.
It says, for example, the USInternational Development
Finance Corporation must use atleast 10% of its funding for

(17:19):
each fiscal year to provideassistance, such as financing
eligible costs for moving andworkforce development, to
businesses relocatingmanufacturing from China to a
qualifying Latin American orCaribbean country.
The bill also provides taxbenefits.

(17:40):
The bill also provides taxbenefits.
So the first example was justtrying to identify where the
issues are from a riskperspective, and you know

(18:07):
there's questions as to whetheror not that can even be figured
out.
But the other one actually isproviding monetary incentives to
get these companies to move tonearshore.
So that's just an example ofwhat's going on.
But again, so you havelegislation that's being passed
that's encouraging nearshoring,reshoring and diversification,
and then you've got others thatare being passed to look at

(18:29):
where the critical componentsare in the supply chain.
But then you've also got firmsjust trying to figure out what
is the best way to manage risk.
What is the best way to managerisk?
And I think that what we'veseen is some firms have done a
better job of using a portfoliokind of approach to production

(18:49):
and supply than others.
If you're interested in stayingup to date on risk legislation
around supply chain reshoring,nearshoring, et cetera, or just
what companies are doing, I findthe Wall Street Journal does a
really good job.

(19:10):
I follow it.
A lot of my information comesfrom articles I've read in the
Wall Street Journal.
So I think that's a good sourcefor and if you want to know
more details, of course, if youread an article, you can always
use a search engine and findother sources and pieces of
information.

(19:31):
If you think about some productsthat have simple supply chains
even if a supply chain is simple, it doesn't mean it's easy to
manage.
For example, watermelons youknow, you grow watermelons, you
ship them to where they're goingto be purchased by consumers
and they're purchased, et cetera, et cetera.
You have complex supply chains,like a car or a cell phone, a

(19:57):
smartphone, where you havecomponents that go into making
components that go into makingcomponents that eventually make
an iPhone or a car.
And one of the big challengesfrom a risk perspective if just
one component is not available,it can mess up the entire supply

(20:18):
chain.
We also see in the UnitedStates that there are lots of
new factories that are beingbuilt that are highly automated,
and I think that'll probablycontinue.
There's going to be moreautomation robotics, artificial
intelligence, computer vision,rfid.
All of these kinds oftechnologies are going to

(20:41):
proliferate in the productionand distribution system in the
United States, but I'm alsocurious about new technologies
that are emerging that will helpcompanies manage the pipe chain
risk more effectively.
If any of you know about these,let me know.

(21:02):
Okay, I hope you enjoyed this.
This was again a little unusual, because I'm not interviewing,
it's just an important topicthat I felt would be important
to cover, and in the future, Imay cover the same topic, but by

(21:34):
interviewing people that areinvolved in this.
Thank you.
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, as well as suggestions forfurther topics and guests.
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(21:54):
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