ManufacturingWhat is Causing Companies to Re-evaluate in Favor of a Regionalization Strategy?

3 key drivers for nearshoring manufacturing

“Slowbalization” as a concept has been around for a number of years. The pandemic, resulting supply chain disruption and constrained markets alongside rising geopolitical rivalry and greater focus on meeting sustainability targets have taken a regionalization strategy from a potential consideration to a highly topical issue. Faced with increasing uncertainty, volatility and the need to keep pace with the market, an increasing number of companies are re-evaluating where and how they manufacture their products. But what’s really behind the need for strategic change? We consider the top 3 drivers moving companies to review their manufacturing and supply chain strategies.

Key Driver 1: Seeking security of supply and resilience

Globalization has exposed companies to many supply chain risks ranging from cyberattacks and supplier disruption to extreme weather events and labor disputes. The COVID-19 pandemic and resulting economic crisis magnified the impact of these risks and exposed additional supply chain risks. Priorities have shifted from cost first, to building in resilience and avoiding exposure in the future.

Understanding vulnerabilities and risks within their current supply chains is driving companies to limit exposure to potential threats from material disruptions as part of business continuity planning. Striking a balance between a lean, “just in time” approach which provides working capital benefits and a “just in case” approach which may drive excess stock risk, can shelter a company from future disruption. McKinsey advises that holding the right level of inventory from component level to finished goods will provide a critical buffer to minimize the financial impact of any future supply chain disruption, as well as position companies to meet sudden spikes in demand.

A regionalization strategy: manufacturing in region for region, reduces reliance on global logistics, which have faced challenges in recent years. For example, in March 2021, the world watched the dramatic events unfold in the Suez Canal when the EverGiven ran aground and experienced the resulting logistical delays. The COVID-19 pandemic drove up global freight costs significantly and although shipping costs are currently declining, these costs have yet to reach pre-pandemic levels.

Key driver 2: Reducing impact on the planet

Environmental “megaforces” are driving companies to make measurable changes, with greater focus on reducing consumption of energy, water and natural resources to limit their impact on the world around them. There is now far greater awareness on how supply chain choices contribute to the overall carbon footprint of a product and the ability for companies to reach Net Zero. This is driving companies to consider if each of the partners within their supply chain operates a sustainable manufacturing facility as well as the impact of travelling to different locations to collaborate.

The International Transport Forum at the OECD estimates that international trade-related freight transport currently accounts for approximately 30% of all transport related CO2 emissions from fuel combustion, and more than 7% of global emissions. They predict that the carbon footprint of international trade freight could grow by almost 400% by 2050. So, while it may still make sense from a cost perspective to transport finished goods halfway around the world, when you consider the environmental cost of doing so, a regionalized approach reducing the distance a product is transported can significantly reduce carbon footprint. Particularly, when combined with low or zero-emissions modes of transportation.

Key driver 3: Levering efficiencies thanks to Industry 4.0

With the implementation of Industry 4.0 and increasing levels of automation within manufacturing, even for highly complex electro-mechanical products, efficiencies have increased. This could range from automated inspection within SMT lines, removing the need for a fourth operator, to increased automated testing and fully automated production lines. The result, less labor required to manufacture each product making higher cost regions more competitive and the nearshoring or reshoring of manufacturing operations more viable.

Implementing Industry 4.0 results in space savings. For example, 1 piece of equipment can have several different programs/functions and time savings in terms of set-up and data collection, which drives better use of a company’s assets. This can be particularly beneficial when the cost of floor space is increasing. Between that and transportation cost savings, adopting a regionalization strategy can help lower the total cost of ownership of a product, providing a definitive competitive advantage.

Regionalization trend set to continue

While globalization hasn’t disappeared, it continues to be impacted by the 3 key drivers discussed above. As companies face increasing pressure, the need to re-evaluate their manufacturing strategies will continue. Nearshoring manufacturing operations, reshoring of manufacturing operations or regionalization benefits companies in a number of ways. Understanding the benefits of a regionalization strategy and ensuring you have the right partner to support any change will allow you to build resilience and security of supply, as well as reduce the overall impact on the planet and provide access to new technologies and manufacturing processes.

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