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Expert Column A Necessity and Strategy for Supply Chain Diversification

Registration dateOCT 25, 2024

A Necessity and Strategy for Supply Chain Diversification
Recently, we are experiencing unprecedented volatility in the global business environment due to the COVID-19 pandemic, natural disasters, and geopolitical conflicts. These factors led to production stoppage, and a drop in profitability and market share, revealing a vulnerability and instability of the global supply chain. Amid this complicated and uncertain situation, supply chain diversification is emerging as a necessary strategy to minimize risks and maintain competitiveness. In this column, we will take a look into volatility and strategies for the global supply chain through data. 1. Global Supply Chain Volatility from Data Perspective
Image of the ship carrying the container (Source: Getty Images Bank)
When container volume from CTS (Container Trade Statistics) and SCFI(Shanghai Containerized Freight Index) are analyzed, we can clearly see how much global trade is impacted by external factors. The analysis shows that the supply chain is more vulnerable than expected and sensitive to unpredictable events.

In January 2018, global container volume recorded 13,656,400 TEUs. SCFI stood at 839 points starting in January and closed at 864 points in December. During the period, there were no significant changes in the index, meaning that stability of the global trade environment was maintained without substantial volatility.

In February 2020, production activities and consumption drastically reduced as the lockdown measure was implemented worldwide due to the rapid spread of the COVID-19 pandemic. This resulted in a decrease in trade volume to 10,972,900 TEUs, down approximately 19.7% compared to January 2018. SCFI recorded 891 points in February, no significant changes YoY, but began to display changes since the pandemic. Since the outbreak of the pandemic, each country introduced a large-scale economic stimulus package and prompted the resumption of economic activities. As a result, depressed demand for consumption surged exponentially and trade volume stood at 15,234,900 TEUs, soaring around 38.8%. SCFI also showed a sharp uptrend and recorded 2,629 points in March 2021. This figure is more than three-fold compared to the beginning of 2020 and reflects both supply chain bottlenecks and freight space shortages.

The outbreak of the Russia-Ukraine war in February 2022 disrupted the global supply chain additionally. Geopolitical tensions and economic sanctions posed by the war resulted in energy price increases and major raw material supply disruption. Thus, SCFI peaked in January at 5,067 points but the index turned to a downtrend due to falling demand caused by the war and economic uncertainty. In December, the index plunged dramatically to 1,129 points. Container volume was also reduced and stood at 13,499,300 TEUs in September 2022 YoY, down around 8.6%. This implies the war and global economic uncertainty negatively impacted the supply chain.
[Global Container Shipping Volumes and SCFI] Global Container Shipping Volumes and SCFI (Source : Container Trade Statistics [1], Shanghai Shipping Exchange [2])
2. A Necessity for Supply Chain Diversification The global supply chain has been optimized with the objective of cost efficiency and productivity improvement. Companies relocated manufacturing plants in an attempt to find cheaper labor and raw materials, and maximized operational efficiency by adopting JIT(Just-In-Time), which enables minimizing inventory. However, the optimized supply chain had limitations in responding to unforeseen external shocks. Moreover, the Russia-Ukraine war disrupted logistics between Europe and Asia, raising maritime shipping costs substantially. The rise in shipping costs led to a global price spike, accelerating inflation further.

A vulnerability of the supply chain harms the overall business management. Supply chain disruption leads to production disruption, inventory shortages, and lead time delays which results in a decline in profitability and undermining customer trust. A Toyota case represents the vulnerability well. In 2021, demand for consumer electronics soared, leading to chip shortages, and had impacts on the automobile industry. Hence, Toyota had to cut its global production plan by 40% and many countries including Japan had to halt or delay their factory operation.

TSMC faced challenges as well. Due to the pandemic, automobile manufacturers predicted a demand inaccurately and cut orders; chip production declined as chip manufacturers including TSMC focused on IT and electronics production accordingly. However, the demand for automobiles surged unexpectedly and this revealed the limitations of the supply chain, impacting not only the automobile industry but also other industry as well.
Images of various ships, trains, trucks, and planes (Source: Getty Images Bank)
Besides, protectionism and restrictions intensified around the world and the supply chain relying on the specific country or region was threatened. The U.S. CHIPS and Science Act and the EU’s Chips Act were adopted to promote chip production domestically and reduce dependence on the global supply chain. The objective of the Acts is to expand domestic manufacturing plants by providing subsidies to the chip-making industry, amounting to $52 billion(U.S.) and 43 billion euros(EU), tax benefits, and R&D development. With the adoption of the Acts, many chip-making companies announced a plan to build or relocate manufacturing plants domestically within the U.S. and Europe. For instance, TSMC is building a large-scale chip-making factory in Arizona.

The U.S.-China trade conflict led to imposing tariffs and restricting exports, thus making companies’ global operations complicated. Restrictions on imports and exports, tariff imposition, and technology transfer have a direct impact on companies’ supply chains and lead to a rise in production costs and a limit to market access. Against this backdrop, supply chain diversification is important to mitigate regulation risks. Regulatory changes are manageable by securing production facilities and supply chains in various regions and countries.

In addition, consumers call for diversification of the supply chain. They are requesting more rapid and flexible supply chain. In line with an increase of online shopping, the expectation of fast delivery poses pressure on faster and more efficient supply chain.

Lastly, in the intensely competitive global market, supply chain diversification is indispensable for companies to gain the upper hand. It maintains the price efficiency while minimizing risks, contributing to the sustainable growth for companies. For instance, multinational companies distribute manufacturing bases to several countries to receive tax benefits and promptly react to local markets. Plus, the flexible supply chain can play an essential role in grasping an opportunity for a new business and adapting to market changes.

However, diversification can act as a risk which makes the supply chain complex. Complexity in terms of logistics management, quality control, regulations, etc. increases when collaborating with diverse suppliers across many countries and regions. It can bring about higher costs and communication issues, resulting in lower efficiency. Additionally, cultural differences, legal aspects and political instability can impact the supply chain, reducing transparency and predictability of the supply chain. Therefore, a thorough analysis of complexity and risks and management strategies should precede when promoting supply chain diversification. 3. Supply Chain Diversification Strategy What are the strategies for supply chain diversification? Supply chain diversification is a core strategy to manage various risks companies are facing and strengthen competitiveness in the modern business environment. To that end, each part of the supply chain should be reassessed and new approaches should be taken to enhance resiliency. The next part is for key strategies to realize supply chain diversification.

First, Multi-Shoring. This is an approach that mitigates risks by locating manufacturing and supplying facilities in different regions and countries. The Multi-Shoring lowers dependency on certain regions, enabling companies to prepare for unforeseen risks and improve the flexibility of the supply chain. For example, production bases that were concentrated in China were relocated to Malaysia, India, Mexico, etc. to disperse regional risks. Apple is diversifying its supply chain by expanding its production from China to India and Vietnam. Diversification can protect companies from political unrest, geopolitical conflicts, natural disasters, etc., and help them maintain their competitiveness in the global market.
Location of the map factory
The second strategy is building duplicate supply chains and expanding manufacturing capabilities. To respond to financial and operational risks, securing duplicate supply chains and manufacturing capabilities is key to reinforcing the resilience of the supply chain. It allows companies to tackle production issues of certain suppliers or raw material shortages by providing alternative suppliers, guaranteeing companies to produce without disruption. Also, it enables you to respond to changes in demand with speed by procuring manufacturing capabilities, contributing to maintaining the market share and higher customer satisfaction. The strategy is particularly crucial in industries where the supply of core parts and raw materials is limited.

Third is diversifying routes through multimodal transportation. Transportation time and risks could be mitigated by utilizing multimodal transportation, such as ocean, air, rail, road, etc. Companies who have only relied on ocean transportation, for example, can improve the flexibility of routes while combining maritime, rail and inland transportation and respond to delays and disruptions in specific routes. In 2024, freight rates skyrocketed as vessels had to divert around the Cape of Good Hope due to Red Sea crisis. Shippers showed a tendency to opt for air transportation despite high costs since they didn’t desire to pay high freights while their cargo stays longer on ships. This action increased flexibility in routes and helped respond to urgent logistics demands.

Fourth is improving transparency and efficiency via digital technologies and data analysis. Real-time data monitoring is essential as it allows companies to detect anomalies in early stages and counter them, minimizing operational risks. Also, it heightens the accuracy of demand forecasts, optimizes inventory, and plans production efficiently through big data analysis and AI technologies.

Last but not least, it improves inventory management strategies. Demand patterns and supply lead time should be precisely calculated to optimize inventory. Companies like Toyota and TSMC suffered disruptions in their manufacturing due to a shortage of inventory as they weren’t ready for the demand surge during the pandemic. To avoid recurrence, companies needs to reevaluate safety stock and revisit the existing inventory management system like JIT. The JIC (Just-In-Case) strategy could be applied to maintain stable supply even in the face of unexpected demand changes or supply chain disruptions. The JIC is one of the supply chain management strategies, a way to keep inventory surplus and manufacturing capabilities against sudden demand spikes and supply chain issues.
Difference between JIC and JIT
By applying these strategies, companies can effectively address the complexity and uncertainty of supply chains and flexibly deal with the changing market. Supply chain diversification is more than hedging one’s bets. It can serve as an opportunity to enter a new market and innovate, which is essential for securing long-term competitiveness and sustainable growth. However, supply chain diversification could lead to higher operational costs and lower efficiency as it comes with complicated logistics management, quality control, regulation compliances, etc. Therefore, it would be important to go through thorough risk analysis and risk management strategies. 4. To Conclude In the current environment of uncertain and volatile supply chains, supply chain diversification is a must, not an option. In-depth analysis based on data is a key to discern weaknesses and come up with effective diversification strategies. Companies should diversify risks and be flexible to the shifting market through multi-shoring, manufacturing and supply network expansion, transportation mode diversification, logistics operation improvement, technologies, inventory management strategies, etc. By doing so, they could procure long-term price competitiveness and achieve sustainable growth.

To effectively implement supply chain diversification, analyses for supply and demand and ocean and air freight are vital. Companies can choose optimal routes and modes through accurate forecasts and manage costs with efficiency. It enables companies to prepare for varying transportation costs, assisting in planning budgets and price strategies. Additionally, companies can enhance overall supply chain efficiency based on precise prediction as it serves as a core part of inventory and production plans. For instance, demand estimates allow companies to prevent overproduction or shortage and freight expectations allow them to select optimal transportation time to cut costs.

In the ever-changing global business environment, only companies which build flexible and resilient supply chains could get themselves ready for future uncertainties. Supply chain diversification is not only a simple risk management strategy but also a key factor in strengthening corporate competitiveness and sustainability. Thus, companies should proactively carry out supply chain diversification through data-based strategies and continuous innovation. # Reference [1] Container Trade Statistics, https://containerstatistics.com/
[2] Shanghai Shipping Exchange, https://en.sse.net.cn/indices/scfinew.jsp

JunWoo Jeon Professor JunWoo Jeon Professor

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