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Geopolitics
The geopoliticization of supply chains: How it started and where it’s going
The COVID pandemic elevated geopolitical understanding as a critical consideration for supply chain managers – and it remains essential to their success today.
In the spring of 2020, in the midst of the many facets of the COVID-19 pandemic, supply chains struggled to maintain continuity of goods manufacturing and getting them into the hands of consumers. Export restrictions and insufficient safety stocks caught the public eye. Over the ensuing weeks, supply chains rebalanced and returned to something like a steady state, and discussions shifted to the enduring consequences and long-term impacts. Much of the focus was on issues like global trade, near-sourcing, just-in-time inventory management, and future supply chain resiliency.
The predictions of a reordering of global supply chains and a new era of regionalization were not universal, as there were very good reasons supply chains found themselves spanning the globe. While extended supply chains lead to higher inventory, longer lead times, and higher continuity risks, these global supply chains enabled companies to source at the lowest cost, tapping into a labor pool wherever it was most available. The total cost of ownership may not have been optimal, but the clear, unambiguous purchase price drove companies to source globally, and there would need to be unambiguous financial incentives to change this equation.
As disruptive as COVID was in 2020, the next two years would have other surprises in store that did just that.
Supply chain as public policy
As disruptive as COVID was in 2020, the next two years would have other surprises in store that did just that.
During 2021, highly publicized backlogs at port infrastructures, most notably in Los Angeles, were largely due to post-COVID spending of economic stimulus funds by a population that was limited in its service and travel options. These logjams provoked shortage gaming and demand signal misinterpretations by large retailers, resulting in very high inventory levels – so high that the subsequent discounting efforts eroded margins to the extent they impacted stock prices.
The headline-grabbing blockage of the Suez Canal by the ship Ever Given also occurred in 2021, and although this incident lasted only six days, each day the canal was blocked cost a staggering $10bn worth of trade.
Any remaining questions around whether the events related to COVID were sufficient to spur companies into consolidating their supply chain footprints disappeared in the face of these ensuing developments. Managers, particularly American ones, were receptive to ideas of resilience and regionalization.
If those ‘black swan’ events weren’t enough to encourage American companies to consider reshoring, public policy provided the final and not-too-subtle push.
In 2021, with the support of the Biden administration, the US passed the BIL (Bipartisan Infrastructure Law) and followed that in 2022 with the Inflation Reduction Act (IRA). Both contained specific provisions for companies to bolster domestic manufacturing and supply chains. Though more industry-specific, the CHIPS Act was passed in the United States to provide subsidies for domestic semiconductor manufacturing. Not to be outdone, the EU passed its own version in 2023. Meanwhile, the war in Ukraine added yet another layer of complexity and ever-tighter sanctions to the storm.
All the pieces were now in place for a transformation of American supply chains. In 2023, US spending on domestic factory construction more than doubled, and has continued growing into 2024.
“The first ones were levied by the first Trump administration in 2018 on Chinese industrial goods.”
Tariffs came, and are here to stay
Lurking in the background all this time were tariffs. The first ones were levied by the first Trump administration in 2018 on Chinese industrial goods. Those trade disputes underwent several iterations, bled into other sectors, and had a clear impact. In 2023, Mexico surpassed China and became the largest trading partner of the US. These tariffs were a precursor to the situation today, with a complex, ever-changing landscape of tariffs that are confounding and bewildering supply chains today.
Wherever one may stand on the merits of tariffs as public policy, the deep uncertainty about what tariffs are and will be in place creates an extremely challenging environment within which to make strategic manufacturing investments.
Even looking beyond 2028, it would be reckless to imagine that the geopolitical environment will return to pre-2018 or even pre-2024. The Biden administration did not rescind the first Trump-era tariffs. It’s not unreasonable to work on the presumption that tariffs are part of the manufacturing footprint equation for the foreseeable future.
Each industry will adapt in different ways and at different paces. Semiconductors have extremely high capital expenditure (capex) and require highly skilled personnel in manufacturing. Pharmaceuticals, for example, have strict regulatory approval and validation processes that can add years to any change of manufacturing location.
A purely supply chain perspective
For a provocative spin on where the last five years’ developments have led, it’s interesting to ask the question of whether, from a purely supply chain perspective, the ongoing regionalization of supply chains is really so bad.
After all, the less far-reaching and global supply chains are, the closer the link between the source and the point of consumption, be it retail or industrial. This means short transit times, perhaps avoiding sea shipments. These shorter transit times translate into shorter overall lead times, which in turn generate fewer service issues. For supply chain managers, while this is an improvement on arguably their most important internal KPI, there are other benefits:
- Shorter lead times also improve inventories – another important KPI – in two ways: Less transit time means less inventory in transit, so mechanically inventory levels are lowered in the chain.
- A second-order inventory impact of shorter lead times is that safety stocks will be lower. A fast reaction time means less probability of service disruptions, which in turn should lead to reduced safety stocks.
- And lastly, of course, shorter transit times mean lower transportation costs.
Indeed, the case for reshoring has been on people’s minds for some time.
For multinational corporations, it is possible that a region-by-region supply chain approach will mean a larger, more complex supplier base. For example, a company might shift from single or dual sourcing globally to establishing suppliers in each major region. The effect of this at a company-wide level is that the number of suppliers increases, but it is possible that, from the perspective of a supply chain manager in a given market, the supplier base has consolidated and becomes more manageable, with communications in the local language and easier time zone management.
So, from a narrow, siloed point of view – a supply chain manager looking to improve their performance in service, inventory, and cost – a fragmented, regionalized supply chain may be a welcome development.
This is proving to be the direction digitalization is heading.
How does Industry 4.0 affect supply chain strategy?
As the conversation around supply chain regionalization took shape in 2020, some predicted that efforts in Industry 4.0 and digitalization would turn toward high-ROI factory floor automation in order to partially offset higher labor costs in developed markets.
This is proving to be the direction digitalization is heading. A study this year by Deloitte found that three-quarters (75%) of companies plan to increase their smart manufacturing budgets, with almost half (46%) of respondents ranking process automation as the first or second priority.
The Big Picture
To even ask these questions and speculate on the future of global trade policy is clearly outside the conventional scope of responsibilities and skills of a supply chain executive, yet this is the world they now find themselves in. These are the questions they are being asked by their senior management. It is a call for supply chain leaders to both add this arrow to the quiver and to look to geopolitical experts to help guide their paths forward through this uncharted or unfamiliar territory.
Here are some practical steps supply chain professionals can take to keep up to date with geopolitical developments that affect their work, and for them to provide input on the implications of these issues to the business as a whole:
Take advantage of internal company networks and experts. Colleagues in security, crisis management, regulatory and government relations, insurance, and risk management will often get early warning of disruptions that may impact supply chain activities, and many of them will be feeding this risk information into an enterprise risk management (ERM) process on an ongoing basis.
Cultivate relationships with regional experts and local partners. Access ground-level insights by establishing links with academics and subject matter experts, and through academic conferences and trade association events.
Subscribe to expert intelligence and analysis. Consider paying for advice and analysis from experts like GLG, Third Bridge, Control Risks, the Eurasia Group, and EMEA Business Group. Citing information obtained from these sources will increase the credibility of a supply chain professional’s input and advice to the business.
Build geopolitical visibility from end-to-end in your supply chain. Develop methods for gathering intelligence on geopolitical trends, material issues, and pinch points that affect your entire ecosystem. Focus on both downstream impacts that could drive emerging customer needs and upstream risks that could disrupt critical third and fourth-tier suppliers.
Use this intelligence as the basis for regular dialogue across the business. Combine insights from internal networks, regional experts, specialized analysis, and end-to-end supply chain monitoring as the source for generating compelling business perspectives. Share your analysis with leadership and colleagues across the organization to demonstrate how geopolitical developments translate into tangible risks and opportunities – not just for supply chain operations – but for broader business performance, competitive positioning, and organizational resilience.
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