The last five years have seen a near-complete reimagining of the globalised, cost-driven approach to procurement that defined sourcing between the end of the 20th century and the worldwide disruption caused by the COVID-19 pandemic.
Prior to 2020, purchasing was defined by sprawling supply chains which prioritised speed and cost over other virtues. These just-in-time supply networks performed poorly when the pandemic caused unexpected spikes in demand, disruption throughout the value chain, and prices to skyrocket. While the effects of the pandemic have gradually faded over the last four years, subsequent geopolitical events and economic pressures point to it as the dawn of an era in which McKinsey analyst Karl-Hendrik Magnus notes “volatility [looks] more and more like the rule rather than the exception.” The current climate of ongoing supply chain disruptions shows few signs of growing more hospitable. As a result, rising costs, extreme weather, and geopolitical tensions have placed nearshoring at the top of the agenda for many supply chain leaders in search of a way to reinject resilience into their supply chains.
From “Just in Time” to “Just in Case”
It doesn’t matter how cheaply you can buy something if it spends months in transit, costs too much money to ship, or never arrives at all. Yogen Shah, a procurement director working in the oil and gas sector, observes that many of the economic and technological systems upon which the modern world depends are overly concentrated in the hands of a small number of large corporations.
“It’s not just about supply chains—it’s the whole world depending on one or two companies based in the United States for their operations,” Shah said, in reference to the outage in late July that left 8.5 million Microsoft computers offline, grounding flights, and disrupting critical systems around the world. “This is similar to what was happening in supply chains before COVID-19, where most large companies depended solely on China for sourcing.”
Shah notes that, by depending on a single country to supply the vast majority of a certain commodity — whether that’s manufactured goods or digital infrastructure — not only does the system become more susceptible to shocks and disruption, but the ability to cultivate those capabilities elsewhere will also be limited, making it progressively harder to pivot away from the single, monolithic supplier market.
“Nobody was thinking about diversification before the pandemic because it was cheap and so everyone was building capacities in China, completely ignoring the risk of depending on one country for their materials,” he says. “If you’re dependent on just one country, over time you’re also losing the skill sets needed to manufacture whatever that country produces elsewhere. With China, we’re losing the ability to manufacture low-tech items. Today, if someone needs to produce something simple like a needle, nobody in Europe or America knows how to do it. It’s not just about losing jobs or economic benefits; we’re losing vital skills.”
In the wake of the COVID-19 pandemic, Shah acknowledges that “there’s at least a realisation that we need a ‘China plus one’ strategy.” In the US, a 2023 report found that companies are aiming to reduce exposure to the Chinese economy by 40%. Chinese exports to the US dropped by 20% last year, compared with 2022.
He adds that a rise in right wing political movements over the past five years has also eroded much of the neoliberal, globalist status quo that preceded the pandemic. “Many are now shifting from globalisation to localization, with governments becoming more right-leaning, like Trump, Modi, or what’s happening in France. Everyone wants to protect local jobs and local economies,” he notes. “We’ll likely see ‘China plus one,’ or even ‘plus three,’ strategies being developed because companies don’t want to depend on one or two countries, or even just Asia. What happens if there’s a civil war or disruption in shipping routes? Where will you turn for your critical operations? That’s why many companies are ensuring that their critical supplies have options available within their own country or region. It might be slightly more expensive, but it’s better to produce something at a higher cost than nothing at all.”
Nearshoring for a more resilient supply chain
From nationalist protectionism to fears of another pandemic-scale disruption, many organisations are increasingly finding reason to disentangle their supply chains from markets on the other side of the world.
Gemma Thompson, a Senior Consultant for Strategy and Growth at supply chain and procurement consultancy Proxima, notes that, “when done effectively,” nearshoring “can reduce dependence on more distant suppliers, which, when done well, can provide resilience in procurement and sourcing strategies.” Hoping to mitigate the risks posed by more complex, geographically distributed supply chains, companies are starting the process of shifting resource extraction, production, manufacturing, and other critical elements of their value chain closer to home.
Thompson adds that there are other attractive qualities to nearshoring than simple risk reduction. “Shorter, more efficient logistics networks will present an opportunity to reduce carbon footprint, and in theory, a shorter supply chain should offer greater visibility and, thus, greater transparency. Operating closer to home also presents an opportunity to simplify regulatory compliance,” she says.
At the same time, however, companies exploring the benefits of a more local supply chain still want to preserve the financial benefits that pulled their business overseas in the first place. This creates some challenges, however.
“Often, the initial costs of nearshoring may be higher due to infrastructure investment and, in particular, higher labour costs,” admits Thompson. However, she notes there may be upsides for some industries that can help balance the scales, and that organisations should view the trade-offs of nearshoring more holistically.
“Reduced transportation costs and lower tariffs could prove to present initial savings, whilst the business case to nearshore may also involve investing in tech to mitigate costs and future-proof supply solutions,” she adds. “Unpicking complex global supply chains is not easy, nor economically feasible for some organisations, in some sectors, or some locations… We are talking about the implications of changing supply models here, and that needs serious consideration in strategy, execution and ongoing management.”
- Risk & Resilience
- Sourcing & Procurement
