The emergence of supply chain localization strategies
As more and more organizations struggle to deal with the deployment of digital technologies, many are overlooking some of the fundamentals associated with managing supply chains. Digital technologies are just that – technologies. As I’ve said in previous blogs, there is nothing inherently good or bad about technologies – it is about what you can do with them, specifically with your supply chain partners, to achieve greater flow and less friction – that will matter in the end.
One of the key lessons that people have forgotten are the basic rules of physics. If you think about some of the most important concepts in physics – velocity, compression, electrical flows, process specification, etc. – almost all of them can apply to supply chains. One of the most important of these that I’ll discuss today is compression. A physical law states that higher levels of physical compression result in greater force and power generation. In supply chains, compression refers to reducing the geographical distances between you and other parties in your supply chain – which equates to a strategy of localization. Note that when you compress matter in physics, it becomes stronger. Similarly, organizations that create reduces geographical space between them and their suppliers, are also going to become stronger.
A senior executive I spoke with this week went so far as to say that he was thinking about eliminating the “global” from his title of Chief Global Supply Chain Officer. Why? “Over half my spend is moving to a regional or a national level!” That is, the shorter supply chain is better. There are many reasons why smaller and shorter is better. First, you have less cash tied up in your supply chain – and less inventory sitting on a boat, on a plane, or in a container. Second, becoming more regionally focused is also good for business. For example, people often think about Apple as a global brand…. but not in China or India, the two biggest markets in the world! Apple has a paltry 9% market share, and is #5 after Huawei, vivo, Oppo, and Xiaomi – brands no one here has even heard of! Maybe that’s why they are dropping the Apple iphone X! In India, the story is even more bleak, as they don’t even make the top 5. The top selling phones are Samsung, Xiaomi, vivo, Oppo, and Micromax… and this is the largest and fastest growing cellphone market in the world. The old adage of “buy where you sell and sell where you buy” is an important lesson here that Apple needs to think about. But so do all the other organizations that still blindly think of the US as the only global market. You need to think globally, and as the world becomes more regional and national, the rise of national brands will overtake global brands that consumers in the market no longer care about.
The other undeniable change is the move away from a global economy. More nations are becoming more protectonist in nature, whether its Europe, China, India, and of course the US. In North America, we are likely going to move towards a Canada/US/Mexico triad, and much of the labor will likely be moving to Mexico. So brands like Xiaomi are building phones in India for the domestic market, and not even thinking about the flooded US market.
So if organizations want to rapidly improve their supply chains, develop a local and national market presence, and be more responsive, they will need to think about shrinking their supply chains, not globalizing them. And another benefit is that if you have local partners that you trust and know well, you can drive innovation and new opportunities to exploit data and analytics. All of this is a solid argument for localizing, not globalizing your supply chain. We can try to argue that it is all irrelevant, as we digitize everything in sight and make it look elegant on our web portals – but you can’t argue with the physics of compression and force that deal with what’s real.