The COVID-19 crisis represented a multi-year worldwide supply chain crisis. Global lockdowns raised prices, created shortages and delays, and threw the entire procurement process into chaos. Now, the echoes of the pandemic are starting to fade.
One might expect this to mean a return to business as usual. That the the highly distributed, low-cost-focused, just-in-time sourcing strategies of the pre-pandemic would soon return. However, even with the disruption to trade sparked by COVID-19 lockdowns in the rear view mirror, the global supply chain looks far more fragile than it did in 2019. In the face of a challenging procurement climate, organisations are increasingly nearshoring their value chains.
A challenging landscape for procurement
Political tensions and trade disruptions continue to dampen the fire of globalised trade. Whether it be US-Sino posturing over the future of the semiconductor industry, war in Ukraine, or the Houthis’ targeting of Israeli shipping interests in the Red Sea, the movement of goods around the world has become slower, more costly, and increasingly prone to disruption.
Climate instability continues to disrupt agriculture and manufacturing. Countries in the Global South have been hit hardest of all. Extreme weather in India, the Middle East, and China has diersupted sourcing at the start of the value chain.
It’s a dangerous cocktail. Inflation, geopolitical tensions, and over-reliance on certain countries for components has weakened supply chains. At the same time, fluctuating freight rates and port congestion have added to a growing list of pain points.
As a result, the past year has seen a growing streak of protectionism in Western procurement practices. A report conducted by Capgemini in November 2023 found that the balance between cost containment and value chain resilience was more even than ever. Almost 80% of consumer product and retail organisations are diversifying their supplier base. More importantly, 71% are actively investing in regionalising and localising their procurement.
“Friend-shoring” grows in popularity
The anxieties of an inhospitable political climate are also driving a rise in what Capgemini describes as “friend-shoring.” This trade practice, which has similar motivations to nearshoring, is becoming increasingly popular. These organisations are shifting their business to countries regarded as political and economic allies. The upshot, they hope, will be a reduction in their source-to-pay process’ exposure to risk.
According to Lindsey Mazza, Global Retail Lead at Capgemini, “as supply chain disruptions continue to pose new challenges for retail and consumer product organisations, they are pivoting their sourcing strategies to build resilience. Balancing cost efficiencies with resilience while focusing on adopting sustainable and circular economy practices will go a long way in creating future-ready supply chains that can drive profitable growth.”
What will (and won’t) change for procurement
In some senses, this trend will not see a fundamental restructuring of the way goods are procured. Cost is still a key driver.
If a US company purchases goods from Vietnam instead of China and ships them to the Port of Los Angeles via the Pacific, rather than shipping them from China via the Red Sea to New York & New Jersey, the broad strokes remain the same.
However, in other cases, we can expect to see an uptick in domestic production, local sourcing, and strategic procurement. This is especially true as technology driven by big data and advanced analytics is increasingly integrated into the process.
Mazza also notes that “Optimising inventories, localising supply chain networks and exploring alternate fulfilment options can help businesses be more prepared during this period to meet consumer expectations. Technology and data will play a key role in this – be it helping with demand sensing, automating warehouses, improving customer experiences, or ensuring efficient fulfilment.”
