Moving supply chains closer to home

Natural catastrophes over the last decade, such as the Thai floods, have inflicted costly supply chain interruptions across various industries. This caused many risk managers to think carefully about where suppliers were located and to question the safety of single sourcing.

Next, rising political risks, such as Brexit, new tariffs and a global trade war between the US and China, prompted manufacturers to rethink their global supply chain structures, many of which rely heavily on Asia.

Finally, these challenges have been exacerbated by the global coronavirus pandemic. Substantial disruptions to the flow of goods and services as a result of country-wide lockdowns made governments and manufacturers hyper aware of the inherent risks in today’s complex, global production processes.

Julien Rouaud, corporate risk insurance manager at AFGA said: “Covid-19 had a tremendous impact on our supply chains. We had to redirect supplies, and we changed a lot of the way we operated because we had to do a sanity check on the global supply chain involved to make sure that all the links were working from manufacturing sites to distribution partners to warehouses.

“We had already rerouted a lot of the shipments before the spread of Covid-19 during the time of higher tension between China and the US. We were already adjusting based on the political context and uncertainties and then on top of that came Covid-19.”

For many corporations, the intense scrutiny on the efficacy and safety of supply chain structures has meant that discussions around total restructures, onshoring and nearshoring have all risen up the agenda.

A Swiss Re Sigma report found that in the 20 largest economies, 40–80% of exports are integrated into the global supply chain and, within this, China is the world’s largest production hub.

The report predicted that parallel supply chains will form as firms diversify their manufacturing presence across new locations to strengthen operational resilience.

Swiss Re said that from a business perspective, the driving force for accelerated restructuring of global supply chains is manufacturers seeking to de-risk operations.

However, risk managers must preach caution as nearshoring is far from a panacea.

Managers must make their organisations aware of the new risks that onshoring or nearshoring can bring. For instance, UK risk managers seeking to bring production lines closer to home need to consider more local threats such as flooding, increased labour costs, strikes and lockdowns.

As well as supply chain interruption risks, there may also be increased risks from sustainability and regulatory issues.