It’s still early in the Trump presidency, but not too early for supply chain professionals to begin planning for what could be major challenges in global markets and trade agreements, especially if President Donald Trump follows through on border tariffs, the dismantling of existing trade agreements, and other “America First” protectionism ideas he has shared as part of his Twitter-storm rhetoric.
One discussion topic among procurement and supply chain professionals is the resurrection of the age-old “near-shore/on-shore” debate, and whether (and when and where) supply chain professionals should either locate their own assets or build relationships with suppliers.
An early viewpoint from the January meeting of political and business movers and shakers in Davos is that thinking too globally might not be the wisest strategy: a shift to “localizing” operations is a good fallback position.
“The basic message is to be more national, don't just be global,” Richard Edelman, CEO of the communications marketing firm Edelman, told Reuters at Davos. “Let’s try and pre-empt that tweet by having a long-term discussion about the supply chain.” The Trump effect on trade/globalization “could mean increased investment in the U.S.,” added Joe Jimenez, CEO of Novartis International AG, the huge multinational pharmaceutical company based in Basel, Switzerland.
Supply Chain Partners Must Be Ready To Adjust
“Supply chains will have to adjust,” says Tim Feemster, Managing Principal, Foremost Quality Logistics, in an interview. “Organizations with global supply chains are realizing that regionalization makes sense, because costs are reduced and speed to market is faster.” Automakers, for example, have known this for some time.
However Feemster is quick to point out, “Free trade makes us better, rather than protectionism.” Feemster continues, "In general, NAFTA (the North American Free Trade Agreement) has been good for all three countries, the U.S., Canada and Mexico. But there are pockets of winners and losers, and as Trump says, ‘thinking big’ allows more boats to rise, but some boats won't do as well.”
In a report, “2017: Bracing for Instability in Global Trade,” Gary M. Barraco, Director, Global Product Marketing, Amber Road, says the message for supply chains in this emerging, uncertain trading environment is that they will have to manage potential and unexpected disruptions with greater visibility, flexibility and collaboration.
Investments in adaptability, flexibility and collaboration efforts aimed at increasing transparency are key components that will benefit any organization in the era of Trump uncertainty,
Near-Shoring And On-shoring
Companies evaluating the impact of the Trump administration’s goal of returning manufacturing jobs on a large scale to the U.S. should begin the process of evaluating their supply chains to understand if near-shoring or on-shoring options are viable options.
But what is the best strategy with regard to when a company should begin efforts to “reverse” or adapt globalization to “America First” policies? The answer is it's complicated, mainly because globalization can’t be easily unraveled. The reality is that Apple, for example, could not produce all of the components that go into the iPhone in the U.S. even if it wanted to. That is also true for automakers as well: cars produced and assembled in the U.S. contain parts from all over the world. “There is no doubt we need to adapt,” said Carlos Ghosn, chief executive of Renault-Nissan, who was quoted in the Reuters report. “All car-makers have to revise their strategy as a function of what is coming.”
Near-shoring is already happening. For example, Feemster notes that Mexico—a major near-shore location for products manufactured for export to the U.S.—has more than 100 trade agreements with other nations, while the U.S. has about 20. This has placed Mexico in a powerful position and a near-shore destination of choice vis-à-vis supply chains and how (and where) they operate. Mexico has become strategically important from both a location and quality standpoint for many companies, including Volvo and Mercedes.
Ryder’s Exchange Blog noted, for example, “the trade benefits of NAFTA make Mexico an ideal sourcing partner.” In addition, “lower labor and shipping costs and proximity to facilities create a compelling case for keeping manufacturing, production, and assembly a drive or short flight away.”
Businesses are also thinking locally to mitigate currency risks in certain markets. “Food companies in Britain, for example, which have seen their costs soar after sterling plummeted in the wake of the Brexit vote, have started moving toward local suppliers where possible to keep costs down,” Reuters reported.
The Due Diligence Of Location
No matter the location, it’s important to do your due diligence when making supply chain decisions on where to locate your assets and source suppliers.
This means “doing the math” when it comes to the strategic sourcing decisions. Companies must delve beyond simply concentrating on labor costs or production costs and bring in all of the projected and actual costs that are involved. This means completing a sound total cost of ownership (TCO) analysis and assessing potential risks early-on in the decision-making process regardless of if the location, foreign or domestic. These include training, distribution, maintenance, software costs, regulatory costs, and many other factors that are below the typical “price” line.
Tax considerations are a key factor as well. Srini Krishna, Shared Services, Strategy & Economics, Microsoft Finance Operations, indicates that not having a complete understanding of the impact of taxes can significantly impact an organization. Microsoft has developed a highly strategic relationship with Accenture and EY as part of the OneFinance operations, who collaborate closely to help Microsoft understand all of the financial and tax impacts from its operations so that it optimizes where and how it works.
Evaluating Strategic Supplier Relationship
Bonnie Keith, president of the boutique consulting firm The Forefront Group and co-author of Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models for Modern Procurement, encourages companies to proactively begin to evaluate their most strategic supplier relationships. “Companies need to understand how their sourcing solution and business requirements are aligned to meet the changing business environment. In many cases, organizations are finding they have a business model mis-match. For example, their business environment demands a highly flexible and collaborative approach where the parties should be working together to mitigate risk. However, they are using an arms-length/transactional contract.”
In the book, Keith shows how organizations can shift along the sourcing “continuum” to a performance-based or a fully collaborative Vested sourcing business model for more strategic supplier relationships. Keith adds, “Flexibility and risk mitigation and innovation are often key reasons why organizations are shifting to a Vested sourcing business model.”
Rick Hof, Director at NEVI-Purspective – the Dutch Association for Purchasing Management – agrees with Keith. “Today’s companies should be proactively evaluating their sourcing business model with their most strategic suppliers. Many organizations are seeing more flexibility with the use of more collaborative models. Transparency and sharing risk and reward is a key benefit of moving to more strategic sourcing business models. Today’s discussion should not be about price – but about flexibility, risk mitigation, and how transparency can optimize the supply chain and reduce risks.”
Organizations such as P&G, McDonald’s and Microsoft have had success by adopting strategic supplier relationships that are designed to share risk/reward with suppliers.
The Bottom Line
The bottom line? It is the bottom line.
It is highly unlikely that large companies with complex and global supply chains will be able to make adjustments to their supply chains quickly. Companies have invested millions to billions of dollars in assets and supplier relationships that stretch from around the corner to the around the globe. It will take time to do the math of a sound TCO analysis and evaluate key supplier relationships. And it will definitely take time if decisions mean changing suppliers, relocating assets back to the America, or restructuring strategic supplier agreements to performance-based or Vested commercial agreements.
The reality? By the time companies can go through the needed review of their complex supply chain and decide to take action. The president might easily be on his way out of the Oval Office.
The good news is that the Trump effect is creating a wakeup call for companies to get smart about their supply chains. Rick Blasgen, – CEO of the Council of Supply Chain Management Professionals, believes this is a good thing. “The smartest companies will begin a process to evaluate their strategic supplier relationships and will begin to do the math – something that was often overlooked in their original outsourcing efforts. They will also invest in training and skill development so their procurement professionals are not just ‘buyers’ but supply chain optimizers.”
NEVI-Purspective’s Hof agrees: “For many, this will mean a shift away from traditional transactional relationships to more strategic sourcing business models designed to increase flexibility and share risk/reward with strategic suppliers. As import duties and tariffs may come and go with political leaders, supply chains need to be architected in a robust way to drive true value creation. This requires a new skillset that companies will need to invest in.”
