Supply chains: Don’t put all your eggs in one basket

… warns DHL in a remarkable analysis of latest supply chain trends. The ongoing global crises, including China’s constant military threat to Taiwan, have reinforced and recently accelerated a trend dating back more than four decades: the diversification of global production and supply chains. Lately, this phenomenon has increasingly been oversimplified as near-shoring, re-shoring, friend-shoring, China +1 and the like.
Here is a summary of DHL’s findings and recommendations for multinational investors and logistics companies, aimed at mitigating risks and avoiding unpleasant surprises.

The smarter diversification and supply chain solution – photo: CFG/hs

One-size-fits-all solutions are a thing of the past
The categories put under DHL’s microscope are Multi-Shoring, Multi-Sourcing, the Use of Different Transport Modes, and as a fourth dimension: the Diversification of Logistics Operations. In a foreword, DHL points out that supply chain diversification occurs as companies put aside agendas driven purely by cost efficiency and service levels. Instead, they now additionally focus on resilience, agility, and flexibility. This shift requires more sophisticated management of logistics operations, including design and inventory control, and may necessitate more investment based on longer-term planning. Since 1980, global trade has increased more than tenfold, reaching a record high of over USD 32 trillion in 2022 and remaining at that level throughout 2023.
The recent cascade-like accumulation of shockwaves caused by COVID-19, Russia’s war in Ukraine, the Hamas-Israel conflict, coupled with natural disasters such as the current heat wave hitting many regions, has led to considerable volatility, with disruption increasing by 183% since 2019 (33% in 2023 alone). The record highs also disguise the challenge of agility and resilience in supply chains, which prevent companies from responding effectively.

Missing out on USD 1.6 trillion in revenues every year
This vulnerability has resulted in an annual average of USD 1.6 trillion in unrealized revenue opportunities in the past few years, DHL calculates. The shelling of commercial vessels in the Strait of Aden by Houthi rebels is a daily occurrence and delays the ocean transportation of goods on the Europe-Far East route by around 10 days, as box carriers avoid the Suez Canal passage for security reasons and circumvent Africa instead.
This all asks for supply chain diversificationby augmenting the logistics infrastructure with additional capacities such as hubs, warehouses, and distribution centers. Depending on the requirements, this could include redundant logistics capabilities in other locations both near and far. DHL illustrates this by pointing at a European elevator manufacturer and a global productivity partner for mining and construction. Both employ a similar logistics diversification strategy but on a regional scale. Each company assembles different parts of its finished products at separate distribution centers across several regions. Spare parts are stored primarily at each country’s local distribution and customer centers, facilitating rapid repair of essential products as needed. Finished products are shipped directly from production sites to customer centers to ensure customer centricity and agility. This mitigates the risks resulting from ocean or rail transports halfway around the globe. A diversified logistics operation provides alternative options that maintain continuity in the supply chain during disruptions, DHL maintains.

Strategic gigafactories and supply chain diversification
To best illustrate the accelerating multi-shoring trend, the second category mentioned in the study, DHL showcases the Volkswagen Group and its electric vehicle strategy. The carmaker established ‘PowerCo’ to bundle the group’s activities along the EV battery supply chains. As a consequence, VW is now building gigafactories strategically located in key markets in Europe and North America. This allows the company to respond rapidly to market demands, optimize costs, meet sustainability goals, and reduce its dependency on the Chinese market.
Multi-sourcing is another tool to mitigate financial or operational risks such as a supplier’s inability to deliver on time or at all. But adding redundant suppliers to a company’s client base to be on the safe side by reducing dependencies might not be the smartest move.
Mode diversification is another category put under the microscope by DHL. It spans from one mode to parallel modes for each part or product. DHL mentions a best-practice model of supply chain diversification by highlighting a retail market leader. “Aiming to respond rapidly to consumer preferences and trends within 10 to 14 days, the company utilizes all modes of transport across all supply lines, opting, for instance, to ship goods via air freight between regions rather than using slower ocean freight. This allows swift and flexible stock reallocation between markets based on customer requirements and disruptions,” the DHL study states.

Enhanced infrastructures
As the final category of its supply chain diversification study, DHL focuses on the expansion of logistics capabilities. This means enhancing the logistics infrastructure with additional capacities such as hubs, warehouses, and distribution centers. Diversifying logistics operations may also involve outsourcing specific logistics activities. Like multi-shoring and multi-sourcing, a diversified logistics operation provides alternative options that maintain continuity in the supply chain during disruptions.
All in all, the study provides much food for thought. It is advisable for investors to take a close look at its contents before making decisions on diversifying their supply chains and business activities. After all, early information can prevent costly mistakes.

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