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How Companies Are Overhauling Supply Chains to Ease Bottlenecks | WSJ

How Companies Are Overhauling Supply Chains to Ease Bottlenecks | WSJ

The global supply chain has been significantly disrupted due to the COVID-19 pandemic, resulting in massive backlogs and shortages of goods. Companies are now exploring various strategies to address these challenges and ease bottlenecks in their supply chains. This includes temporary fixes such as stockpiling goods and chartering private container ships, as well as more long-term solutions like shifting manufacturing closer to home. However, implementing these strategies can be complex and costly, requiring companies to retool their global production networks.

How a Globally Distributed Supply Chain Works

To understand the challenges faced by supply chains, let's take a look at the example of Timberland's Pit Boss Boots. The materials for these boots, including leather and metal details, are sourced from various locations around the world. These materials are then shipped to a factory in Bangladesh, where the boots are assembled. The finished boots are transported to a distribution center in Virginia before being shipped out to retail locations and customers worldwide. Modern supply chains are complex and span multiple countries, making them vulnerable to disruptions at every step.

The Need for Change

Disruptions and delays in the supply chain have led to increased costs for many goods. To safeguard their supply chains and bottom line, companies are exploring different location strategies. One such strategy is regionalization, which involves setting up factories in multiple parts of the world. This allows operations in each region to supply products to their closest markets, minimizing risks associated with disruptions. Another approach is near-shoring, where production is moved closer to the countries where the products are distributed and sold.

The Shift Towards Near-Shoring and Re-shoring

The concept of near-shoring has gained popularity as companies seek to reduce the length of their supply chains. Italian clothing company Benetton, for example, decided to increase manufacturing in countries like Serbia, Croatia, Turkey, Tunisia, and Egypt - closer to where their products are sold in Europe. This move involves cutting Asia production by half over the next year or so. Re-shoring, on the other hand, refers to the return of manufacturing to the country where it was originally located. This can be driven by various factors, including insufficient production capacity abroad or transportation bottlenecks.

Challenges and Costs

While shifting production locations can help alleviate supply chain issues, it is not a universal solution and comes with its own set of challenges and expenses. According to a report, the combined cost for US and European companies to move manufacturing out of China could amount to a staggering one trillion dollars over the next five years. For smaller companies, the costs involved may be too high to bear. They need to weigh the cost of delays in products made elsewhere against the potential increase in production costs if the items were manufactured domestically. Furthermore, overhauling an entire supply chain can be a time-consuming process that may take years to fully implement.

Keywords

Supply chain disruptions, backlogs, shortages, global production, regionalization, near-shoring, re-shoring, challenges, costs, bottlenecks.

FAQ

Q: What is regionalization in the context of supply chains?
A: Regionalization is a strategy where companies establish factories in multiple regions globally to ensure a closer supply of products to their respective markets, reducing the impact of disruptions.

Q: What is near-shoring?
A: Near-shoring refers to moving production closer to the countries where products are distributed and sold. It involves bringing manufacturing operations back to regions that are geographically closer to the target markets.

Q: What are the challenges of overhauling supply chains?
A: Overhauling supply chains requires significant investment, time, and resources. Companies need to retool their global production networks, which can be complex and costly. Additionally, there is uncertainty regarding how the changes will impact the cost and availability of goods.

Q: Why are companies considering re-shoring?
A: Companies may choose to re-shore their manufacturing operations if they have experienced difficulties in getting products from overseas due to production capacity constraints or transportation bottlenecks. Moving production back to the country of origin can help mitigate these issues.

Q: How are supply chain disruptions affecting costs?
A: Disruptions in the supply chain have led to extensive delays, driving up the cost of many goods. Companies are facing increased expenses due to inventory shortages, transportation challenges, and the need for temporary fixes, such as charting private container ships.