Saying Goodbye (to a Supply Chain Partner) Is Hard To Do

Hello,

The global supply chain just played a real-world version of MIT’s “The Beer Game” – and lost.  And due to soaring costs and super-slow deliveries, a breakup with China may now be in the offing.  Maybe we should have just stayed home…

As discussed in a previous PriSim post, no matter the industry, your company has a network of suppliers that provide the products and services you need to stay in business.  But outsourcing, just-in-time production and inventories, and reliance on shipping and logistics to get products back to the home country have put enormous pressure on the supply chain, with large-scale disruptions becoming more and more frequent.

And then the pandemic happened…  Suppliers brought down production as demand fell during the beginning of the epidemic – but unexpectedly, online demand suddenly took off and supply simply couldn’t keep up.  Now any efficiencies gained from the previous global outsourcing model are being overrun by extra costs and delays.  And the bargaining power of suppliers in Porter’s 5-Forces model is weakening as firms look for other solutions to a broken supply chain including: sourcing locally; reducing the number of suppliers while avoiding sole-sourcing; and working to support smaller domestic suppliers.

So, is it really the end of global outsourcing?  Breaking up is hard to do, and a full-scale global retreat would likely only end in tears.  China has over 3,500 years of written history, and its dominance in the global supply chain, begun just 40 years ago, will probably not just become part of that history.  Costs in China are still low, and there are other risks of departure including equipment left behind that could be used to produce competing products.  But as with almost everything else since the pandemic, a hybrid model will probably prevail, in this case with a mix of both global and increasingly local supply.

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