The current difficulties call for a more strategic approach to arranging our global supply chains.
The supply chain chaos in the aftermath of the pandemic has highlighted the risks associated with globalization. As a phenomenon, globalization has served many of us well. Its ideological opponents, however, see today’s situation as justification for its demise. There is no denying current events have highlighted shortcomings. We would be foolish not to learn and adapt.
I’ve addressed the subject of onshoring as a potential antidote to globalization many times in the past. Arguably, now, the idea makes more sense than ever. On the face of it, shorter supply chains promise some protection against the unpredictability of today’s world. Hot on the heels of the pandemic, we now have the Ukraine crisis, and there is the fallout from Brexit, which has made for difficult and time-consuming trade between the region’s most influential economies. One major obstacle to the return of onshoring is essential indigenous-supporting industries have been largely swept away as activities have migrated offshore, taking expertise and investment with them. The conditions that caused and drove the offshoring remain in place, perhaps masked by current logistical difficulties. Accessing the data needed to move manufacturing activities from an established location is another barrier to reshoring.
If replacing globalization is not practicable, then arranging protection against its disadvantages is surely a sensible move. We might forgive ourselves forgetting this wisdom during the long period of relative peace and stability we have enjoyed in the West, probably since the end of World War II. Logistics is a major aspect of our business, which is to supply high-value materials. Without good logistics, there is no way to deliver, and without a delivery mechanism, there is no business. Keeping the supply chain simple, with as few external partners as possible, has protected against many problems over the past few years. The more partners there are in any supply chain, the more difficult it becomes to control, and the greater the risk that a link will fail.
Now, after the pandemic and while critical resources like shipping are still struggling to return to their normal places and routes, we have the Ukraine crisis. We have not yet felt the full effects of this. Some lead times for important materials in PC fabrication have increased to a year, which seriously challenges companies’ ability to control deliveries to customers.
A large proportion of important natural resources, such as titanium and lithium deposits, are found in Ukraine. Forty percent of the world’s palladium, which is used in catalytic converters, is mined in Russia – and is no longer accepted in leading bullion markets. This alone could seriously impact Europe’s car producers, which, of course, are dependent on other materials heavily influenced by Russian suppliers, such as steel.
I believe we will not feel the full impact of the Ukraine crisis for some time. However, the effect will be significant. Other less high-tech industries are also affected by the disruption to materials supplies. Ukraine supplied about 25% of all clay consumed by Italy’s ceramics industry, which had already been struggling with sharply rising gas prices at the onset of the conflict. To use sources from other locations, the ceramics engineers will need to modify their mixes. There are always imaginative reworkings of products and ideas, as industries deal with externally imposed changes. Our shared industrial heritage is all about adaptation in the face of adversity. However, workable alternatives often take time to conceive and implement.
This raises the question of second sourcing as a means of protecting against shortages in critical parts and materials. This is a sensible idea companies often do not enact simply because it is difficult, time-consuming, potentially more expensive, and, under most foreseeable circumstances, not needed. I remember when the earthquake and tsunami of 2011 in Japan caused an industry-wide shortage of a specialty pigment that was manufactured only in a single plant, which happened to be in the affected region. It was a strange problem, largely unforeseen, that had unexpectedly serious – although entirely predictable – consequences.
The problems we are all experiencing right now will likely continue for some time, so the need for a second source may become increasingly apparent as the crisis continues, but now is not a great time to be desperate for a rare commodity.
As an industry, if we are to remodel our global supply chains to be more resilient and provide protection against future disasters, we may benefit from developing easy and cost-effective approaches to arranging a second source.
Of course, making large changes also requires investment, which requires a worthwhile return for investors. So, if reshoring some of the industry’s key activities were to make sense from a political or ideological standpoint, or for environmental reasons, there are substantial practical justifications for reshaping and ruggedizing the structures we have.