A long-awaited revolution in the logistics industry is finally here, but many businesses found themselves ill-prepared to meet the demands of the changing landscape.
On January 23, 2020, China closed the borders of Wuhan and several surrounding cities to control the outbreak of the now-identified COVID-19 virus. This decision rang alarm bells across the world, as Wuhan was the centre of global automobile and electronic manufacturing. Plus, its strategic location made it a crucial throughway to export other commodities manufactured in the region.
The closure didn’t only negatively impact China’s economy but also resulted in a long-lasting disruption to the centralised supply chain across the world.
Now, more than a year into the pandemic, the world continues to experience the vulnerabilities associated with having a centralised supply chain in a highly globalised, digital world.
Disruptions to Supply Chains Cause Crisis
A recent report stated that 94% of the top Fortune 1000 companies felt the effects of COVID-19 in their supply chain. Meanwhile, 75% of global companies claimed that it had a negative impact on their business overall, forcing 55% to downgrade their growth plans.
Adding to this situation is the sudden and sharp decline coronavirus caused in global trade as a whole. The World Trade Organization estimated that world trade experienced a decline of 13-20% in 2020.
This means that 90% of businesses will continue to experience lasting damage in the years to come, ranging from profit losses to the permanent closure of companies.
However, this was not the first time that businesses saw first-hand the potential risks of a centralised supply chain.
From 2010-2011, a range of natural disasters hit the world—a tsunami in Japan, a volcanic eruption in Iceland, an earthquake in Thailand—all of which hit the automobile and tech industries hard, with cost efficiency and profits both plummeting.
One agribusiness lost at least USD $1.2 million in revenue, up to 107% of its operating income, and 12% in shareholder returns in 2016 due to a single disruption to their supply chain.
A contaminated batch of pet food from their supplier. And because the business only had one supplier for all their products, their entire operation was affected, resulting in a recall of all products, not just the contaminated pet food.
Why Centralisation is No Longer Viable
We live in a highly globalised world—the modern-day consumer no longer exists within just the physical boundaries of their city and country. Advancements in technology have conditioned their psyche to expect instant gratification for their desires and needs.
For example, if an Australian consumer sees an advertisement for the latest iPhone, they don’t think of going all the way to the USA to purchase the item. They expect that the gadget is already available in their neighbourhood mall.
Consumer behaviour evolved, but the decades-old supply chain system did not.
The iPhone that’s being sold in Australian malls is most likely manufactured in the same location as 24 other countries that distribute Apple products.
Because of this, systems are stretched thin, with labourers working long hours to fulfil the expectations and demands of consumers.
Not only does this lead to increased mistakes, oversights, and errors, but it also leads to human rights abuse and environmental degradation, not to mention China becoming the top polluter in the world.
Furthermore, this also exposes the system to easy paralysis that can stem from simple mistakes to minor disruptions that result in disproportionately massive blowbacks.
But industries are now listening to the experts who’ve been rallying for the decentralisation of supply chains. No one wants another coronavirus.
Decentralising can not only solve and avoid crises in supply chain disruptions like the one we’re experiencing now, it will also create a path for more ethical and sustainable sourcing that will have long-term positive impacts in the future.
Contrary to popular belief, decentralising your supply chain is not about having one product with its parts manufactured by several countries. Rather, decentralisation means that there are two or more manufacturers or suppliers for one part or one commodity, ideally in different locations.
The recent push for increased decentralisation means that global businesses are tapping into local and regional suppliers to meet the need for a more diversified supply chain.
With distributed suppliers, your business can mitigate external risks, increase efficiency, promote business continuity and agility, develop more sustainable practices, and earn long term revenue.
Most of all, you can grow and develop in ways that you can’t when you rely on a centralised supply chain.
Because there’s more than one supplier for a commodity, you can more easily contain and control risks to just one part of the supply chain without affecting your entire operations.
So, if you experience a contaminated batch of food in your production, you don’t have to recall all of your products made during that same time frame and employ stop-gaps in all of your operations to fix it. Instead, you’ll continue to generate income with your uncontaminated supplier while the other contaminated supplier undergoes the necessary inspections and corrective measures.
You can also more easily avoid risks and errors in your supply chain, as decentralisation gives you more hands and eyes to monitor the quality of your products and the efficiency of your chain. Your supply chain will no longer be stretched thin, as more people are working to get the quantity and quality of output you require.
In a centralised system, the power, control and profits pass mostly into the hands of a few big players.
This can decrease competition, while increasing your business’s over-reliance on a single supplier. That means less competitive pricing, and fewer opportunities to diversify your supply chain.
On the other hand, a decentralised supply chain delegates control to other players in the system. This helps foster a culture of cooperation among suppliers, but it also makes it easier for your business to source products at competitive prices and consistent volumes.
You also empower your vendors to make quick decisions on their feet that will be beneficial to all, instead of having to go through a hierarchy of approvals to adapt to new circumstances.
Respond with Agility
With a decentralised system, you’ll be tapping into local industries, and thus, you won’t be relying on a series of overseas shipments to assemble your commodity and get it into the hands of your buyers.
For example, a laptop with its keyboard coming from Indonesia, its microchip coming from the Philippines, and the rest of its parts to be assembled in China will take months to finish. Then, it will take another few months for the assembled laptop to reach the consumer.
Instead, a decentralised supply chain lets you tap into local suppliers who’ll need less time for logistics and even less time for shipping the commodity to you or your customers.
Another benefit is business continuity: when an unexpected disaster or disruption occurs to one location within your supply chain, you can recover quickly by shifting production to unaffected suppliers.
Promote Sustainable Practices
Because China has long been the epicentre of manufacturing, it has also become the top polluter and home to some of the worst labour practices in the world. Its pollution is so immense that its citizens constantly face the danger of dying from air pollution, among many other things. While labour conditions are so dire in some circumstances that news reports about them regularly make headlines.
This is because the majority of the world’s commodities come from just one country: China.
However, if we move away from China and opt to spread the load of an entire world’s production across other countries, the division of labour and production will be achievable, and we can avoid unnecessary human rights and environmental issues.
Plus, manufacturing sites might even be closer to home, meaning a reduced carbon footprint when it comes to shipping and transportation.
Increase Long-Term Profits
Although decentralisation may sound like a costly investment, with lots of time spent searching out multiple factories in different locations and navigating the local labour and environmental laws in different countries, it’s one that yields many benefits in the long run.
You can save millions of dollars by avoiding mistakes, containing disruptions, and quickly reacting to and meeting changes in your customers’ behaviours and preferences.
Plus, decentralising can sometimes shorten transportation times, something which can save a lot of money, depending on the industry you’re in. For example, products with limited shelf lives can have their product lifetimes optimised, with less time spent in transit.
Safety in Decentralisation
Businesses have long felt the vulnerabilities of a centralised supply chain, but the recent COVID-19 pandemic has forced us all to confront this reality, once and for all.
The decentralised supply chain is no longer an option, it’s a necessity.
Decentralisation enables a globalised business to efficiently and effectively function with reduced risk, increased efficiency and agility, better sustainable practices, and better long-term profitability.
We know that decentralising a decades-old system can seem like an impossible task without outside help.
That’s why we at Good for Life are here to help you make the transition as efficient and seamless as possible. We have more than ten years of experience in decentralising businesses away from China towards a more sustainable, risk-free, and profitable future.
Contact us to learn more and get a quote.