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Global Supply Chains in transition - Is regionalisation coming?

Global Supply Chains in transition - Is regionalisation coming?

 

Corona as a wake-up call

For more than a year, closely interlinked and coordinated global supply chains have been severely impacted by the coronavirus pandemic. Many companies are feeling the  consequences of the global division of labour. Bottlenecks in procurement, delivery delays and reduced transport capacities are leading to interruptions in production and higher costs in many places. The electronics and textile industries, as well as plant and mechanical engineering sectors, obtain their raw materials in the form of semi-finished goods sourced largely from Asia.

Experts agree that supply chains will be affected more frequently by various crises in the future. The recent blockade of the Suez Canal, the most important trade route between Asia and Europe, supports this assessment. Cyberattacks, punitive tariffs, and natural disasters are other events that companies must increasingly learn to expect. For many, this raises the question of how they can make their supply chain more crisis-proof.  

 

Regionalisation gains in importance

One approach that has been much discussed in recent months is regionalisation. Although the concept has been under discussion for several years, the coronavirus crisis has significantly increased focus on it. The reasons for this are complex. Legislators, consumers, and various other stakeholders are increasingly putting pressure on creating sustainability and transparency in supply chains. Negligence in climate and environmental protection, inhumane working conditions, and unethical business decisions should soon become visible as a result of the European supply chain law. In addition, ESG funds are increasingly arousing interest among investors. Those who blatantly ignore ecological and social aspects risk sanctions and enormous damage to their image which can fundamentally jeopardise the continued existence of companies. Regionality in procurement and production shortens the necessary transport routes and supply chains and sustainability and transparency can therefore be better guaranteed.

Another argument for more regionalisation is the generally increased volatility of demand. With shorter lead times, regional sources of supply allow for faster responsiveness to any fluctuations and lower inventories. The partial economic decoupling of the global trading world is an additional, essential aspect. Regionalisation creates new jobs in the region, which sustainably strengthens the business location.

 

Reshoring and nearshoring

During the first months of the pandemic, there was an extreme shortage of Personal Protective Equipment (PPE) and ventilators throughout Europe. The majority of system-relevant products are manufactured in Asia for cost reasons and could not be delivered due to interruptions in the supply chain.

As a consequence, production capacity was created in Austria and Europe to ensure security of supply. Another example of reshoring is the maintenance of the Novartis penicillin production facility in Tyrol. Despite higher production costs, the continuation of production in the country of origin is ensured by state and European subsidies.

But companies in other sectors, such as plant and mechanical engineering, are also pushing the creation of regional networks. Alternative procurement sources are being created through so-called nearshoring – the targeted development of supply sources in geographical proximity.

 

Supply chain goes ‘glocal’

Regional sources in production and procurement offer numerous advantages. However, the costs of relocating the entire production back to the region are often prohibitive. Apart from the financial perspective, there is a lack of production capacity in Europe for electronic goods, for example. Creating this capacity is a long-term process. In addition, complete regionalisation entails complete dependence on this one region and risks a standstill in the event of a breakdown.

Companies should therefore strive for ‘glocalisation’ and combine the advantages of regionalisation and globalisation. The supply chain network is diversified at the necessary points through additional options. The advantages of digital technologies cannot be dismissed. They create increased transparency in the supply chain, enable sound supply chain risk management, and help maintain high quality and delivery standards. A prerequisite for the successful implementation of new technologies is the creation of expertise within the company. The establishment of an internal supply chain department and the awareness of employees, for example through training, provide the necessary support.

In a digitalised supply chain, an early warning system allows timely countermeasures to be taken in the event of delivery delays or overseas bottlenecks. The rapid switch to alternative procurement sources from the region enables business processes to be maintained. This allows companies to make the best possible use of their internationally and regionally diversified supplier and production network. Transparency, flexibility, and costs are optimally balanced to create a resilient supply chain.

 



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