The continued supply chain disruptions are nothing new, but major shutdowns in China are giving a sense of déjà vu of the beginning of the pandemic in 2020. The lockdown in China’s largest city, Shanghai—now in its fifth week—has immobilized not only the production of goods, but also the transportation of goods at the world’s largest port, contributing to worldwide supply chain disruptions, port congestion, and shortages of basically anything made in China. Is supply chain localization the solution to struggling globalization?
As Shanghai is a major hub of America’s semiconductor and electronics supply chains, this is especially relevant to our country’s auto industry, electronics companies, and other consumer goods industries. According to Yahoo! News, Richard Yu, the head of consumer and auto business at Huawei, noted that “if Shanghai continues being unable to resume work and production, from May, all tech and industrial players involving the Shanghai supply chain will completely shut down, especially the auto industry!”
Forbes reports that Tesla’s Shanghai factory, which usually makes 6,000 Model 3 and 10,000 Model Y vehicles a week, halted production at the end of March. Volkswagen has also faced reduced operations in the city. This manufacturing delay extends to Japan as well since they are unable to obtain parts from China. Meanwhile, nearly half of Apple’s top suppliers are in or near Shanghai, potentially affecting the supply of the tech giant’s products stateside.
As of the last week of April, the Chinese lockdowns spurred by a strict nationwide zero-COVID policy affected an estimated 373 million people, roughly one quarter of China’s population. (For reference, the entire United States population is roughly 329 million.) But, newly targeted lockdowns in certain neighborhoods of Beijing—China’s capital and second largest city—push that figure even higher and threaten the economic recovery of not only China, but the rest of the world.
While the port closure in Shanghai has led to other ports filling in the gap, the ongoing lockdowns have also caused delays and closures at airports critical to the supply chain for cargo shipments, manufacturing, and warehousing. Of course, all of this contributes to the increased inflation in the United States as shipping costs rise. Inbound Logistics cites that “a container shipment from Asia to the United States that would have cost less than $2,000 a few years ago cost as much as $20,000 in 2021.”
So what now? How can the U.S. supply chain combat the effects of global supply chain disruptions? One growing trend is localization of the supply chain.
What is supply chain localization?
Supply chain localization refers to manufacturing and shipping goods locally. In short, localization is a strategy based on buying where you sell and selling where you buy, and it has been a growing trend even pre-pandemic because of growing nationalism and environmental concerns, among other factors. However, in the face of globalization faltering due to disruptions, localization—which does not depend on global trade and manufacturing—adds resiliency to the supply chain.
Prior to the outbreak of COVID-19, cross-border trade and global supply networks exploded as U.S. manufacturers realized they could make their products more cheaply overseas. But, for many, the efficiency and cost advantages of global manufacturing no longer outweigh the negative effects of supply chain disruptions on globalization.
Instead, creating regional manufacturing strategies and sourcing materials locally could help stabilize production and supply of goods. Additionally, localized supply chains enable companies to respond to increasing demand quickly and efficiently because they do not have to wait on goods shipping from overseas, which drastically reduces lead and transit times.
What is needed for supply chain localization?
Localization of the supply chain requires a large, upfront investment to bring manufacturing, warehousing, and materials sourcing back stateside to recreate domestic supply chain networks that have dwindled in favor of globalization. However, leveraging current, improved technologies focused on visibility over the entire supply chain will help make this transition easier.
Implementing technology like warehouse management system (WMS) and order management system (OMS) software with demand forecasting and business intelligence will help mitigate the instability in disrupted supply chains where lead times and demand can vary. Both OMS and WMS platforms offer complete visibility to both warehouses and their customers about inventory levels, receipts, orders, and shipping, which helps with stability of the supply chain while simultaneously preventing the overselling and overstocking of inventory.
In order to be successful, localization also requires strong partnerships among all of the participants in the supply chain. Third-party logistics (3PL) warehouses are known for their prowess in managing shipping carrier, supplier, and client relations, making them a natural leader in localization efforts. Utilizing the right technologies and applying localization strategies, 3PLs can help offer solutions to problems that COVID-19 has exposed.
For more industry insights and trends, read the 2022 State of the Third-Party Logistics Industry Report.