Rarely a day goes by these days without a news event that carries significant implications for the global supply chain. After decades of successful globalisation, this comfortable arrangement is being tested with such worrying frequency in recent years that many companies are reconsidering their supply chain strategies. Even before the outbreak of COVID19, rising US-China trade tensions at the start of the Trump administration in 2016 had kicked off the discussion on supply chain diversification, as multinational companies tried to navigate sudden tariffs and unexpected policy changes. The global pandemic in 2020 heightened that debate.
Then, just as the world started to normalise after two years of COVID19 disruptions, the global supply chain was dislocated by a six-day blockage of the Suez Canal in 2021, before being challenged on an even larger scale by the Russian war in Ukraine in 2022. The sudden outbreak of the Israel-Hamas war in 2023 delivered more reminders of global supply chain shocks. Shipping routes have been diverted, resulting in longer and costlier freight transport while prices of crude oil, metals and other commodities have soared.
It is little wonder then that many global multinationals have begun diversifying their supply chains away from the conventional concentrated strategy. Supply chain diversification can help a firm manage the risks of supply chain disruptions and production shutdowns, while allowing it to be more responsive and flexible in coping with fluctuations in demand. China Plus One is a strategy that has been explored by many companies. A recent survey by the American Chamber of Commerce of over 346 businesses revealed a 22% increase in the number of businesses wishing to reduce their investments in China. Japanese MNCs have also been slowly shifting their production to countries like Vietnam, India, Bangladesh and Thailand.
Growing cost pressures in China have also spurred many international brands to shift most, if not all, of their production out of China. Similarly, many leading apparel brands have started expanding their sourcing beyond China.
Given the current scenario, the tiger cub economies of Malaysia, Thailand and Vietnam are poised to benefit from the change as they can supplement manufacturing operations in China with production units in their countries. Likewise, India is also becoming a key manufacturing partner for companies around the world. However, supply chain diversification brings its own set of problems and challenges. It’s no coincidence that many global MNCs favour the concentrated supply chain strategy – there is much to be said about the advantages from an economics and management point of view.
Spreading the supply chain across a vast region can pose serious challenges for even the most efficient and effective multinational corporation. From fast-moving consumer goods to commodities, clothing manufacturers, automotives or technology, the pain points in managing a fragmented and complex supply chain are considerable in most industries.
Further diversification of the supply chain may worsen the inefficiencies, such as trapping precious liquidity inside the supply chain web and hindering supply chain financing programmes.
For instance, a typical global technology corporation in Asia with an annual revenue of USD 20 billion may have more than 200 suppliers in 15 markets and an average payment tenor of 60 days. The complexities that come with trying to stay on top of that supply chain process with its multiple logistics, cross-border payments and domestic banks are mind-boggling. Further diversification of the supply chain may worsen the inefficiencies, such as trapping precious liquidity inside the supply chain web and hindering supply chain financing programmes. Typical pain points of a fragmented and diversified supplier network include the added complexities associated with supplier onboarding and ongoing supplier risk management. Poor visibility due to the sheer number and geographical spread of suppliers also inhibits a CFO’s ability to devise and monitor value chain financing programmes at scale, let alone pay attention to deep tier suppliers who tend to require the most support.
Furthermore, as most smaller suppliers and distributers operate on semi-manual backend processes, their lack of digital connectivity to the main enterprise often curb their ability to access low-cost financing. But with the adoption of technology, moving a complex and fragmented supply chain process onto a digital platform can resolve the bulk of these challenges. Thanks to a single point of convergence on a digital supply chain financing platform, a company can benefit not only from financing through its value chain, but also automation efficiencies, enhanced risk management and other value-added utilities.
Procurement can be enhanced from supply chain financing automation with straight-through processing across multiple banks while suppliers can be onboarded digitally. The company can also enjoy end-to-end workflow automation and customisation, which can pave the way for sophisticated business intelligence and reporting tools to enhance visibility and timely decision making.
By moving onto a working capital platform, it can save up to USD 250,000 in cost of goods sold reduction within 12 months, extend its days payable by up to 20% and double its supply chain financing limits.
In the earlier example of the tech MNC with an annual revenue of USD 20 billion, over 200 suppliers in 15 markets and an average payment tenor of 60 days, by moving onto a working capital platform, it can save up to USD 250,000 in cost of goods sold reduction within 12 months, extend its days payable by up to 20% and double its supply chain financing limits. This is not an insignificant amount, indeed.
So, as the world trade map is being redrawn and global corporations are mulling diversifying their supply chains, they would be well-advised to consider adopting digital platforms to manage the challenges that come with complex and fragmented supplier networks.
