skip to Main Content

Business supply chain strategies are evolving, can poor countries benefit?

Business supply chain strategies are evolving, can poor countries benefit?
  • Multiple sourcing and proximity sourcing are shaping into long-term trends as global firms hardwire resilience and agility into their supply chains.
  • Less developed countries face considerable risks in this new environment where the organisation of international production and investment is being transformed.
  • But there will be opportunities for these economies to better plug into global and regional value chains on the other side of the COVID-19 pandemic.

Participation in value chains has been a key plank of low-income country development strategies over the past generation. Many analysts and businesses are anticipating a period of transformation that will see a wide-ranging overhaul of supply chain configuration.

The organisation of international production and investment is entering a new phase driven by powerful undercurrents – which have been laid bare or given added momentum by the impacts of COVID-19 on economies and societies worldwide.

Forces at play include the adoption of fourth industrial revolution technologies, the rise of political and economic nationalism, the urgent need to address environmental sustainability and the greater frequency of shocks to the global trading system emanating from endogenous and exogenous risks like extreme weather events, pandemics, cybersecurity and financial crises.

As the supply chain management decisions of multinationals and lead retailers adjust to this new environment, what are the implications for less developed countries?

Poor country participation in value chains

Since the early 1990s, many least developed countries (LDCs) have tried to emulate the export-led industrialisation model followed to good effect by several Asian economies. To achieve this, they have sought to attract foreign direct investment (FDI) – mostly efficiency- and resource-seeking – and to link their domestic sector to foreign markets through participation in global value chains (GVCs). A sizeable share of LDC exports are now routed through such chains, which represent up to 40% of international trade.

While the strategy has seen pockets of success, outcomes have generally been disappointing from a developmental perspective. Increased participation has mostly failed to boost productive capacity growth or stimulate a process of structural transformation. The economy-wide spillover effects of integration have been relatively small, with the technological and organisational benefits correlated with exports often limited to a narrow set of firms and activities. Decent jobs have not been created at sufficient scale and countries have struggled to capture value and upgrade.

In addition, trade and FDI growth have declined since the 2008 financial crisis, which has left LDCs competing for a shrinking pool of capital and reduced opportunities to integrate.

At present, LDC firms tend to perform low value-added and labour-intensive tasks in supply chains in primary industries (extractive and agro-based), low-tech industries (textiles and apparel), processing industries (food and beverage) and entry-level services. Here we mainly consider the agri-food and apparel value chains, which are buyer-driven, fragmented and geographically distributed.

Resilience and agility in supply chain management

The COVID-19 pandemic has exposed the fragility of supply chains, and rebuilding with resilience has become a mantra of business and policy circles. These vulnerabilities may have crystallised awareness among lead firms that “the distributed global business model, optimised for minimum cost, is finished.”

The outsourcing and offshoring model that has propelled globalisation for the past 30 years has been guided by costs, especially labour. Due to rising wages in developing countries and technological advances that substitute for manual tasks, labour arbitrage is no longer the primary factor driving investment and sourcing decisions. Hidden costs related to risks tied into the pursuit of supply chain resilience have surfaced during the pandemic. Supply chain stress tests will become the norm.

The need for agility in the supply chain is not new. But the COVID-induced disruptions – and the uncertainty that lies beyond – has served to make the realisation starker. The sourcing criteria of multinationals have expanded to respond to changes in consumer preferences. Beyond costs and quality, they comprise flexibility and short lead times. The EY Future Consumer Index has identified new consumer segments that will emerge from the pandemic. Firms that adapt to these behavioural shifts will have digitalised and invested in differentiation. Adjustments in supply chain logistics and sourcing networks will accompany this change.

Multiple sourcing and proximity sourcing

Two long-term trends are taking shape as lead firms hardwire resilience and agility into their supply chains: multiple sourcing and proximity sourcing.

Multiple sourcing refers to diversification of the supply base, and will impact industries relevant to LDCs like agri-food and low-tech manufacturing. The goal is to reduce vulnerabilities associated with single-source dependencies and excess concentration in a region or supplier. The key drivers include state incentives for stable supplier networks, cost differentials and digitalisation. This diversification will increase the distribution and fragmentation of supply chains in affected sectors. Governance will become more platform based – typified by low FDI intensity and high propensity to regulate through private standards. Digital technologies are giving rise to new tools for supply chain risk management and monitoring capacities that enhance traceability across multi-tiered sourcing networks.

Proximity sourcing denotes reshoring and nearshoring. Supply chains become shorter and regional – with a possible rebundling of certain intra-firm activities. Proximity sourcing is influenced by new technologies like automation, the shift towards sustainability and a policy environment pushing for self-reliance and the build-up of strategic industrial capacities. Accelerated speed to market and lower supply chain coordination costs are also important determinants. Intra-regional trade and market-seeking FDI will increase as lead firms relocate and diversify supply chain segments. Reshoring will reduce GVC trade and efficiency-seeking investment.

Click here to view original web page at Business supply chain strategies are evolving, can poor countries benefit?

Daisie Hobson

Daisie Hobson is a Director at the Reshoring Institute and an engineer with many years of experience in manufacturing and project management.

Leave a Reply

Back To Top