China's zero Covid policy, and the shutdown of Shanghai are impacting global supply chains.
To discuss this, and strategies organisations can take, I invited the Reshoring Institute's Rosemary Coates back onto the podcast.
We had a fascinating conversation. I learned loads, I hope you do too...
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There are so many other aspects of decision-making in terms of geopolitics, in terms of where your customer base is, in terms of where your future lies. Is your growth market in Asia? Which is likely you're likely to say yes. Is your growth market for certain products in Western Europe? So evaluating those kind of, things and, approaches and understanding of the geopolitical environment, where the risk exists, all of these things go into that decision. It's not merely a based on a total cost of ownership or, uh, evaluating the costs only like it was in the pastTom Raftery:
Good morning, good afternoon, or good evening, wherever you are in the world. This is the digital supply chain podcast. The number one podcast, focusing on the digitization of supply chain. And I'm your host global vice-president at SAP Tom Raftery. Hi everyone. Welcome to the digital supply chain podcast. My name is Tom Raftery with SAP and with me on the show today. Welcome back my special guest Rosemary. Rosemary. Would you like to introduce yourself?Rosemary Coates:
Yes. Thank you. I'm Rosemary Coates in Silicon valley. And I'm the executive director of the Reshoring Institute in the U S. We're a nonprofit nonpartisan organization, helping companies reshore not only to the us, but into their particular country, some in Europe, some in Asia, some in Australia. So all around the world, uh, we're helping companies rethink their global supply chain strategies.Tom Raftery:
Nice now, just for people who might have missed your last show, or your last appearance on this show, explain what reshoring is for anyone who doesn't know, and why people might want to do it?Rosemary Coates:
Oh, resharing basically is, I think defined in the public is bringing manufacturing back to your, local country, your domestic country, uh, and that may be manufacturing or sourcing. We have, we're seeing a lot of, uh, reshoring of sourcing at the moment, but in our case, at the reshoring Institute, we really help companies think through their global strategy. So where in the world should they be manufacturing and why? So, for example, if Asia is your growth market, growth across Asia, somewhere around 14%, you may want a manufacturer in Asia somewhere to serve that market, but also think about potentially bringing manufacturing back to the U S for example, or bringing it back to Europe so that, uh, you can leverage both, we call that sort of local for local. So you're locally manufacturing for the local market.Tom Raftery:
Okay. And is that just because, we've all seen the disruptions we've had in supply chain, so is it, was it just to get over that? Or is it to reduce, we've seen increases in costs of shipping as well and delays in some cases. So, is it that, or is it all of the above? What is it what's driving it?Rosemary Coates:
Yeah, definitely all of the above. So we've been seeing a trend towards reshoring for the past, maybe 10 years, at least. But when the pandemic hit, it introduced risk in a way that we've never considered in the supply chain. And we we've always thought about risk and risky suppliers and so forth. But what happened with the pandemic is it, it just put so many disruptions in supply chains, both in, on the supply side, the logistics, the backups, the, inability to get parts around the world to move parts around the world just was, you know, introduced all this, chaos into supply chains. And that really, kicked off of a boon to reevaluate, global supply chains now in today's environment. Holy cow, we are in a mess right now. And of course, you know, with the war on Ukraine, uh there's first of all, major disruptions, especially in Europe with flight times and, servicing, air freight and truck freight across the all across Europe, because of the Russian air, carriers are not allowed to land. And, you know, there's, there's all sorts of disruptions there. That's right. Exactly. But in addition to that, the Ukraine, uh, supplies about a third of the world's raw materials in terms of metals and other raw materials used in manufacturing. So for example, most of the neon comes from Ukraine and neon is used to manufacture semiconductors. So here we are sitting in the global environment, already having a problem with uh, semiconductor shortages all over the world because of the pandemic. And I'll explain that in a minute. But now we can't get neon so even if we want to produce semiconductors, it may be very difficult going, going forward. And semiconductors have been, you know, this whipsaw kind of problem since the pandemic and the reason why is that, you know, when we were all sitting at home, we were all ordering, uh, laptops for our kids and, uh, extra ones for home and consumer electronics. And doing all this. And the semiconductor manufacturers, shifted a lot of their production from industrial manufacturing, automotive manufacturing into consumer products. And we're building semiconductors to support this huge spike in demand in, laptops and other consumer electronics. So, while doing that they created shortages in other sectors like automotive and industrial manufacturing. So when you know, we started, sort of recovering from the pandemic now we've got shortages in sectors that we didn't expect. So not only is there a huge growth in semiconductors, but the changes in what kind are being manufacturer and trying to get back to, more stable kind of manufacturing is going to take awhile. Then we've got, now we've got shanghai, which is completely shut down.Tom Raftery:
Yeah. CompletelyRosemary Coates:
shut down.Tom Raftery:
That's crazy, isn't it? I mean, the zero COVID policy that China has been pursuing it kind of beggars belief that they can shut down. somewhere like Shanghai as, I mean,Rosemary Coates:
based in Spain and at the start of the pandemic 13th of March, 2020. I remember it, it was a Friday, the 13th that's when they instituted the, uh, the hard lockdown here in Spain. And we had one of the hardest ones, of any place outside of China. And yet I balk when I hear what's being done in China, in, in, in the, in Shanghai and the like down they have there and it's going on for several weeks now and set to go on for several more.Rosemary Coates:
At least, at least. Yeah, that's correct. So you made in the us, we are coming out of the pandemic, I guess. I think most people are starting to be unmasked and it feels like we've gotten over the worst of it and we're starting to recover. In Shanghai, they're just shutting down the city again and forcing people to stay home. And this time it is a really, really strict and really bad. So Shanghai is 25 million people. And I think there are 15 other cities now that have been shut down as well. And then so, with that many, that much shutdown and especially in Shanghai, which, you know, the Pudong area, which is just, uh, across the river is a more industrial area. all of that manufacturing is closed because there are no workers you're not allowed to leave your house. So in the last, uh, shutdowns, at least the, the people were allowed to go to the grocery store and that, that sort of thing, doctors, and not now, It is completely shut down and food is all delivered. There is no shopping open or that sort of thing. So this is, uh, this is the most severe and likely to have the biggest impact of anytime during the pandemic So not only we're going to have shortages now. Because manufacturing is shut down in this huge manufacturing region. But when things do start to open back up in a few weeks or months, or depending on how long it, it goes because the Chinese government has very strict regulations. We're going to have a huge, huge problem with, shipments coming out of China and going to multiple destinations, whether it's Europe or Australia or the US or Africa, because all this pent up stuff is just sitting in the port waiting to be shipped and more to come.Tom Raftery:
Or waiting off shore waiting to be offloaded...Rosemary Coates:
yeah, we're, we're just going to have this huge ripple effect, all over the world. So you've got shortages in raw materials, which is going to constrict manufacturing, especially in China. And then now you've got a shutdown and this, this kind of a whipsaw effect, across the world because of the shortages coming out as a Shanghai.Tom Raftery:
Yeah. And again,Rosemary Coates:
Not, no, I was just going to say, it's not a happy picture. I mean, this is going to be a real problem for us for probably a couple of years.Tom Raftery:
Yeah. And, and how do we deal with that? I mean, the, the knock on effects of that are going to be myriad? So how, as, as organizations be it manufacturing or whatever, how do we deal with that kind of ripple effect?Rosemary Coates:
Well, you know, this, what we're seeing at the Reshoring Institute is that companies are now seriously considering bringing manufacturing back to the local, environment. So in the U S bringing manufacturing back to us and Europe to Europe, and considering how they either reduce or shut down their manufacturing in Asia. Also in the us, we're seeing a lot of companies sort of bringing back manufacturing to Mexico, uh, within the north American free trade, group. And that allows you to manufacture in Mexico and import into the US duty free.Tom Raftery:
you know, there are considerations like that. So I think, you know, it's going to have that kind of effect, but one of the things that we're seeing immediately is that so many companies are starting to source locally. And in fact, I was talking to someone in Australia last night, about domestic sourcing in Australia. So they're a manufacturer and have been importing parts from China for their production line. And now they're trying to develop sources in Australia to fill, those gaps because they can't get what they want or what they need out of China.Tom Raftery:
So I think we're going to see, you know, those kinds of considerations as well as, um, right now we're seeing a lot of, uh, turn to domestic sourcing.Tom Raftery:
And it will be as well, a shift from single source or single sourcing to multi-sourcing I'm sure and getting a web of suppliers instead of a chain of suppliers, no?Rosemary Coates:
Yeah. know, I've been in this industry for a long time and there was a period when single sourcing was the thing to do or to find one, um, major source and develop that source and, you know, really continue to develop products that were, coming from, from that source and working with them. And that was all the emphasis. In today's environment that is a very risky strategy because if you know, you're developing and have only one source in Shanghai, for example,Tom Raftery:
What are you going to do now? You can't get product out of there. So, it's pretty, you know, that kind of introduction of risk is pretty obvious. So what we're seeing now is dual sourcing or multiple sources being developed. You see this over time, there's different, popular ideas and things going on. And, and now all of a sudden we're rethinking them. Lean manufacturing is another one. So lean was the thing to do. You know, I can't tell you how. Lean projects I worked on with my clients. Um, and now we understand that that means taking inventory out of your pipeline that may put you in a very risky position. And so building inventories becomes a, another strategy that is going on now,Tom Raftery:
I think, yeah go ahead.Tom Raftery:
I was just going to say all these things kind of seem to be on a pendulum it's it's like in computing, there's the move, from client server to, to cloud. And it'll go back the other way. And, you know, I wonder will we start shifting in a few years, time back to single sourcing and back to lean again. And then will everything, that's old become new again?Rosemary Coates:
Uh, you know, I think that's, that's really true. Business is, very cyclical and w what old ideas become new ideas and hybrids and that sort of thing. The one thing that I've found though, that I think is, very telling is we used to help companies work through their process of manufacturing or outsourcing all their manufacturing or chasing the low cost countries all around the world. So it was a matter of dollars and cents and where could they reduce their costs and move to a manufacturing environment that was going to greatly reduce their, cost of production. It's different. Um, No I'm executives has gotten smarter and these kinds of decisions are made at a much higher level at the C level or the board level. As before it was more, you know, at the director level or, sourcing the buyers were making decisions to go overseas. Now it's a much, much higher level, more sophisticated decisions. So use of data, the use of, you know, of other tools that give you really the opportunity to thoroughly examine and evaluate your decisions on where you're, going to manufacturer. And that's different. I mean, I think, you know, there's so much more analytics and, and just portions or just, points for decision-making now than there ever were before. I was telling somebody the other day I toiled away at supply chain management for 40 years and I used to have to explain to people what I did and, you know, their eyes would glaze over. Like, ah, let's go get another drink or, you know, just not very interesting, I think to most people, but today supply chain is the thing, right? I mean, so headline news every day is what executives want to talk about. It's, you know, it's really come to the forefront, in terms of decision-making and importance in a company.Tom Raftery:
Yeah, absolutely, and I gotta think with the shift to more digital technologies that has been kind of kick-started by the pandemic and the recent crises we've had that that will enable organizations to be more nimble. So a shift to multi-source from single source or back to single source in a couple of years time. And then maybe back again to multi-source could probably happen significantly faster, right?Rosemary Coates:
Yeah, absolutely. So I think you're on the right track. I think we're going to see business shifting back and forth depending on what the popular idea is. But I think the pandemic is going to have long-term effect on that decision-making in terms of evaluating risks. I don't think anyone's going to make a decision in the future without examining risk is, and that's different from in the past. And, you know, used to be when I started helping companies move to, offshore, I worked on, global supply chain projects for 20 years that mostly included moving to China, moving manufacturing to China. And there, there was very little decision-making process. I mean, we'd looked at the total cost of ownership, but then it was so obvious that it was cheaper to go to China, that it was sort of ended the analysis. Then executives would say, okay, set me up in China, you know? Today. It's not like that. The decision making process is much more complex. People are more thoughtful. Executives are considering various options. I mean, it's a, it's really a change kind of decision-making process. But you know, like you said, two years from now, five years from now, who knows,? Um, business may go back to thinking that single sourcing is a good idea. Maybe, but I think we're going to see a hybrid going forward. Yeah.Tom Raftery:
Okay. If decisions in the past were about making organizations lean and going single source saying I'm producing in the low cost regions. If we're now rolling that back, does that mean things are going to become more expensive to manufacture? Are we going to start seeing this causing inflation?Rosemary Coates:
Oh, yeah. I mean, I think in the, I don't, I can't predict the future, but in the, but in the near term, in the next few weeks, the next few months, because of all these things that are happening worldwide, the shortages of raw materials, the shut down of logistics providers in certain regions. the shutdown because of the pandemic, all this stuff, all of that is going to have an effect on supply and demand. And when that happens and we're going to see increase in prices and this inflationary flare, that is going to be introduced in a lot of the aspects of what we're doing. It's probably a few years before we get out of this current inflationary environment.Tom Raftery:
Hmm. Interesting, interesting. Rosemary we're we're coming towards the end of the podcast now. Is there any question I haven't asked that you wish I had, or any aspect of this we haven't touched on that you think it's important for people to be aware of?Rosemary Coates:
I think it's just really important to remember when, companies are making these kinds of decisions, the total cost of ownership, a lot of, companies get stuck there. Um, the total cost of ownership is only the first step. All right. So in today's environment, TCO is, a good way of evaluating, the current costs and, you know, looking at logistics options and that sort of thing. But it is clearly only the first step. And from there, there are so many other aspects of decision-making in terms of geopolitics, in terms of where your customer base is, in terms of where your future lies. Is your growth market in Asia? Which is likely you're likely to say yes. Is your, growth market for certain products in Western Europe? So evaluating those kind of, things and, approaches and understanding of the geopolitical environment, where the risk exists, all of these things go into that decision. It's not merely a based on a total cost of ownership or, uh, you know, evaluating the costs only like it was in the past. So I think that's the one thing I'd leave the audience thinking about is what else do I need to consider when I'm, changing the way my business operates.Tom Raftery:
Fascinating fascinating Rosemary if people who would like to know more about yourself or the Reshoring Institute, or any of the things we talked about in the podcast today, where would you have me direct them?Rosemary Coates:
Our website is www dot Reshoring Institute. Dot org. And once again, as I mentioned, we're nonprofit and non-partisan. We post all of our research, our case studies, our white papers, everything is on the website. It's all downloadable, it's all free. So, uh, you know, go there. There's lots of goodies there. So, and you can contact me at rcoates r c o a t e s at reshoringinstitute.org.Tom Raftery:
Fantastic. And Rosemary, you haven't mentioned your podcast.Rosemary Coates:
Oh, yeah. I also have a current podcast on, women and manufacturing, um, where I interview women executives in manufacturing and that's, those podcasts are also, uh, posted on the reshoring website.Tom Raftery:
Okay. And are they available through things like Spotify or the, Apple Podcasts, Google podcasts, et cetera.Rosemary Coates:
Yes, they are. Yes. And it's called women and a N D manufacturing.Tom Raftery:
Fantastic. I'll post links to that in the show notes as well. Rosemary that has been really great. Thanks a million for coming on the podcast today.Rosemary Coates:
Alright, thanks Tom.Tom Raftery:
Okay, we've come to the end of the show. Thanks everyone for listening. If you'd like to know more about digital supply chains, head on over to sap.com/digital supply chain, or, or simply drop me an email to Tom dot Raftery @sap.com. If you like the show, please, don't forget to subscribe to it in your podcast application at choice to get new episodes, as soon as they are published. Also, please don't forget to rate and review the podcast. It really does help new people to find the show. Thanks, catch you all next time.