Location, location, location! This phrase applies to any well-run supply chain. A supply chain is a network between a company and its suppliers used to produce and distribute the final product to the customer. Selecting a good location can result in an efficient and cost-effective supply chain – which a business’s success depends on.
Traditionally, companies have used a “lean framework” of manufacturing, where efficiency and cost optimization are the critical yardsticks in gauging a supply chain’s success. When business is booming, companies ramp up production and focus on getting the same products out quicker. And when the economy faces pressure, their focus is on ensuring they can contain supply costs. So it only makes sense that companies select a location that best meets the twin demands of efficiency and cost.
Escalating trade wars and the COVID-19 pandemic have compelled companies to rethink supply chain management. It’s not enough to be “lean” – you also have to be more agile. The right location will be low-cost and efficient and will minimize unnecessary macro-economic, geopolitical and business-specific disruptions.
An agile supply chain, if we think about it, is one that can best meet unpredictable customer demand and adapt to a volatile operating environment. The following are critical factors that will guide you in selecting the right location for your supply chain.
First, consider whether to centralize your supply chain hub in one location or have one primary location “plus one” or even multiple locations. Traditional supply chain management typically prefers one place since having multiple locations will drive up structural costs and/or result in operational inefficiencies. Setting up offshore hubs was primarily about driving efficiency and optimizing costs. It was about picking the location with the lowest overall costs (labor and infrastructure) and production capability. However, to keep your supply chain agile, you’ll have to consider broader consequences, such as the COVID-19 pandemic and US-China trade tensions, which could lead to potential interruptions or sudden shifts in your business. The importance of a resilient supply chain became apparent during the disruption at the start of the pandemic, which resulted in a shortage of personal protective equipment (PPE). Having at least a plus-one approach helps you minimize disruption due to geopolitical risk in any one location and manage the increase in structural costs reasonably.
Second, assess the availability of qualified talent in the location(s) where you’ve decided to operate. Talent availability is actually twofold – it includes (1) the talent that is available locally, and (2) the talent you could potentially send from your head office to the location(s) to help set up. For local talent, you can evaluate the quantity and quality of the selected site’s overall education eco-system and the working population’s productivity and wellbeing, among other demographics. You also need to have accurate remuneration data for the market to ascertain how much you need to invest in attracting and retaining the right talent. A crucial metric is the turnover rates in a given location, which will help you assess hiring costs and training investments. For talent from your head office that you choose to send to a site, you would need to evaluate how “attractive” the selected location is for talent when deciding whether to take on an assignment. Cost of living data will indicate adjustments you may need to make to salary packages, and quality of living indicators will allow your talent to compare the overall livability of the chosen site and their home location.
A new trend related to creating an agile supply chain is the rise of virtual assignments. The COVID-19 pandemic is making it more challenging to move talent to different locations in the short run. What started as a way to cope with mobility delays could be, in time, a feature of your agile design to have supply chain roles in more than one location.
Lastly, consider government performance in the selected location(s): This includes a government’s stability and whether it has the right legislation and appropriate infrastructure to support business and enforce contracts. In the COVID-19 era, it’s crucial to factor in how governments are handling the pandemic itself, which is a vital indicator of how they will handle recurrences of this or other unforeseen significant events in the future. We have seen varying degrees of governments’ competence and stability when managing trying circumstances, which could substantially impact businesses. This is critical to gauging how resilient your supply chain will be in the face of large-scale disruptions.
Selecting the right location will always play a significant part in supply chain management. Applying agility to your thinking, and going beyond just efficiency and cost reduction, will help safeguard your business in an uncertain operating climate. In truth, while multiple locations may help protect against disruptions, the cost of replicating supply chains widely in different places may be prohibitive. A more plausible choice for companies will likely be a plus-one strategy that strikes the right balance between agile and lean supply chain management.