Should You Consider a Regional Supply Chain?

An article in the August 4^th edition of The Economist provides an interesting perspective on global and regional supply chains.  The article states that the initial mass globalization was driven by the lowering of transportation costs both ocean freight and trucking.  Large firms were able to use transportation cost reduction to establish manufacturing plants far from their intended consumers.  And in many cases, this globalization created new markets for the products in the countries that offered the lower cost labor.

Less recognized is the fact that since the 1990’s, emerging markets in countries close to the industrialized countries were able to capture some of the supply process for themselves, even with limited resources.  Think Mexico in proximity to the United States or Vietnam in proximity to China and Japan.  Trade data analyzed by Professor Robert Johnson of Dartmouth College and Professor Guillermo Noguera of Columbia University show that the rate of GDP increase in developing  countries has been significantly higher than comparable data for advanced countries.  Interestingly, they note that a single component may be exported several times during its supply chain journey providing more opportunities for emerging markets to participate in the total supply chain process.

Messrs. Johnson and Noguera also state that regional supply chain clusters have resulted among neighboring countries.  Regional trade agreements can be a factor in facilitating the formation of these clusters.  “Industrialization is now within easy reach of poor countries, provided they are within easy reach of industrialization”.

This suggests that mid-size companies need to re-examine their current supply chains.  There may be cost and lead time advantages to thinking regionally as compared to going global in every situation.  Shorter transit times may provide enough advantage in terms of reduced inventory to offset some of the maximum global cost savings.