Why supply chain reorganisation now tops the CEO’s agenda

Amid mounting geopolitical tensions, CEOs must take direct control of supply chain resilience, writes IMD’s Carlos Cordon

This article is republished with permission from I by IMD, the knowledge platform of IMD Business School. You may access the original article here.

The recent second visit to China this year by Apple CEO Tim Cook came as a surprise. But, while US CEOs don’t tend to linger in that particular geography, Cook clearly felt this market deserved a personal touch. Not only is Apple battling falling demand for its products in China, it also faces a supply chain headache in a country that has provided Apple with a key base for more than two decades.

Apple’s problem is that it is increasingly being caught in the political and mercantile sniping between China and the US. In September, it saw almost $200 billion wiped off its market capitalisation following reports that government agencies in China had banned the use of Apple products in various government departments and state-owned enterprises. While the claims were subsequently denied, Cook has already begun shifting parts of Apple’s production to Vietnam and India, so concerned has Apple become about the deteriorating US-China relationship.

The travails of Apple provide just the most high-profile example of the growing concern many large companies feel about their global supply chain relationships. Research published recently by EY identifies supply chain disruption as one of the most pressing concerns for CEOs. In the UK, for example, 88 per cent of CEOs say their companies are adjusting their supply chain or geographical profile.

CEOs take charge

Such data underlines the extent to which supply chain management has now become a CEO issue. The conversation about sourcing, production and logistics, which was traditionally overseen by the chief supply chain officer (CSCO) or an equivalent executive, is now so fundamental to the business that it is taking place in the CEO’s office.

That shift began during the COVID-19 pandemic, when lockdowns exposed the vulnerability of many companies with long-distance supply chains, particularly where they were over-dependent on a particular country for key materials or production.

The climate change agenda also provides an important dynamic. With every organisation under pressure to reduce its carbon footprint, scrutiny of complex and extended supply chains is increasing. Continually moving materials thousands of miles during the production cycle is difficult to justify from an emissions perspective.

However, it is the fraught geopolitical backdrop that is robbing CEOs of most sleep. From Russia to the Middle East, and from Africa to Asia, CEOs see political and military conflicts, over which they have absolutely no control, jeopardising supply chain security, which they now prioritise over cost control.

Read more: Demand fulfilment: a key to supply chain management sustainability

Changing direction

With CEOs in charge, supply chain practices are now changing dramatically. Data from McKinsey suggests that more than three-quarters of companies have increased their inventories over the past year. They are shifting from the just-in-time model pursued by CSCOs, which prioritises supply chain efficiency, to a just-in-case approach, which emphasises the requirement for sufficient stocks to withstand unforeseen disruption.

Similar numbers of businesses are now pursuing dual-sourcing strategies as widely as possible. They no longer want to be beholden to a single supplier or geography. Diversification is the goal.

Above all, suggests McKinsey’s research, the trickle of “nearshoring” seen during the pandemic has become a flood. The number of businesses now looking to secure more inputs from suppliers close to their production sites has doubled over the past 12 months, the consultant says. They want to operate in neighbouring countries, rather than depending on long-distance relationships. 

At the very least, they want to contain their supply chains regionally. CEOs believe that nearshoring will facilitate smoother communication, support cultural alignment, and drive quicker response times. But, while physical proximity will enhance collaboration, reduce time zone differences, and enable face-to-face interactions, it may also have cost implications. To put it bluntly, your neighbouring supplier may charge much higher prices than their more distant competitor. 

Indeed, this cost consideration is another reason why CEOs feel compelled to take greater responsibility for supply chain management. The impacts of trends such as nearshoring will be felt across the company. Most obviously, prices may rise and margins may come under pressure. The CSCO cannot be expected to make decisions with such significant ramifications autonomously.

Winning support

Similarly, where companies want to bring sourcing and production fully onshore, CEOs may need to use their influence externally to make this possible. In many industries, reshoring simply isn’t possible today, but investment in infrastructure or industrial development could change that. When not in China, for example, Apple’s Tim Cook, along with many other tech sector CEOs, has worked hard to support US Government initiatives to accelerate domestic semiconductor manufacturing capacity. Apple hopes to begin buying chips from a new facility in Arizona when it comes online. Still, those plans are a good example of why making radical supply chain changes can often prove so difficult. 

One issue for the US tech sector is that this new facility will only handle part of the production cycle. It will still be necessary to locate some assembly in Taiwan, constituting a potential geopolitical flashpoint, given China’s ongoing claim to sovereignty over the territory. Also, the facility’s launch has been delayed by labour-market problems, with its owners struggling to secure the required skills. In this context, “friendshoring” may offer some additional options, with some businesses now rerouting supply chains to countries they perceive to be politically and economically low-risk, even if these nations are still less geographically close than ideal.

Read more: Apple and Foxconn: addressing power imbalances in global supply chains

US Treasury Secretary Janet Yellen is one influential figure who has been pushing CEOs to explore this issue. She has urged companies to strengthen their ties with companies based in countries that share the US’s norms and values. Nations such as South Korea and India, for example, may become ever more significant players in Western supply chains.

Towards vertical integration

Another option for CEOs to consider may require M&A or strategic investment in other businesses. Supply chain anxiety is beginning to drive vertical integration, with businesses taking direct control of suppliers and logistics providers. Amazon provides an early example: its leaders have long felt that its use of third parties to manage inventory and fulfil orders could leave it vulnerable. Recognising that capacity shortages at these providers, or outright disruption, could put a brake on its growth, Amazon developed an in-house supply chain and logistics operation that manages everything from warehousing to ship charters and last-mile distribution. 

CEOs will require this level of strategic and imaginative thinking in the months and years ahead. Moreover, as radical resets and significant alterations to operating systems will require high-level sign-off, the CEO will be required to monitor supply chain in a very hands-on capacity. Even with the CEO on high alert, some supply chain issues may prove intractable, at least in the current climate. 

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For example, as industries race to secure manufacturing raw materials, they will face crunch points. China’s move to limit exports of gallium earlier this year provides just one example of how political tensions can drive disruption (China provides 98 per cent of the world supply of the metal). CEOs will, therefore, need to stay on top of new supply chain threats and to join with their CSCOs in seeking new solutions, working with governments, industry parties and other partners wherever necessary. Supply chain looks like it will stay at the top of the CEO’s agenda for some time.

Carlos Cordon is a Professor of Strategy and Supply Chain Management. Professor Cordon’s areas of interest are digital value chains, supply and demand chain management, digital lean, and process management.