As we’ve been experiencing dramatic changes in rubber manufacturing supply chains, manufacturers had to adapt to the new status quo including SIC Hungary. In this article, we would like to provide a brief overview on logistic trends in the industry and a sneak peek into how they influenced our perspective on global supply chains.
Supply chains became global in the 1990’s and have dominated manufacturing until about 10 years ago when a gradual, slow shift has started toward shorter, local, more reliable supply chains. The COVID-19 pandemic has only accelerated this trend, which is very beneficial for many manufacturing companies.
According to an Orange Business Services survey, 40% of companies stated that their supply chains failed to deliver at the height of the pandemic – regardless of what industry we’re observing, the statistics are dramatic for all sectors relying on global supply chains.
Whereas another study pointed out that 45% of European manufacturers have already switched to alternative suppliers.
What drives these changes? What makes manufacturers opt for local instead of global sourcing? How does this affect the industry? We’ll be investigating these topics in this article focusing on the rubber industry.
Underlying reasons in the rubber industry
Commercial and political forces have often resulted in higher prices and periodic shortages in the supply of raw materials and intermediates necessary for the continued production of rubber products. We’ve experienced regular material product shortages since the 20th century, which have seriously impacted the global rubber industry. As these shortages are likely to stay with us in the long run, rubber supply chains must adapt to them.
In our globalized world rubber product manufacturers are exposed to several risks during their operation. But the biggest two threats are decrease of raw materials, product supplies and decrease of buyers demand. Both can be mitigated by geographic diversification, increase of the supply risk by shortening, multiplying and thereby strengthening local/regional supply chains.
Contrary to popular belief, it is not tariffs, import taxes and protectionist politics that are driving this shift in supply chains. It is true that until now shocks affecting global supply chains were mainly brought about by politics (just think about trade wars the Trump administration initiated), but the pandemic has put everything into a new perspective
Constrained freight capacity causes a much larger disruption in supply chains. Even though the underlying reasons were different in 2020 than about 2 or 3 years ago, the trend is clear. Issues with freight capacity results in great volatility on the market and stretched supply and demand.
A good example is what we’ve seen in case of the 2021 Suez Canal obstruction by Ever Given – one of the largest container ships in the world.
China’s role is changing
When global supply chains were booming about 10 years ago, it was impossible to compete with prices in China. Today, however, costs seem to be converging. Economies of scale is not the most important factor anymore as more and more products have to be customized and not mass-produced. The other reason for converging costs is the development of automation in manufacturing.
Example from the rubber industry: The logistics of raw elastomers, reinforcing agents and other compounding ingredients produced in East-Asia are determined by the economic laws of supply and demand with a strong correlation between shipping costs and lead times.
Higher value-added services play a key factor in local sourcing
The role China plays in global supply chains is changing for two major reasons:
- Most multinational corporations can’t keep track of who supplies their supplier, but they are highly reliant on them. If a supplier cannot deliver, their whole production fails, causing a domino effect.
- The role of value-added services is ever increasing as they are often direct inputs into the manufacturing process.
Example from the rubber industry: Manufacturing of high-volume or large series of standard products are usually outsourced to Asia for the sake of cost-efficiency and global competitiveness. Custom-made products with high added value, requiring specialized industrial know-how are generally developed and manufactured in Europe and the North Atlantic region.
Ecommerce plays a major role in supply chain trends. Localized supply chains are more flexible both in speed and variety of products. Over long distances providing instantaneous shipment and large variety is extremely challenging.
As for technological innovations both in supply chain and manufacturing, they have also contributed to this trend. Machine learning and demand analytics, 3D printing, and the automation of production processes and innovative manufacturing technologies enable production at competitive costs locally.
Innovative manufacturing technologies allow us to stay competitive
Sustainability is a clearly demand-driven trend as consumers are looking for sustainable products mainly in the retail sector. Supporting the local economy, having a close connection to the community, creating jobs locally is a must today to maintain a good reputation. What’s more, suppliers are often evaluated based on sustainability and pollution factors, thus the market forces them to adopt sustainable practices.
Shorter and localized supply chains in manufacturing
Today manufacturers are inclined to source rather close to the market they are serving – and not necessarily choose the option with lowests overall costs. For instance, assembly of products for the EU market may be based in Easter Europe, while for the US rather Mexico is likely to be a better option.
What other factors do manufacturers weigh other than raw costs?
- supply chain risks
- additional services and added value
- extra flexibility
Pros of localized supply chains
We usually associate localized supply chains with higher manufacturing costs since for example, it is more costly to manufacture in Europe than in China, but there are other expenses that need to be taken into account. Manufacturing locally usually leads to lower inventory costs, lower freight/logistics costs and lower duties.
Moreover, the similar legal, political and economic environment increases risks involved. For instance, volatility of exchange rates can be avoided.
Proximity of partners improves reliability of business flow in general due to faster response times, fewer disruptions and faster cycle times. The end result is not only higher client satisfaction, but also better adaptation to demand and market conditions, meaning that the competitiveness of companies who choose to source locally improves.
Last but not least, we must emphasize the importance of sustainability again. Sourcing locally causes less pollution, supports the local economy and has several sustainable benefits.
Cons of shorter supply chains
Complexity is frequently named as a major risk factor of global supply chains. Shorter supply chains are not necessarily less complex , either. The goal of keeping things local is usually to make customization possible, innovate quicker and guarantee fast delivery times, meaning that local supply chains can be equally – if not more – complex.
As for costs, labor costs are generally higher as they had been the primary factor in outsourcing production in the first place. Manufacturers may be able to choose from a smaller pool of skilled workers that reflects in the price of the products.
Real-time intelligence and the future of supply chains, Orange Business Services, 2021
Three-quarters of European supply chains are negatively impacted by coronavirus, Supply Chain Media, 2020