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Four reasons you may want to localize your supply chain

Published 15 November 2021 in Brain circuits • 2 min read

The pandemic exposed supply chain weaknesses throughout the globe. Now companies are taking stock of their systems, not just because of COVID-19, but the very real problems associated with the geopolitical landscape. Businesses are looking at becoming more local, or at least more diverse in terms of their supply chain as a path to resilience. If you find yourself reconsidering your supply chain, here are four things to consider first.

Supply chain costs are increasing fast

Companies must consider the total acquisition cost incurred to make the component or service available for use, including packaging, transportation, customs, tariffs, exchange rate insurance, so on. If these costs rise to the point where they become a competitive disadvantage, then the localization of sourcing makes good business sense. 

Governments and consumers are demanding more local goods

The demand for locally sourced products has been rising in recent years, benefiting producers that can emphasize provenance and strengthening the case for localization. If a big enough segment of consumers would buy local products, even at a premium, reshoring should be considered. Localization also makes sense if consumers are likely to value the faster fulfillment of their orders, because sourcing nearby accelerates speed to market. 

Geopolitical risks are rising

It is important to consider the geopolitically charged trading environment, which is reflected by trade wars, Brexit, and the rise of vaccine nationalism.  In addition, the risks of offshoring, including supplier viability, have become increasingly evident during COVID-19, pushing companies to consider localization.

Environmental concerns are growing

The environmental benefits of manufacturing closer to home are becoming increasingly evident.Production in advanced economies can be more efficient in some cases due to the lower carbon intensity of electricity generation. 

The environmental impact of transporting goods and components over long distances is driving a push to localize production, so ESG responsibilities and goals should not be overlooked. Regulation is tightening, with governments increasingly adamant that foreign suppliers meet acceptable sustainability standards, so business leaders will need to carry out greater due diligence on their suppliers.

Further reading: 

Localization – where effective supply chain management meets smart politics by David Bach and Salvatore Cantale

Authors

David Bach

David Bach

Professor of Strategy and Political Economy

An expert in political economy, David brings to IMD a proven track record of creating impactful learning journeys in a dual role as both Professor and Dean of Innovation and Programs. Through his award-winning teaching and writing, Bach helps managers and senior executives develop a strategic lens for the nexus of business and politics. 

Salvatore Cantale - IMD Professor

Salvatore Cantale

Professor of Finance at IMD

Salvatore Cantale is Professor of Finance at IMD. His major research and consulting interests are in value creation, valuation, and the way in which corporations structure liabilities and choose financing options. Additionally, he is interested in the relation between finance and leadership, and in the leadership role of the finance function. He is the Program Director of the Business Finance program.

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