I recently discovered Mark Millar’s vlog on the long-term impact of Covid on global supply chains in the January issue of UKWA’s NEWSrack. Always very enlightening, his views are very much in line with what Indigo Software is seeing in Europe and Asia too.

Millar, a supply chain expert, discusses how the shock created when China halted all its commercial activities at the very beginning of the Covid outbreak, has led to widespread supply chain strategy reviews by outsourcers. Companies have been reassessing how they source manufactured goods to hedge their bets and avoid being reliant on a single supply region. Many are moving to shorter, regional supply chains, a trend Indigo Software has observed first-hand, through our operations in the UK and ASEAN regions. Coronavirus has ‘exposed the intrinsic risks of a connected supply chain in a volatile world’.

Removing risk from the supply chain

From our perspective, the gradual transition away from being too reliant on China was already underway before Coronavirus emerged in November 2019. This is also verified in research by Gartner, whose survey of 260 global supply chain leaders in early 2020 found that 33% had either already moved some sourcing and manufacturing activities out of China or planned to do so in the next two to three years. Additional research by the American Chamber of Commerce in 2019 offers similar insights, with 40% of members either actively transferring outsourced manufacturing or thinking of doing so.

For companies in this position, suppliers based in the ASEAN (Association of Southeast Asian Nations) – like Vietnam, Philippines, Thailand, Malaysia and Indonesia – offer a perfect alternative. This is partly down to lower cost bases for outsourcers to this region, but also thanks to the many financial incentives available to companies seeking a re-shoring solution for their supply chain.  ASEAN network countries have been quick to respond to these business opportunities, with a range of incentives that include free trade agreements (FTAs), long term tax breaks including double taxation agreements and the formation of special enterprise zones.

How to manage costs when ‘home shoring’ your supply chain

In addition to diversifying supply partners, another trend discussed by Millar that Indigo Software can verify, is for ‘home shoring’. Here companies are looking to bring their manufacturing either back home or have it located much nearer to home, where it can be more easily controlled. Aside from the control factors, manufacturing costs in China have risen rapidly in recent years and it is no longer as financially efficient as it once was. In contrast the ASEAN countries can still be more price competitive.

Elsewhere, just as the ASEAN countries are offering special commercial incentives, so too are other countries, all hoping to attract investment onto their shores. In the UK, the government’s latest freeport strategy is another example of this, designed to boost the post-Brexit economy by incentivising manufacturers to expand their home manufacturing operations with bases located near to ports and within special economic zones. The North East England Freeport bid is a good example, proposing to develop a virtual free trade zone operated by a coalition including 3 ports, an international airport, advanced manufacturers, logistics service providers and clean energy specialists. It plays directly to the UK government’s encouragement of home shoring, by allowing some raw materials to be outsourced and then used in manufacturing. Duties are only payable on finished goods when they are exported. And the more a manufacturer can source from within the UK, the lower their tax liabilities.

E-commerce accelerates warehouse automation

The pandemic has also ignited phenomenal growth in e-commerce, as consumers everywhere have been required to adopt internet shopping for practical reasons. As Millar describes, the Covid crisis has been a ‘super accelerator’ for e-commerce. When this trend is combined with the tendency to home shore operations, it has a big impact on costs. If businesses are moving their sourcing platforms and distribution centres closer to home, where property and labour costs are higher, they will need to turn to automation as a way to recoup that additional expenditure.

Indigo Software is seeing a wide range of automation levels in the warehouse. At one end of the spectrum, there are fully automated and virtually unmanned, lights out warehouses. At the other end are businesses without any warehouse automation, who still rely on paper-based processes. These latter businesses will struggle to control costs and maintain profitable levels of efficiency in a busy warehouse, without at least automating core warehouse processes. For instance, goods in and ‘put-away’, replenishments, order picking and dispatching sales orders, plus stock management reports. Labour costs in the warehouse have been steadily increasing and adopting a Warehouse Management System (WMS) effectively enables many manual processes to be automated, which improves working conditions, reduces the likelihood of errors and allows a warehouse to increase throughput without having to increase headcount. Technologies like voice directed picking can also be introduced, further improving efficiency and ergonomics.

For businesses looking to future proof their supply chains with an efficient e-commerce warehouse, or to reduce labour costs when home shoring manufacturing operations, a WMS is an ideal investment.

Author

Eric Carter, Solutions Architect at Indigo Software