How shockproof is your provide chain, actually?

Whereas international commerce has risen dramatically for the reason that Nineteen Nineties and has continued to enhance the lives of hundreds of thousands of individuals, geopolitical issues have currently been rising too. Phrases akin to “reshoring” and “friendshoring” have seen elevated use in company displays by greater than 20-fold up to now few years.

For instance, in recent times China’s share of US imported manufactured items fell from 24 to fifteen %. The newest value-added knowledge extends solely by means of 2020, because it takes time for official sources to conduct and finalize their analyses. For now, the trajectory of the newest years, in addition to the future of value-added versus gross exports, stays unknown. But it’s clear that an organization doesn’t make sure that it has a geographically numerous provide chain if it merely shifts from suppliers that assemble and ship from one nation to suppliers that assemble and ship from one other nation. Actually, even because the share of US imports of manufactured items from China declined, the share of worth added in last consumption remained regular (exhibit). Items that had been provided straight from China are nonetheless being largely produced in China, however they’re additionally being rerouted by means of different nations that add incrementally to the ultimate worth. The end result may be {that a} provide chain isn’t considerably extra geopolitically diversified—and is now additionally longer and doubtlessly extra opaque.

For CFOs—who in lots of organizations operate because the de facto chief danger officer on the highest staff and, in each case, ought to be asking and inspiring laborious questions—it’s important to dig deeper: How effectively can we perceive our personal provide chain? What’s our firm’s publicity if totally different geopolitical situations play out? In one recent survey of senior international provide chain executives, solely about half reported that they understood the placement and important dangers of their tier-one suppliers—and solely 2 % had visibility past the second tier. But our research finds, too, that in occasions of uncertainty, the most effective leaders hone three sorts of aggressive edge: insights, commitment, and execution. As uncertainty ramps up, CFOs will want a lot clearer insights throughout borders.

For extra concerning the reconfiguration of world commerce patterns and the potential trade-offs forward, see Geopolitics and the geometry of global trade, McKinsey World Institute, January 17, 2024.