Over the past three decades, the Japanese perfected the art and science of 'Just-In-Time' (JIT) business practice. To cut costs and increase efficiency, companies got the raw materials and components that they needed, at the time when they required them. This seemingly-simple, yet complex, system became the norm as outsourcing flourished. In the new globalized village, the cheapest and best form was off-shoring or sourcing products and services from a far-flung nation. India and China, apart from Vietnam, Taiwan, South Korea, and East European and Latin American nations benefited from this new global trend.
The trade wars (US-China), sanctions (on Russia), Covid disruptions, post-pandemic quakes and the Russia-Ukraine war changed the mentality and mindset of policy makers, corporate managers, and experts. Today, the buzzword is de-globalization. JIT is giving way to 'Just-In-Case' (JIC). Off-shoring is being replaced by newer terms such as on-shoring, near-shoring, and friend-shoring. Dual sourcing, even multiple sourcing, is being discussed animatedly in corner rooms across the globe. Instead of depending on a single nation like China or Russia, businesses wish to evolve a China+1, or China-Russia+1 strategy.
JIT was a near-perfect plan during peace times. But as nations, and their leaders, become more aggressive and adventurous, firms need to now prepare for JIC. Just in case a powerful leader like Russia's Vladimir Putin decides to go to war with Ukraine, or China's Xi Jinping wishes to exert pressure on Taiwan and Hong Kong. Just in case the US wants to arm-twist China on trade issues. Just in case Britain exits the European Union. Well, just in case there is a worldwide pandemic that disrupts global supply chains, and a post-Covid era that leads to high inflation, higher interest rates, and fears of an expanding recession.
In a bid to deal with unexpected disorders, businesses have to "optimize" delivery systems to combat such eventualities.
According to a piece on the website of McKinsey, a global think-tank, managers now keep a higher inventory of critical items. JIT fails miserably during troubled times. JIC, though expensive, is better. The second step is, obviously, dual or multiple sourcing. In a McKinsey survey (March 2022) of supply-chain leaders, 80% respondents said that they had "implemented dual sourcing, up from 55% a few months ago". During Covid, they shifted from China, and now they want to avoid Russia.
China was a major supplier of most products. But, post-Covid, companies shifted their procurement bases, or set up new ones, in Vietnam, India, and other countries. Since the Russia-Ukraine war, they moved out of Russia in droves. This explains why India, with its 'Make in India' vision, hopes to replace or compete with China as a more dependent supplier to the world. However, the moves themselves are disruptive, costly, and imply drastic changes in corporate strategies. Since no one can really pinpoint the next source or location of a 'Black Swan' event, firms need to be nimble and flexible, which isn't easy.
Dual or multiple sourcing forced firms to think of off-shoring in newer ways. In the past, it meant setting up units or buying raw materials from nations that offered lowest prices, best quality, and efficient logistics for JIT deliveries. JIC changed it.
The MAGA (Make America Great Again) campaign hopes to bring on-shoring back on the table. It implies it is better for nations to be self-sufficient, at least in products and services that are crucial. Britain too felt the same when it exited the EU several years ago. Atmanirbhar Bharat harbors a dual vision – building large factories to satisfy both domestic and global demand.
Yet another concept, states the McKinsey piece, is near-shoring, "especially in the high tech and construction industries". This, according to a website, implies that a company outsources projects to another one in a nearby country. For example, West Europe sources from East Europe, and the US does the same with Latin America. A more interesting case is that of an Irish firm outsourcing to a firm in Spain. Despite higher employee costs compared to off-shoring, near-shoring can be cost-effective due to lower or nil time difference, proximity and savings in travel, real-time engagement, and closer collaboration.
Finally, think of friend-shoring, a concept popularized by the US Treasury Secretary Janet Yellen. In Americanese, it means that manufacturing is spread within a group of nations "with shared values". The objective, states a piece The Washington Post, is to "prevent less-like-minded nations from unfairly leveraging their market positions in key raw materials, technologies or products to disrupt the US economy or those of its allies". The same article adds, "Indonesia, Malaysia, Vietnam and other Indo-Pacific countries would likely benefit as production plants, jobs and investments move towards nations deemed to be 'trustworthy' by the US and its allies."
Alam Srinivas in an independent journalist and author. He can be reached at alamsrinivas@gmail.com.