The Next Evolution of Supply Chains

For those looking to update their supply chain strategy over the next 3-5 years, the world markets are over-served, and global supply chains are going to evolve to the next logical configuration.

The adaptation of supply chains to the new global world economy had already started before the U.S.-China trade war and COVID started, and these events have accelerated the process of redefining global supply chains.

Any business student learns that during the maturity stage of the product life cycle, distribution evolves to serve market sub-segments. And this matters a lot in a world where the population of middle-class consumers will reach 5.5 billion or over 60% of world population by 2030—a phenomenal growth from 1 billion middle-class people comprising 20% of world population in 1985. Middle-class consumption will soon comprise one-third of global GDP. Five-and-a-half times as many middle-class consumers means far too many consumers to be efficiently served by a “global factory” even when located in a country like China that is remarkably proficient at doing exactly that.

This was all true before the current unstable political environment of trade wars and forecasts of a “new cold war” and the convulsions of COVID. These disruptions and uncertainties have accelerated the pace of evolution, and if we had to describe the next era of global supply chains with one word, it would be “fragmented”.

China will certainly develop and control its own supply chains for as many products as it can. Its middle-class population requires it, as does the population of India. Southeast Asia will likely split between India and China, and the countries with larger middle-class populations like Indonesia and the Philippines will likely play both sides while also maintaining ties with historical colonial powers in Europe and the United States.

North America will form its own supply chain with key industries re-shored from Asia to Mexico, which is looking increasingly more economical than China as a source of labor for a variety of products, with the added bonus of providing shorter and more responsive supply chains. Latin America’s time maybe coming as a supplier to North America and Europe.

One drastically under-appreciated component of global supply chains is in the service arena. The past few decades have seen services growing in importance as a creator of value in the “total offering” for a variety of supply chains. Something like 40% of American jobs are susceptible to “telemigration”. Countries like India, Brazil, Argentina, and Uruguay have substantial pools of qualified talent such as Ph.D.’s who cost far less than talent in developed countries, and that’s a cost difference that will drive economic growth in developing nations that have invested in educating their people. Developing nations will likely align with developed countries in similar time zones—Africa with Europe, Latin America with North America, etc.—in the next evolution of service supply chains.

The future is coming, and globalization won’t go away despite naysayers. Globalization will change to include regions that were mostly excluded over the past generation, and the world’s supply chains will be more fragmented—yet they will also offer more opportunities both for markets and sources of supply.

Fragmented supply chains mean that companies seeking resilience, redundancy, and success will find it, albeit they will need to develop new supply chain management practices. Research strongly indicates that the companies most successful in the current environment are the ones investing in the next generation of technologies that some call Industry 4.0, and these companies are also best prepared to collect on the promise of fragmented global supply chains.

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