Post Brexit, the pandemic and amidst the geopolitical volatility in the world today, supply chain managers are no strangers to navigating complexity.  Accurately forecasting what is going to happen next has been a massive challenge for nearly every electronics business across the world to ensure they can consistently produce their core goods.

Alongside this, energy costs have spiralled across the US and Europe, and show no signs of abating which has a significant impact on transport and logistics as well as core production costs.  Earlier this year, the World Bank forecasted that the spike in energy prices to the highest levels they have been seen in decades will be a significant contributory factor to global output reducing by nearly 1 percent by the end of 2023.

Manufacturers are having to think carefully about what they need, when they need it and are starting to take action to reshore their vital component production where they can in order to guarantee their supply chain, minimise costs and restore some level of control.

What history teaches us

David Malpass, World Bank Governor predicts that “even if a global recession is averted, the pain of stagflation could persist for several years unless supply increases are set in motion.”  To avoid the suffering caused by stagflation in the 1970s, it is essential that we find a way to keep growth and production moving.  The manufacturing and electronics industries will play a key part in this.

Similarly, we have strikingly comparable conditions to the early 2000’s where we saw the market shifting quickly from long lead times to overstocks.  To address long lead times and ensure shortages didn’t stop production, customers would double or triple their orders, overstocking to try to guarantee supply.  However, as soon as lead times begin to ease, the over ordering abruptly stopped and orders were cancelled.  Almost overnight, the market changed to a position of excess stock which is difficult for both suppliers and manufacturers to manage efficiently.

A key indication that this scenario is at play currently was the recent news coming out of the US stock exchange where Micron Technology announced recently that they were cutting down semi-conductor manufacturing. This seems strange because over the last 18 months all we’ve heard about is the huge semiconductor demand and the need for increased production – this is the first sign that markets are starting to shift.

De risking the supply chain

To keep markets going and production consistent, the smart money is on increasing self-reliance.  The UK government is significantly stepping up initiatives to become more energy independent and so too are manufacturers as they think about their supply chains and production facilities.  We are starting to see manufacturers that have previously outsourced to Asia and Europe actively seek advice on reshoring key parts of their operations to the UK.

Where so much in the world is volatile, nothing beats local production and logistics where teams can get together in person, talk through what they are doing and make decisions together there and then in the same language and produce a crystal-clear set of expectations.  Even though the unit costs may be slightly higher, the control and predictability of supply, as well as the improved working capital advantages, mean that overall, the economics often actually work out.

And as exchange rates are also fluctuating, the general trend is that, since Brexit, the UK is below par, and forecasts are currently showing that there is no dramatic strengthening of the pound on the horizon.  This, coupled with smarter product design, allowing for increased automation in manufacturing, means there is now a better argument for reshoring labour as many manufacturers that were based in Eastern Europe, for example, will now only see marginal price difference if they get that work done in the UK.

Another issue being addressed by manufacturers onshoring is quality control.  Anyone that has outsourced their product development to the other side of the world will know that it is uncomfortably common for replacements for components that have become expensive or are in short supply to be made at short notice.   This lack of control can be catastrophic when production lead times and shipping mean that getting replacements can take weeks or months for orders that have already taken some time to arrive.  Intellectual property (IP) can also be vulnerable when outsourcing overseas, especially in regions where IP protection is not highly valued or protected by our laws.

Key considerations for 2023

As we close off 2022 and look forward to 2023, we see many companies thinking about reshoring it because it now makes a lot of sense.  It can also improve sustainability credentials overnight which is increasingly important for investors and consumers alike.

And for those who decide not to reshore or which will still be reliant on input from overseas, the temptation will be to exert control, but success will be achieved by exercising restraint on committing to orders that could be in excess too far in advance.

In markets like these where things are shifting quickly and unpredictably, getting the right insights and advice will be key as each business will have its own dynamics and will need to plot its own pathway carefully.