23008_Nearshoring Report

Similarly, where concentration of supply is limited to a small number of supplying countries – particularly in crucial raw materials or intermediate/component goods upon which downstream production systems rely – this creates a risk which was highlighted during the Covid-19 pandemic. Where a country or handful of countries are responsible for the supply of the majority of specific goods – such as semiconductors or the raw materials for pharmaceuticals production – companies in importing countries may be challenged to find alternatives should their primary supplier experience a major disruption. Another, which has become far more minded of late, is sustainability. Transporting goods over far longer distances creates a greater environmental challenges Whilst we are seeing the rise of alternative fuels and evolving transport strategies to lower the impact, these are unlikely to be fully effective, meaning longer supply chains present a higher level of environmental impact. The International Energy Agency estimates that as at 2021, shipping and aviation contribute around 4% of total global greenhouse gas emissions. Through the period of rapid globalisation,

Whilst offshoring manufacturing to these lowered cost and regulatory requirements, it meant other supply chain considerations were sacrificed. One of these is order lead times. ‘Farsourcing’ orders means ordering further in advance for goods to be made and then delivered due to the extended shipping period. But for some product types, their business models have evolved to require faster production and delivery to be able to refresh stock in a far shorter cycle. The widespread adoption of the JIT model which spread from manufacturers to nearly all parts of the economy dealing with movement of goods meant that the capital tied up in valuable inventory was driven down further and further and supply chains pushed ever leaner and leaner. Similarly, an issue that has been brought to the fore in recent years as a result of the massive global shock of the Covid-19 pandemic is supply chain resilience, that is, the ability to respond to and recover from unexpected events. The development of well functioning systems that can accommodate shocks – for example, a major weather event, natural disaster or man-made shock such as trade dispute or terrorism – is crucial for business continuity. Many shocks will be geographically specific, applying to only a discrete country or even sub region (such as flooding) others may be much more broadly felt. Recent history has been marked by not only global shocks which impact the world economy – such as the Global Financial Crisis (GFC) in 2007-2010 and the Covid-19 pandemic from 2020-2022 – but also by a growing frequency of natural disasters and climate change risks.

this negative externality was largely ignored in exchange for lower costs of production.



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