Insight: Supply Chain Changes Imply Higher Future Prices

Insight: Supply Chain Changes Imply Higher Future Prices

The law firm Foley & Lardner recently released a compelling survey of nearly 150 manufacturing executives across a variety of industries, including a large number operating in the automotive industry.

The survey focused on supply chains, and in particular, how supply chains are evolving in response to significant disruptions related to both (i) mounting trade tensions in recent years, and (ii) the impact of COVID-19.

As someone that has worked in and around the industrials sector for a number of years, I was struck by the trends aimed at pulling back from decades of supply chain-focused cost reduction initiatives…namely low-cost country sourcing (China in particular) and just-in-time (JIT) inventory management systems. Survey respondents indicated that while costs will continue to be a prominent consideration for purchasing executives, there is a new reality in which the value of supply chain reliability must be weighed against the higher costs that come with it.

Some of the survey’s key findings include…

  • 93% of the executives surveyed indicated they are either implementing or strengthening contingency plans to address future disruptions
  • 43% of respondents with operations in China have either already withdrawn from the country or are in the process of doing so, with another 16% considering it
  • For those companies exiting China, 74% are looking at reshoring some portion of operations to the United States, while 47% are considering Mexico and 24% looking to Canada
  • 70% of respondents expect that, as a result of the pandemic, companies will reduce their focus on sourcing from the lowest-cost supplier
  • Almost two-thirds of respondents believe companies will place less focus on JIT manufacturing models in order to ensure greater operational stability and resilience

Bottom Line

The negative effects of increasingly frequent and severe supply chain disruptions outweigh the cost savings associated with traditional supply chain models that have largely focused on low-cost country sourcing and JIT manufacturing processes. While costs will go up, the value associated with supply chain stability and resilience justifies those increased costs, at least in the near-term. The question remains where those increased costs will be absorbed, with higher prices to consumers likely to be at least a part of the answer.


Don Luciani

Partner, Investment Banking Practice Leader