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Supply Chain Redesign ‘Clearly’ Underway: Gartner

Whether it be the factory lockdowns from the Covid-19 pandemic, questions surrounding the origin of raw materials, trade tussles involving China or the longer lead times associated with the general current supply chain constraints, businesses have been hit with a glaring reality—they need to rethink the current state of their supply chain networks both near and far.

So far, top execs across industries have been responding in kind—74 percent of supply chain leaders made changes to the size and number of locations in their supply chain network in the past two years, according to a recent Gartner survey.

Comprising that percentage, 51 percent of the 403 respondents said they increased the number of locations, while just 23 percent said they were reducing the size of their network.

Another 24 percent said they have made no changes to the number of locations, but have increased inventory or buffer capacity within the network. Only 2 percent have made any meaningful changes to their network.

“There’s clearly a supply chain redesign underway, but not everyone is moving in the same direction or even to the same extent,” said Kamala Raman, vice president with the Gartner supply chain practice. “Supply chain leaders have been modifying networks in a number of ways, be it with expansions, consolidations or simply modifications to buffers—which are more reversible than footprint decisions.”

As constraints, inflation, sustainability goals and national industrial policies put global supply chains under pressure, chief supply chain officers (CSCOs) are adapting their networks to fit this new environment.

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American Eagle Outfitters (AEO) is a prime example of a business that is taking supply chain expansion to heart by acquiring and merging multiple logistics companies—AirTerra and Quiet Logistics—into one firm, Quiet Platforms. AEO is using Quiet to gain access to a wider, more affordable last-mile services network that can cut its long-term costs and get products to more shoppers quicker, while also providing these capabilities to other retailers and brands.

In a conversation with Sourcing Journal founder Edward Hertzman in May, AEO’s chief supply chain officer Shekar Natarajan emphasized that retailers and brands should be working together to make these expansion efforts work.

“So many retailers have tried to build their own vertically integrated supply chains, but building more assets and buying more resources is not the answer to achieving hyper-scale efficiencies. Sharing is,” Natarajan said.

Already known for its robust global supply chain, Amazon has aggressively expanded its logistics and fulfillment capabilities throughout the Covid-19 pandemic. The e-commerce giant says it nearly doubled the size of its fulfillment network since late 2019. Data from Canadian supply-chain consulting firm MWPVL International Inc. tallies Amazon’s total warehouse space as jumping from 165 million square feet pre-pandemic to 379 million square feet by May this year.

Even though Amazon has publicly acknowledged that it may have overdone it with the expansion efforts, suggesting that it wants to right-size its industrial real estate portfolio, the tech titan is still going through with three massive warehouse construction projects in New York, California and Colorado spanning more than 11 million in square feet.

And Gap Inc. is among a group of U.S. companies looking to strengthen its nearshoring capabilities, with the specialty apparel retailer committing to increase its Central American sourcing by approximately $50 million per year for $150 million total by 2025.

The evolving supply chain networks span a variety of operating models. Twenty-eight percent of respondents now describe their network as a hybrid regional model—meaning a combination of local or regional elements in a global supply chain network. This is closely followed by global models with regional final assembly (23 percent) and local-for-local networks (22 percent), Gartner said.

“While the range of scales and approaches is wide, supply chains are undoubtedly on the move. Over half of participating organizations report making changes to manufacturing and supplier networks supporting at least 20 percent of revenue,” Raman added.

Brands evaluate sourcing, but ‘China Plus One’ still persists

China gets the most attention in any global supply chain narrative, particularly in recent years amid the continued tariff tensions and the recurring lockdowns. In total, 95 percent of survey respondents say they are evaluating or executing changes to their China sourcing and manufacturing strategy, and 55 percent of those already acted on their plans.

Designer Brands Inc. (DBI) is one of them. The DSW parent is planning to pull back on manufacturing in China, revealing earlier this year that is committing to cut its percentage of China-sourced goods from 80 percent to 50 percent by 2024.

“The reality is we don’t want to be that invested in one country,” Bill Jordan, president and chief growth officer at DBI, said at the company’s annual Investor Day in April. “We want to be able to source every category of goods that we make in at least two countries. Doing that will diversify and limit our risk, but will also open up speed and cost opportunities for us.”

However, Gartner indicated that their data does not show strong signs of large-scale nearshoring to developed markets. The consulting firm said organizations are still operating with a “China Plus One” approach that leaves most of the China-based network intact and places net new additions in other markets, or a diversification strategy that still holds significant sourcing or manufacturing in China.

The diversification route from China has also positioned many countries in the rest of Asia to profit from new foreign direct investment, and it is benefiting all sides of their supply chains. Among APAC survey respondents, 60 percent see their home region not only as a supply base but as an end market. Globally, 40 percent of respondents consider APAC both a supply base and an end market, Gartner said.

“The signs are clear that in a fragmented world, global firms have been making changes to their heavily cost-optimized, one-size-fits-all networks, and now favor a mix of global, regional or local elements,” Raman said. “Investments into other parts of Asia—outside of China—coexist with expanded investments into developed markets as organizations take advantage of generous national/trade-bloc-level trade incentives.”