July 12, 2024 Strategies for Rewiring Global Value Chains

Volume 27 | Issue 2

As global disruptions grow in intensity and frequency, businesses will need to continually rewire and strengthen their value chains.

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Recent geopolitical tensions, rapidly changing technology, and a growing climate crisis have upended global value chains and sent executives scrambling for ways to make their supply chains more flexible, resilient, and sustainable. No small task. Nevertheless, leading manufacturers are making headway, rewiring their value chains to address constant disruption, and sometimes even turn it to their advantage.

Simplification and streamlining is not always the answer in an environment fraught with societal, environmental, and geopolitical upheaval. Rather than stripping away complexity from their value chains, manufacturers may be better served by harnessing the scale and interconnectedness of their networks and embracing new, holistic, and data-driven methods to increase efficiency.

Recently, Kearney, in partnership with the World Economic Forum, conducted a survey of over 300 global operations executives, followed by a series of more than 30 in-depth interviews to better understand how manufacturing and supply chain leaders are redesigning their value chains. We looked at strategies across five distinct trends, characterized by the following shifts that leading manufacturers are making, from:

• Global to globally connected, multi-local value chains
• “Doing” digital to “being” digital across end-to-end operations
• Economies of scale to economies of skill
• Regulatory compliance to innovative sustainability
• Cost-driven to customer-value-driven

We also found that while most executives acknowledge the importance of these shifts, evidence points to a significant gap between strategic ambition and operational delivery. Not surprisingly, leading companies are the ones making the most progress in closing this gap, and the strategies they are using can serve as guideposts for others facing similar challenges.

From global to globally connected

The pandemic, climate catastrophes, and rising tensions in multiple areas around the world have driven home the pitfalls of relying too heavily on overseas suppliers in the pursuit of lower costs. The path that is currently emerging is one in which the value chain is globally connected, yet multi-local in its composition. But balancing local and regional sourcing can be challenging, as evidenced by our survey results: while 92% of manufacturers said they are prioritizing regionalization, only about a quarter (28%) expect to have in-region-for-region operations by 2030.

Leading manufacturers recognize the need to strike a balance between local and global supply. Many are selectively reshoring such functions as innovation research and development, intellectual property, and the more complex elements of their value chains, while keeping other functions offshore to take advantage of lower manufacturing costs. Building a diversified manufacturing network that prequalifies suppliers in different regions as standby options is another risk-reduction strategy. Leaders plan to further refine and enhance value chain devel opment by using end-to-end stakeholder collaboration to enable flexible nodes and real-time re-routings.

From “doing” digital to “being” digital

Digital technologies have been transforming enterprises for decades, and the pace of change is only increasing. Today, artificial intelligence is top of mind for most business executives. Indeed, nearly two-thirds (64%) of executives we surveyed perceive AI as central to lowering supply chain costs and increasing resilience. However, a mere 1% say they have been able to fully automate processes through AI or robotics, an indication that such barriers as complex legacy systems and cultural resistance remain formidable.

What distinguishes leaders is their progress in harnessing AI and other cutting-edge digital technologies. Nearly half of these companies say they have adopted advanced planning systems (APS) for demand forecasting, while around one-third have introduced AI either as a standalone capability or in conjunction with APS. These leaders are revamping their legacy systems and investing in technologies that give them real-time supply chain visibility. They are laying the groundwork for future strategies, including combining advanced analytics, big data, and GenAI to optimize value chains; integrating AI decision-making capabilities with supply chain digital twins; and implementing real-time enterprise resource planning (ERP) to improve decision-making.

From economies of scale to economies of skill

One of the biggest barriers to optimizing the latest technological advancements is a skills gap. Workers simply do not have the skills that companies will need to remain competitive, and it is estimated that 60% of the global workforce will require significant training to meet the future needs of their employers. Leading manufacturers are far better prepared for the future, with some 72% of those surveyed saying their operations people have the skills to run the supply chains of 2030, compared with only 53% of non-leaders. These companies are not only investing in reskilling and upskilling programs, but they are rethinking organizational structures—for example, shifting to a model in which 80% of the workforce is able to work across functions, while the remaining 20% focuses on specific capabilities.

From regulatory compliance to innovative sustainability

Most companies today say that sustainability is high on CEOs’ agendas, but some find meeting sustainability goals to be challenging. For example, only 14% of companies surveyed said they are redesigning their manufacturing networks to reduce Scope 3 emissions.

The cost associated with achieving sustainability goals is a frequent barrier. Nevertheless, leading manufacturers often prioritize sustainability over cost: two-thirds (66%) say they have selected a supplier that had the best sustainability credentials but not the best price, compared with only a third (34%) of non-leaders.

These companies are building fully measurable zero-carbon supply chains, with an eye to reducing Scope 1, 2, and 3 emissions. By definition this involves close collaboration with suppliers and customers to ensure everything from raw materials to final product is as sustainable as possible.

From cost-driven to customer-value-driven

Meeting consumer demand in a challenging value-chain environment helps companies retain or even gain market share. But this requires a reorientation that prioritizes short lead times, in order to meet customer demand. Easier said than done: while a majority (60%) of companies we surveyed rate customer value as one of the priorities driving supply chain reconfiguration, only 15% could cite tangible examples of actions designed to meet customer expectations.

Leading companies maintain a close watch on customer needs, creating omnichannel strategies to ensure rapid order fulfillment and building flexibility into manufacturing processes. Once again, effective demand planning will require end-to-end supply-chain collaboration. This allows manufacturers to rewire their supply chains so that customer value can be created at each point in the supply chain.

Enabling tomorrow’s value chains to flourish

There is little doubt that ongoing disruptions mean that organizations will need to rewire their value chains for better flexibility and value creation. The effort will take time, capital, and commitment. It also calls for a step-change in current levels of stakeholder collaboration, including between the public and private sectors. Multi-stakeholder engagement will play a vital role in the development of industrial policies and strategies aimed at creating global value chains that are both robust and resilient in the face of the challenges of the future.

About the Author:
Per Hong is a Senior Partner in the Strategic Operations practice of Kearney, a global management consulting firm and co-author of From Disruption to Opportunity: Strategies for Rewiring Global Value Chains.

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