Companies are increasingly looking to mitigate supply chain risk to both better manage their
businesses, as well as shoring-up a business to sell. This trend was initially (2014–2017)
fueled by labor shortages and increased manufacturing costs in China. While many Asian countries
competed for this shift, Vietnam took advantage with its lower labor costs and younger workforce
(Figure 1). In 2019, the ongoing trade war between the U.S. and China, with each side imposing
mounting tariffs, demonstrated exposure risk as uncertainties negatively impacted businesses and
weighed on the global economy (Figure 2). Now during Covid-19, this trend has become heightened
because of supply chain disruptions which began in December 2019. Business continuity risks are
being highlighted during Covid where manufacturers are dealing with the inability to produce in
certain countries due to issues with labor, production, etc., as well as suppliers who cannot
produce and distribute inventory.
Given the current trend towards supply chain diversification, competition among alternate
sourcing destinations is heating up, and a finding the right location and partner is
increasingly becoming difficult. As an example, India is offering companies land as a way to
lure companies to leave China and invest in India. Firms now are required to balance sourcing
decisions being driven by straight economics with business continuity. Mitigating risk now
involves the countries chosen for manufacturing (and whether to even look beyond your own
borders), the volume of manufacturing partners to include a bench of suppliers rather than just
one or two, and developing a “Plan B” in their supply chain to allow for business continuity
"The issues for us have been stretched out far beyond the domestic
market. Our facility in China was shut down mid-January, so for a solid 2 months before
issues in the States we were operating with supply issues and had no workaround other
than to stretch inventory."
America, U.S. Consumer
Labor costs, the trade war, and Covid have pushed a growing list of U.S. companies (Hasbro,
Uniqlo, Levi’s, Crocs, Calvin Klein, Tommy Hilfiger, etc.) to move their entire manufacturing
base out of China. Top Japanese companies like Sony Corp., Ricoh Co. and Asics Corp. have also
been shifting production away from China to bypass U.S. tariffs.
"We thought we were near the top of our sector for supply chain risk
management, but it was only risk mitigated within the same cost structure."
—Head of Supply
Historically, there were three primary factors that were considered in developing the sourcing
supply chain—cost, quality, quantity (bulk) and reliability. Now companies are increasingly
looking at three additional factors: geographic diversification/profiling, traceability
(visibility), and a combination of bespoke and bulk (Figure 4).
Firms looking to adapt their evolving diversification requirements need a commitment to risk
mitigation through smarter, and more malleable supply chains. The ensuing section highlights the
two new areas for firms to focus on—namely geographic diversification and traceability.
How to Address Geographic Diversification:
Macro prioritization of countries and identification of potential manufacturers is often the
first step towards diversification. Important to note, in Asia it is not necessarily a country
strategy but rather a city strategy, with many emerging cities within Asia vying for
manufacturers. The challenge for U.S. firms is navigating through the nuances and prioritizing
based on a multitude of factors, as illustrated in Figure 5.
Once a company has identified a country/city which offers the best options, implementing a
supplier diligence on short-listed manufacturers is a critical next step. Supplier diligences
should cover a multitude of factors to highlight the robustness and sustainability of the
supply chain (Figure 6). Companies should look beyond short-term cost savings and consider
long-term partnerships to further manage business continuity and risk.
While open borders assist with supply chain diversification, firms should not neglect their own
domestic capabilities as another method to safeguard and mitigate risk within their supply
chains. Developing both a domestic and global supply chain strategy can assist companies
navigate planned and unplanned risks such as Brexit, increasing cost of labor, logistics,
tariffs, etc. Better for companies to be proactive than reactive to potential future
Sourcing in multiple countries brings with it a number of considerations not encountered
domestically. Some of the complexities include:
How to Address Traceability:
Supply chain visibility is part of this evolving framework which brings the need for
traceability in systems and allows firms to utilize their data to dashboard real-time
information on their supply chains (Figure 7). The ability to look at different
platforms/systems and aggregate disparate data across platforms provides companies with unique
insight via audience-specific dashboards (C-suite, manager-level) to perform real-time supply
chain management. Visibility into potential supply chain disruptions helps companies mitigate
risk by identifying and assessing current risk and develop appropriate strategies. This allows
for diversification within suppliers to provide business continuity.
For mid-market investors, supply chain resilience was a growing issue pre-Covid, and now has
become a much larger issue while managing within Covid. Investors are seeing lots of indirect
exposure risk they did not see and/or anticipate before.
Managing supply chain risks thru the evolving new framework (Figure 4) allows for companies (and
investors) to ensure business continuity and higher value creation.
Paul Edwards is a Managing Director at Stax, Inc. where he leads the firm’s private
equity practice. He directs client engagements on behalf of major corporations, upper
and upper middle market funds and their portfolio companies.
For more than a decade, Edwards has led projects at Stax, bringing together a network of
resources from various areas of expertise throughout the firm. He supports nearly 50
transactions and growth-strategy engagements annually for the world’s largest private
equity firms and their portfolio companies across five continents, and the practice he
leads now supports over 100 transactions per year. Edwards also specializes in providing
data-driven analysis to support investment strategies across multiple business sectors
including healthcare, industrial/ manufacturing, agriculture, education, and technology.
A published thought leader in the Journal of Private Equity, Edwards holds an M.B.A.
from the European School of Business Management (U.K.), and a B.S. in Material Science
and Industrial Management from the University of Wales (Swansea).
Dr. Kumudu Gunasekera
Dr. Kumudu Gunasekera, Ph.D., is a Managing Director of Stax, jointly heading Asia
Pacific operations. For over 20+ years he has been working with investment banks,
private equity funds, multilateral donor agencies, government institutions, & large
corporates across multiple industries. During his tenure, Stax grew its presence within
the APAC region, expanding its service offerings in consulting and analytics to offer
actionable insights to help clients enhance value. Prior to joining Stax, Kumudu was a
Principal Economist with Parsons Brinckerhoff (now WSP). Kumudu has published numerous
articles in peer-reviewed journals and industry magazines; has presented at conferences,
workshops, focus groups, and stakeholder meetings 10+ countries; and has instructed
numerous undergraduate, graduate, and professional courses. Kumudu earned his Ph.D. in
Economic Geography, and a joint M.A. in International Relations and Environmental Policy
from Boston University. He has a B.A. in Economics from Hobart and William Smith