Do shorter supply chains really cost more?

shorter supply chains

Shortening global supply chains will lead to significant extra costs, claimed Steven Brakman, a lecturer in international economics at the University of Groningen, in the Dutch financial newspaper Het Financieele Dagblad recently. However, all Brakman’s comments reveal that he doesn’t really understand global supply chains. One only needs to compare the financial performance of Inditex (parent company of the likes of Zara, with short European supply chains) against that of H&M to see that a shorter (and hence more agile and lower-risk) supply chain is much more profitable.  

In our own recent study of 143 European manufacturing companies, 45% of the respondents indicated that they have already switched to alternative suppliers (in Europe) due to the coronavirus crisis and disruption to supplies from China. In a comparison of the total landed costs of goods (components, semi-finished products) from China versus Europe, the difference is often minimal. However, when you also consider that the longer supply chain from the Far East ties up much more capital, then sourcing goods from Europe becomes more interesting from a cost perspective after all.

And that’s not to mention the increased agility and responsiveness associated with a shorter European supply chain, enabling you to react quickly to the fast-changing market demand. Besides that, you have a clearer view of the working conditions at suppliers in Europe. It is for sustainability and agility reasons that the Dutch mattress manufacturer Auping sources its raw materials within a 300km radius of Deventer, where its factory is based, and only sources goods elsewhere in Europe in exceptional circumstances.

Complex interdependencies

I believe that economists forget to include all these considerations in their macroeconomic models. They probably can’t even model and measure such complex interdependencies. Even Statistics Netherlands (CBS), which approached me for the underlying results from our European research, works with wholly outdated sector codes for its statistics. First and foremost, I am amazed at the way in which certain well-known manufacturing companies are registered at the Chamber of Commerce.

Besides that, in the physical goods business, it’s not about sectors at all, but rather about ecosystems that result in specific end products. The automotive ecosystem includes the multinational Henkel, for example, which not only supplies adhesives to car makers but also owns brands such as Pattex for the DIY sector. The automotive sector was severely disrupted by the coronavirus crisis, whereas the DIY market experienced a surge in demand. Try to put that in an economic model…

Outdated models

In my opinion, the current outdated models of CBS and economists are unable to deal with this differentiated impact of Covid-19 on suppliers such as Henkel (which also makes Persil detergent) – even though there is now sufficient computing power and machine learning capability to develop self-learning models. It’s time that CBS and economists finally understood how global supply chains actually work. Supply chain management deserves the same respect as financial management.

Martijn Lofvers, Chief Trendwatcher Supply Chain Media