Geopolitical risk | Global Risks Report

4 considerations when reassessing your next-shoring strategy

February 23, 2016
Why manufacturers should pay attention to geopolitical instability and cyber terrorism.

Vice President, Head of Manufacturing

Cindy Slubowski is the Head of the Manufacturing and Wholesale Trade Distribution business... About this expert

electronics

One of the biggest manufacturing trends in recent years is the adoption of a “next-shoring” strategy to produce products closer to a company’s end users, whether retailers or consumers. The benefit of next-shoring is that it allows manufacturers to increase the speed at which new products can be delivered, as well as more customization for each particular market. In addition, savings in shipping, warehousing and labor costs can also be achieved.

A McKinsey report on next-shoring emphasizes that the strategy helps grow new markets around the world by focusing on the physical proximity to emerging markets, innovation, talent and customers. Technology innovation, in particular, is having a profound improvement on manufacturing through its ability to increase quality, allow faster communications and reduce downtime.

However, as the Global Risks Report 2016 released by the World Economic Forum (WEF) in collaboration with Zurich indicates, there is a higher intensity of geopolitical risks in emerging markets and increasing rise in cyberterrorism. These trends could require manufacturers to reassess their next-shoring strategy as they can negatively impact the ability to have secure production locations, maintain innovation-oriented partnerships and access a stable labor pool.

The top 10 risks of most likelihood in the Report include two geopolitical risks—failure of national governance and interstate conflict—along with the technological risk of data theft. Illicit trade is also in the top 10 and a big concern for manufacturers, as it can undermine brand reputation and supply chain resilience.

According to the 13,000 global executive respondents to WEF’s Executive Opinion Survey, failure of national governance is perceived as the highest risk to doing business in Latin America, Sub-Saharan Africa, Eastern Europe and Asia—key markets for new growth for many U.S.-based manufacturers and thus, likely locations for next-shoring. Operating in countries affected by poor governance can increase the risks and costs of doing business. It’s difficult to produce quality, timely products when there is a constant threat of social unrest and economic instability—risks closely connected to the failure of governance as displayed in the Global Risks Report’s interconnections map.

What should manufacturers focus on as part of a reassessment of a next-shoring strategy?

  1. Remain flexible and open to relying more on global trade in order to keep a reliable supply chain and stable labor pool.
  2. Create more resilience in geographic instability by staying engaged with active participants in the region or countries, whether it’s people in government or in business alliances to stay ahead of developments.
  3. Keep informed of population and labor force trends—not only to stay closer to customers, but also to ensure a stable, reliable workforce.
  4. Develop redundant systems, offline backups and parallel networks to help thwart cyberattacks and defend critical infrastructure facilities from malicious threats.
     

The decision about next-shoring production is always a complicated one, but made more so by the increase in geopolitical turmoil and cyberattacks around the world.


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