A new trend in global procurement and supply chain management is friend-shoring. This sees companies forming trade partnerships based on shared values and mutual interests between countries, potentially offering greater stability.
Call a friend
Like all “shoring” options — off, near, on, re etc, friend-shoring is based around the resilience and value in the supply chain, says James Kearney, MSc Chartered Member Institute of Logistics & Transport (CMILT), education manager CILT, network manager CILT mobility & supply chain, Skillnet. “Supply Chain managers must constantly balance cost/value and resilience/risk in the supply chain. The term was coined by Janet Yellen in April of 2022 in a speech to the Atlantic Council where she highlighted the issues with allowing ‘countries to use their market position in key raw materials, technologies or products to disrupt our economy or exercise unwanted geopolitical leverage.”
“The concept is long-pursued at government level for sensitive and strategic items — like restrictions on the sourcing, sale and distribution of military equipment, strategic energy reserves, intelligence sharing and resource availability. The key difference appears to be the idea that mainstream business should consider a similar approach.”
We live in a world where products can be made anywhere, shipped from anywhere and delivered to customers all around the world through multiple channels, says Lorcan Sheehan, founder and chief executive, PerformanSC. “For years companies have sought competitive advantage by strategically locating manufacturing and distribution operations. In recent years, attitudes towards supply chain risk and sustainability are changing priorities in international supply chain design.
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“The disruptive impacts of geo-political risks have been evident with the invasion of Ukraine by Russia, and it heightened the awareness of other potential geo-political fault lines in areas with high concentrations of supply chain activity. The trend has been towards shorter supply chains (from a sustainability perspective) with critical items being sourced in stable economies that are less likely to present geo-political challenges — so-called ‘friends’.”
Finding friends
Governments have tried to influence friend-shoring from a policy perspective across critical economic and social goods —microchips, pharmaceutical products — but this has been accelerated by the realisation of global supply chain vulnerabilities through the Covid-19 pandemic and the more recent war in Ukraine, says Sheehan. “The speed of closure of regions, countries and supply lines through health policy issues, economic policy shifts (tariffs) and trade sanctions have brought a realisation that supply chain security requires access to stable sources of supply that are unlikely to be disrupted by political actions and instability. Companies use the data in their supply chains to optimise the evolution of their manufacturing and supply chain footprint, but the supply chain resilience and sustainability now have a higher weighting than cost in that consideration.”
In considering locations to locate manufacturing and supply chain functions, access to key markets, cost and infrastructure remain critical, says Sheehan. In looking for ‘friends’, companies also need to consider political stability, energy security and labour availability.
Friends may be something of a misnomer, says Kearney. “Instead think of it that companies need to consider which countries are more or less likely to face restrictions through political actions. This may have been the case for many companies in the UK through Brexit when EU companies faced sourcing challenges many just excluded the UK due to uncertainty around the relationship post-Brexit. Broadly, however, Irish companies will consider any democratic and stable country to be a reliable market. Subsequently, a hierarchy may emerge for the rest.”
Ireland’s friendships
Ireland is well positioned within the EU, as a neighbour to the UK, with close ties to the US and other leading economies, says Sheehan. “We also have a strong supply chain tradition, not only in the manufacture but also in the management of the execution of global supply chains. In this regard, we would pass many of the criteria of being a ‘friend’ and an attractive target for investment.
“We also need to decide for ourselves the role that we want to play within global supply chains. We have a leading position in food, pharmaceutical, and medical devices manufacturing, but in other industries that manufacturing base has moved on and is unlikely to return. We have also become leaders in orchestrating global supply chains, regardless of where the manufacturing occurs.”
Kearney agrees trade between Ireland and the US/UK/EU is unlikely to be affected (Brexit notwithstanding) but relationships between the western alliance and some parts of the world may determine a great deal of Irish trade activity and the fear is that effective decisions will have to made at very short notice. “Friend-shoring is to set about avoiding these impactful events by undertaking trade efforts in markets that are least likely to be the focus of these impactful decisions.”
Choose your friends wisely
Some countries were slow to get behind sanctions against Russia and to condemn Russian aggression — this may have motivated political leaders to encourage commercial enterprise to look more closely at these relationships, says Kearney. “As Russia becomes more and more isolated it seems friend shoring may be less important than other trends. Particularly as western solidarity holds the line in support of Ukraine, countries that may have sought to ‘exercise unwanted geopolitical leverage’ may now believe that this solidarity would withstand these efforts. This does remain a very fluid situation.”
Apple has recently moved to expand production in Mexico and India and reduce activity in China. Though not a withdrawal, it may certainly be said that diversifying production is a safeguard against political risk and enables Apple to have some confidence in the ability of its supply chain to survive any disruption, says Kearney. “At this stage of the Russian aggression in Ukraine supply chain managers might expect that sanctions will start to spread to countries supportive of Russia but not yet included in the sanctions and managers may be considering the sustainability of relationships they currently have in these markets.”