Transcript
Intro: You’re listening to Supply Chain @ KPMG. A KPMG podcast series that addresses your supply chain needs from strategy through execution.
Mary Rollman: Welcome to the KPMG supply chain podcast. My name is Mary Rollman and I lead the supply chain practice at KPMG. Today we're exploring the intriguing realm of global supply chains and the latest trends redefining the industry. With me today is Brian Higgins, the US consulting leader for industrial manufacturing, who has a background in supply chain and also is one of the sponsors of the report that we're gonna talk about today. Brian, do you want to introduce yourself?
Brian Higgins: Yeah, Mary, happy to. Thanks so much for having me. As you pointed out, I lead our consulting organization for our manufacturing sector, but also, as you point out, I'm really a supply chain person to the core, and I had the privilege of sitting alongside for the ride on this particular piece that we're talking about today.
Mary Rollman: Absolutely. It is a time where we, we're starting to see some, some pretty significant shifts. Let me demystify for the audience the report that we're talking about. It's a recent KPMG report titled The Proximity Premium. It's focused on strategic shoring as a method to mitigate the risk of supply chain disruptions. And according to the 250 senior executives that answered the survey, there were 3 areas that were all in contention for the business case as to why near shoring or proximity was important to their supply chains. Those are greater agility and resilience, a faster time to market, and better access to skills and talent. Brian, I'd love to hear your thoughts and responses on what the key advantages are to near shoring and why those three bubbled up to the top.
Brian Higgins: Yeah, again, happy to. I mean this is incredibly timely and incredibly impactful topic. And as you know well, Mary, it's dominating our client's agenda right now. And when we talk about near shoring or strategic shoring, I know in the paper Mary, we sort of, oftentimes they're used interchangeably. But, you know, if you peel that back just for a second, what we're really talking about is companies need and desire to optimize the supply side assets. So, these are the deliberate decisions around, you know, what is my manufacturing footprint look like? Where is my supply base located? Where are my distributions located? So, those are the fundamental kind of decisions that we sort of ball up into this strategic shoring. It's all about optimizing those supply side assets and, and essentially just trying to figure out how you can locate those sources of supply and those sources of manufacturing closer to the end market. And here in this particular conversation, obviously, we're talking about the US market and servicing US and other markets. This rise in this, this strategic shoring, as you, as you referred to it, the interesting thing is when you cited some of those survey results, right? They were clustered a little bit, meaning, you know, there was a portion of the respondents that said, yeah, it's all about greater agility, a portion that said it's all about faster time to market and a portion that said it's all about access to better skills and talent. You know, I, I don't know if I would absolutely be able to come back, Mary, you know, you know, which, which of them is, is least valuable. But I can say without any hesitation that there is a huge rise in the premium that people are placing on that notion of flexibility. You know, if you think about supply chain and sort of what we've navigate on our client's behalf for many, many years, it's always a trade-off and it's a trade-off on cost, quality, performance, flexibility, right? Those are bigger dimensions. But this clear premium on flexibility is really emerging. I think that's reinforced by some of the study that you just referenced, with these 250 executives. I think they're raising their hands now saying, hey, given the instability that I'm trying to navigate, that, that flexibility is really coming out on top as a key expectation and, and benefit driver associated with some of this strategic source or strategic shoring efforts that are on the way.
Mary Rollman: Yeah, very different than only a few years ago where cost was the only lever, right? And so, you said a lot about, you know, talk and results and, and what people are saying, right? And I would love to get your perspective on this new concept of near shoring, which we all know near shoring isn't a new thing. It's a very traditional supply chain strategy to use. How much of this is talk versus action, in, in your opinion? Are organizations really changing from this global supply chain to something that feels a little more regional?
Brian Higgins: Yeah, I, I think it is, um, I think it's a marked trend, so I would answer your question of, of yes, right? It's not always easy to action, but virtually every account and every client interaction that I have, there is this trend anchored on relocating supply in or around the US, right? It's been in flight for a while and, and yeah, companies are in fact changing their structures to the extent, as I said, that they can. And there's some really good reasons that are driving it, right? And, you know, you, you had mentioned, hey, it wasn't that long ago where a lot of these supply chains were built on, you know, lowest cost kind of principles. Most of the global supply chains in place today for US-based multinationals, they were designed at a different time for a different purpose, and they were anchored on certain assumptions. Current administration is really challenging and stripping away a lot of what people thought were benefits of trade liberalization and global interdependency. So that, that assumption is no longer true. The, the second one was really related to some of the cost dimensions that you've already alluded to this belief in long-standing labor arbitrage, right? The cost of doing business differential, that has, that has eroded significantly. The last two areas that I'll round out that sort of meet the same criteria of once true but no longer true the tax code provisions, right? They, they, they were in, in for the most part, generally accepted to provide an advantage, you know, and promote kind of some of this global trade doctrine. And, and then the last was executives, supply chain executives thought that it was a perfectly acceptable strategy to use inventory buffering as the primary and first line of defense against supply risk. So, you add up all those things, Mary, all those things that used to be true and no longer are, and it's really forcing companies and supply chain executives to rethink their overall structure, right? So, to, to answer your initial question, yeah, absolutely. I think this is a documented trend, not an expected trend.
Mary Rollman: Well, that's a really good point, Brian. Considering the, the cost aspect of the global supply chain was the only lever, and one you couldn't have convinced supply chain executives would be as volatile as it was in the last 5 to 6 years. Therefore, right, there was no need to consider some of the near shoring actions up until, you know, the pandemic, and then we started seeing some of these business cases shifting very, very quickly and the need to really rethink your source of supply, especially for the US market, which is, of course, what this report was focused on. So now I, I would love to look into the crystal ball of Brian Higgins and really layer over the latest discussions and changes around geopolitics, right? Geopolitics are going to be a part of supply chain for the foreseeable future. Do you think that 80+% of executives that said that they are going to truly near shore, bringing their supply closer to the Americas for the US market, will the changes in geopolitics potentially maybe change their attitude towards near shoring? Again, this is you predicting it wasn't in the report, but I'd love to hear your perspective.
Brian Higgins: I don't know how to answer it fully, but what I can describe, Mary, is a couple of things, right? One is the geopolitical actions are for sure gonna continue. I think the second point I would mention is that companies and chief supply chain officers' confidence in their current operating model and structure has significantly eroded. I think that all these stresses and strains have really shined a bright sunlight on their current operating models and just reinforced some of the things we talked about just a couple of minutes ago, which is that they're very, very exposed and that they have very limited flexibility, a ton of increased risk, and are sitting on operating models that are certainly not suitable to sort of futureproof them, right? So, none of them have sort of backed into optimal. So, I do feel like the, the results on the proximity and premium study that suggested that, you know, 81% of the executives expect that these strategic shoring shifts, you know, to be, to be complete or have some advancement in that in the next several years. I don't see anything going on the geopolitical side that's going to dampen that, right? I think for geopolitical reasons and other reasons that supply chain executives are probably gonna continue down that march to try to get more strategic shoring to shorten up their supply chain, to reduce the risks a little bit, to introduce more option rights and flexibility. I think that's going to be the kind of the, the, the new North Star, because companies aren't gonna be able to avoid future stress and strain. I think they now understand that, right? This is not just a period of increased stress and strain and uncertainty. I think that the general expectation is that that's gonna persist for a while. Disruptive events are going to occur and it's gonna lead Mary to this bigger need for establishing more shock absorbers. And that's what I think is gonna be a more fundamental and important design principle. That is a recognition that says, I can't avoid all this stuff, but I can certainly structure my supply chain, my operating model such that I have better shock absorbers. And I think part of that strategy will include optimizing supply side assets in the, in the fashion that we're talking about with strategic shoring and strengthening capabilities required to manage in that new structure. Because if you think about it, you can't just dictate a new strategy and expect that there's no additional capabilities that you're gonna need to manage in that environment. So, so I think it's a combination of both here.
Mary Rollman: If my hypothesis would have been built into this study, I would have guessed that the real actions that companies were taking might have been a little lower than what was actually reported. It was actually pretty significant in terms of the number of respondents that, that really were making changes. It really showed and demonstrated that supply chains have become such a critical part of businesses that they absolutely have to have their supply chains working. So, one other question for you, and this goes along with the, you know, the survey results and the changes. I asked you if it's a trend, right? Because the whole trend towards globalization, now we look at regionalization. Are there other supply strategies that you think companies should be considering to stay ahead of the competition.
Brian Higgins: You know, a, a couple of points, you know, that I, that I think are interesting. And when we initially did this study and it was what Mary, this was late fall, right? So, this is all pretty fresh, right? We had already identified this trend and we were seeking to better understand how supply chain executives and companies were thinking about it themselves. We've got a lot of really important insights. One kind of line of differentiation that we didn't, you know, initially cross, but, you know, I think we're up against it now, is the difference between strategic shoring, as we've sort of defined and how companies were describing their, their moving towards more strategic shoring and near shoring. A lot of the respondents that said they are doing things in that direction are no doubt doing things in Canada and in Mexico, right? And as part of the, the, the near neighbors to the US as part of that strategy. You know, if we ask that question now, get and the latest geopolitical and trade and tariff conversations and the fragility with the, with NAFTA and the, and the, and the, and the Canadian and Mexican kind of border and trade conversations. It'd be interesting just to hear what's happening and what's going forward. So, I think it's going to be interesting to see how much broader strategic and near showing there is versus bringing stuff back into the US, right? And there's a difference there, but the direction travel, I don't think is gonna change whether it's broader, strategic shoring or into the US specifically kinda of near shoring. I think that trend is, is continuing. And the question you asked was also then on, hey, well, what, what should companies do, like recognizing that that is likely, that trend is likely to continue. And I do think, Mary, that there are a few kind of no regrets approaches, right? That companies need to get much better at and ingrained in a much more meaningful way into their supply chain and into their operating models. I think maybe the most important is a deliberate move on simplification and complexity management, right? And every year, we work with so many supply chain executives and so many companies that just throw up their hands and say, hey, I am dealing with more and more complexity every year. It's, it's always getting more SKUs, more service levels, more suppliers, more, more contractual arrangements, more sources of supply. Right? And there's, there's very few companies that fully appreciate the benefits of deliberately simplifying your supply chain and how that can contribute to some of what we're talking about on optimizing the supply side assets, because otherwise, you know, you're just making a difficult job more difficult if you don't have that deliberate simplification and complexity management under control. So that, that's sort of at the front of my mind and when we're having client conversations, Mary, there's a tremendous amount of interest, energy, and in-flight kind of initiatives recognizing that that's, as in my words, no regrets, meaning, you know, you gotta take care of that so that when you do make these moves on strategic shoring or near shoring, you know, you have a, you have a, you have a better chance of navigating it because you've, by definition taken out some of the complexity in route, right? There's certainly a laundry list of other, you know, technology adoptions and AI and Gen AI that we certainly cannot avoid those conversations. But for the sake of this conversation, you know, I would highlight that, that, that notion and that emphasis on simplification and complexity management.
Mary Rollman: Yeah, I'm glad you brought that up because if you, at the end of each one of our podcasts, we, we always talk about how the role of a supply chain leader is not getting any easier. It's getting more and more complex. And I would say your job might be complex, but your supply chain doesn't have to be. So you can always look for ways where you can simplify and decomplexify a supply chain and not let it get out of control. So Brian, I want to thank you for joining me today and sharing your valuable perspective and a very heartfelt thank you to all of our listeners for tuning in. For more information about this topic or any other supply chain topic, please visit us online at KPMG.com/supply chain, and that's all we have for you today.
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