In recent years, companies around the world have started to rethink the structure of their supply chains, driving a shift toward regional production and sourcing that can be traced back to the early days of the pandemic.
In many ways, the pandemic represented a critical turning point for how companies viewed the structure of their supply chains. When manufacturing in China shut down early in the crisis, it exposed the fragile nature of sourcing and procurement strategies that relied on a single country. Although many businesses have long understood the theoretical risk of concentrating production in the abstract, once factories closed and goods stopped moving, the consequences became immediate and visible across industries.
The experience forced companies to ask some difficult questions: How reliant are we on a single country for key inputs? What parts of our supply chains should we be worried about as a result? And what would happen if another disruption occurred?
Those conversations helped spark a larger push toward regionalization, and today, we’re seeing supply chains organized more around major economic regions rather than a single global production hub. Essentially, companies are increasingly manufacturing and sourcing closer to the markets where they sell their products.
The advantages of that approach are relatively straightforward. Regional supply chains help mitigate risk, and diversifying production across multiple regions reduces a company’s exposure to things like geopolitical tensions, trade disruptions or natural disasters. And if the last several years of ensuing disruptions have shown us anything, it’s that it doesn’t take much to create a shipping bottleneck that can end up costing a business millions, making it all the more important to have multiple sources to lean on.
Next, regional production improves customer service by placing manufacturing and distribution closer to the end consumer. When products are produced next to the markets where they’re sold, companies can shorten lead times, respond faster to demand changes, and maintain more consistent product availability.
And finally, regionalization can reduce freight costs. Transportation is often the single largest operating expense in a supply chain, and shorter shipping distances can significantly trim those costs, while also reducing exposure to volatile freight rates.
Real Estate as the Foundation
Regionalization also has physical implications. Producing closer to customers requires companies to rethink where their factories, warehouses and distribution centers are located, and in many cases that entails building entirely new networks of facilities within key markets. That shift makes real estate and site selection essential to the regional supply chain conversation, since the locations companies choose ultimately determine how efficiently those networks can operate.
When it comes to executing a regionalization strategy, identifying the right real estate has long been overlooked as a critically important piece of the puzzle. In the early days of supply chain education, the textbooks rarely contained a chapter on real estate, and the result has been a decades-long disconnect that we’re still trying to bridge even today.
In a broader context, if you don’t have a facility, you don’t have a supply chain. And if you don’t have the right plan in place to find a property to build that facility on in the first place, the whole house of cards comes tumbling down. However, once that strategy is established, site selection can flow naturally, and that’s where a strong, stable supply chain plan can be pinned to the ground.
Rethinking Site Selection
As supply chains evolve, the criteria for selecting facility locations have changed. For decades, the guiding principle in real estate was often summarized as “location, location, location.” But while location still matters, companies now evaluate potential sites through a broader lens of “people, proximity and power.”
First, you need to ensure that your site has an available labor force to staff up a facility (people). Second, the site must be within a practical range of customers and transportation infrastructure, ensuring that the facility can be connected to highways, ports, rail networks and population centers (proximity). And third, a modern facility needs to have the latest automated technology and equipment, making it essential to have a reliable energy infrastructure that can provide significant electrical capacity (power).
For manufacturing facilities, the requirements can be even more complex. Some operations require large amounts of electricity, water or specialized utilities, all of which must be available before a project can move forward. Large distribution centers will also often need to be able to power artificial intelligence systems and robotics.
Technology and Productivity
In the early days of warehouse automation, advanced robotics were largely limited to massive companies with the scale and capital to invest in new systems. We saw that play out firsthand with early adopters like Walmart, IBM and Procter & Gamble.
Today, the economics of automation are changing. As it goes with most technologies, the capabilities of robotics and automation have continued to improve while costs have fallen. As a result, it’s become far easier for a broader range of businesses to justify the investment.
That trend is making automation accessible to a much broader range of companies, including mid-sized businesses that previously couldn’t consider the investment. As systems continue to become more affordable and easier to deploy in the days to come, more companies will integrate robotics and automation into their operations.
Incentives Reshape Economics
When it comes to balancing government incentives with finding the right facility, it’s important to remember that no amount of incentives can make a bad site good.
Yes, programs designed to encourage domestic production like the CHIPS Act can help offset some of the costs associated with building a new facility. But incentives should be seen as the cherry on the top, not the base of the sundae.
In most cases, businesses evaluating new facilities should narrow their options down to a handful of viable locations that fill the “people, proximity and power” requirements, and only then should incentives come into play, serving as the final factor that tips the scales between otherwise comparable sites.
Ultimately, when you talk to C-suite executives, you won’t hear them discussing something like reshoring as an end in itself. What they’re really talking about is finding ways to save money, get closer to the end consumer, and mitigate risk, and regionalization happens to be the way to accomplish all those goals. While achieving all of that can be a long haul, what matters most is sticking to a process and making smart decisions for your business.