Globalization and the new global economic system have brought enormous benefits and lifted millions out of poverty across the globe. But it has also started posing significant risks. Particularly the transportation of people and goods illustrate the achievements and the drawback of globalization.
Role of location
Humans have been traveling and trading across vast distances for centuries. However, in the XX century, globalization had increased exponentially especially due to advancements in travel. Travel has literally made the world smaller. The XX century led not only to the rise in global transportation, but also of the world wide web, the end of the cold war, trade deals, and new rapidly emerging economies – all these factors combined creating a system that has made nations dependent on each other. To such an extent that, if a nation is hit with a disaster, the effect is felt on the other side of the globe very fast.
This interdependence was recently recognized (just think of one example, covid-19), and it has led to a new phenomenon that firms and people operating them have started exploring alternatives closer to their homes. Firms have accepted that cheap price will not help them against volatility in global markets. Moreover, as the industry’s supply chains lengthened, transporting the products over thousands of miles significantly increased the strain on the environment caused by moving goods around the world.
Reshoring – what is it?
In business, risk avoidance and vulnerability of supply chains, as well as sustainability concerns started to overweight. Businesses started looking for opportunities in closer locations. This new phenomenon is called reshoring, in other words, a kick-start to bringing the industries back locally.
Reshoring, or the act of relocating a firm’s manufacturing operations back to the country of origin or nearby, is gaining popularity in the 2020s. Reshoring offers a chance for businesses to gain a viable balance of environmental sustainability and economic reward.
Reducing the Length of the Supply Chain
To combat the challenges related to distances, many firms have invested in proximity manufacturing, commonly known as “local for local”. This is a strategy that focuses on creating goods near the locations in which they will be sold. Proximity manufacturing enhances sustainability through greenhouse gas reduction.
Increasing Regulatory and Environmental Compliance
In previous decades, firms directed their manufacturing toward less developed countries. It was motivated by lower labor costs, as well as less stringent regulations. Less stringent environmental regulations resulted in creating “pollution havens”, a phenomenon in which firms in high-wage countries export dirty manufacturing processes to low-wage countries in an effort to avoid the costs associated with strict environmental laws. This migration to low-cost countries is particularly potent within CO2-intensive sectors, such as steel refinement and cement production.
The changes in EU regulations (EU 2023) made it mandatory for all somewhat big companies (500 people employed and more) to publish their corporate sustainability reports, and the situation has started changing. It does not matter anymore where the company pollutes since the results are anyhow made visible and published via the calculations and reporting of CO2 emissions across all three scopes: scope 1, scope 2, and scope 3 (which includes CO2 emissions from all supplies). For this reason, it is imperative that firms commit to reducing their carbon emissions and environmental footprint toward less harmful operations. Compliance with the new EU regulations (EU 2023) is a tangible method for accomplishing this goal.
Innovating for Becoming Agile and Local
A third way how reshoring allows for greater sustainability is commonly known as agile manufacturing. This is an approach that allows rapid responses to consumer needs. Agile manufacturing plus automation can provide a competitive advantage for firms that produce their products locally. In fact, a key element to successfully integrating agile manufacturing is the availability of effective human capital. (Agile, Vorne 2023)
The level of efficiency provided by agile manufacturing not only reduces the environmental footprint of an organization through waste reduction but also allows for more sustainable operations through the elimination of unnecessary resource usage. Finally, to stay competitive when producing locally, the firms also have to accelerate innovation in their products and sourcing.
Eliminating Geopolitical Risks
Also, the trade war between U.S. and China combined with the Covid-19 pandemic has moved companies to actually start considering re-shoring seriously. For example, a robust, secure, domestic industrial base for lithium-based batteries requires access to a reliable supply of raw, refined, and processed material inputs for lithium batteries. In such a business context, the goal is to reduce Europe/U.S. battery manufacturing dependence on scarce materials or materials controlled by unreliable partners. This is necessary for basic risk management, in order to develop a stronger and more secure supply chain.
Also, as people around the world are becoming aware of the environmental impact and companies are becoming ever more sensitive to reputational damages, it becomes critical that things are done right in all parts of the supply chain, both upstream and downstream. For example, in the case of producing lithium batteries, it means that new mineral extraction must be held up to modern environmental standards, according to the best-practice labor conditions, based on conducting rigorous community consultation, including with tribal nations through government-to-government collaboration, – and all that begin done while recognizing the economic costs of manufacturing, waste treatment, and processing.
A Way Forward
The new trend does not mean that globalization will cease or it will be reversed. However, it has definitely slowed down, which is not entirely bad news considering the rapidly rising temperatures and constantly increasing CO2 levels around the globe (WMO 2023).
Reshoring enables firms to be more sustainable, and sustainability keeps firms economically and socially viable. This is exactly what the society is looking forward to. At the same time, we must remember that shifting away from commonly accepted offshore supply chains and manufacturing is anything but easy. It requires a clear vision, accountability, and most importantly, commitment from companies to take up the challenge of changing the status quo and willingness to evolve in the ever-changing business landscape. In other words, taking meaningful steps to make the world a better place, and walk the talk.
About the author:
Satish Kumar is currently a Senior Sourcing Engineer at Valmet Automotive and a graduate of the Master´s Programme in Business Informatics. His interests are related to developing sustainable supply chains. Satish is co-teaching in the “Corporate Social Responsibility” course at Metropolia Summer School in Business in 2023: https://www.metropolia.fi/en/academics/summer-studies/masters-summer-school.
References:
Agile Manufacturing. Overall Equipment Effectiveness Manufacturing Made Easy by Vorne, https://www.vorne.com/learn/tools/overall-equipment-effectiveness/
Bloom, J. (2020). Will coronavirus reverse globalisation? BBC News, April 2, 2020. https://www.bbc.com/news/business-52104978
Bové, A.-T. and Swartz, S. (2016). Starting at the Source: Sustainability in Supply Chains. McKinsey & Company, https://www.mckinsey.com/capabilities/sustainability/our-insights/starting-at-the-source-sustainability-in-supply-chains
EU (2023). Corporate Sustainability Reporting. European Commission: What EU is doing and why. https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
WMO, World Meteorological Organization (2023). Global Temperatures Set to Reach New Records in Next Five Years. Press-release. May 17, 2023. https://public.wmo.int/en/media/press-release/global-temperatures-set-reach-new-records-next-five-years
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