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Crisis and climate force supply chain shift

By Richard Milne in Amsterdam

Published: August 9 2009 18:43 | Last updated: August 9 2009 18:43

Manufacturers are abandoning global supply chains for regional ones in a big shift brought about by the financial crisis and climate change concerns, according to executives and analysts.

Companies are increasingly looking closer to home for their components, meaning that for their US or European operations they are more likely to use Mexico and eastern Europe than China, as previously.

“A future where energy is more expensive and less plentifully available will lead to more regional supply chains,” Gerard Kleisterlee, chief executive of Philips, one of Europe’s biggest companies, told the Financial Times.

Supply chain experts agreed, with Ernst & Young underlining how as much as 70 per cent of a manufacturing company’s carbon footprint can come from transport and other costs in its supply chain.

Dan O’Regan, the accounting firm’s head of supply chains, said: “It is not just the prospect of regulatory changes but also the downturn that is forcing many organisations to consider restructuring their supply chains in their entirety. I think you will find smaller, more regional supply chains.”

Mr Kleisterlee said businesses needed to find ways to build an economy on a sustainable basis ahead of the Copenhagen summit on climate change later this year, with “a review of global logistics and transport” one of the important steps. He said that until now cheap transport costs had meant “Mexico wasn’t competitive with China for supplying the US”.

But he now forecasts that companies such as Philips will use countries such as Ukraine for supplying Europe rather than Asia.

David Bartlett, an economic adviser to accounting group RSM International, pointed to industries such as steel, automaking, aerospace and furniture where “there is a sense that distance to market really does matter”. One example he cited was the use by Boeing of Mexican aerospace suppliers. He added: “We really are seeing a shift from a global supply chain to a regional one.”

In Europe, there have been many examples of companies bringing manufacturing back home or closer to the domestic market, from Samas, a Dutch furniture maker, to Zumtobel, an Austrian lighting group.

Mr O’Regan said several forces were causing companies to regionalise supply chains from rationalisation of production networks and regulatory change to pressure on the speed of delivery and the erosion of many of the cost or labour advantages some countries had enjoyed.

Mr Kleisterlee said: “An economic crisis is a period when you should step back and think: is this a moment to make some fundamental changes?”

Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from and redistribute by email or post to the web.


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