Supply Chain: Five Key Trends in 2023

By Tsang Ng, Partner, Strategy & Operations, and Goldman Gao, Manager, Strategy & Operations, KPMG China

‘Supply Chain: Five Key Trends in 2023’ was published in the spring 2023 edition of the German Chamber Ticker. Editor: Noga Feige, Senior Editor of the Ticker Magazine. 

Supply chain operations have faced great challenges in recent years due to the pandemic -hurdles that will continue in 2023. Ongoing and forecasted issues, such as inflation and economic recession, the increasing manufacturing costs in China, geopolitical tensions such as the Russian war of aggression against Ukraine and the ongoing tension between China and the US, and others, continue to cast a shadow on supply chains worldwide. All of these could hamper the availability of goods and their logistics, slow port operations, affect containers and ocean freight, increase prices, and create more disruptions.

Despite these changes, 2023 will also bring about trends that can help leaders strengthen organizational resilience: Asia for global as the new normal for supply chains; material shortages and price surges will remain a challenge; implementation of location and product diversification strategies to increase resilience; supply chain technology investment will accelerate; and scope 3 emissions will be scrutinized.

Companies looking to set themselves up for success should secure the following:

Capability: A mature supply chain planning capability to always be ready to tackle supply chain risks and opportunities.

Agility: Making sure the supply chain is responsive and agile to manage the unexpected and deal with disruptions appropriately, efficiently, and profitably.

End-to-end forward-looking visibility: Having ‘control tower’ visibility on key real-time indicators; moving the supply chain beyond one’s business borders; and building real-time collaboration with supply chain partners’ ecosystem will likely be crucial. The end goal is to enhance cooperation across the supply chain ecosystem.

Five Key Supply Chain Trends in 2023

Asia for Global: The New Normal for Supply Chains

Over the last two decades, the world has witnessed a significant shift in the global supply chain landscape. Originally, China was the global manufacturing hub (‘China for Global’). It then shifted to cater to the fast-growing domestic demand (‘China for China), and the focus now lies on Asia for global supply chains. This transition has been influenced by a range of factors, including geopolitical tensions, an increase in the cost of goods sold (COGS) and operational expenditures (OpEX) in China, and the COVID-19 pandemic.

China for Global: China emerged as the world’s manufacturing hub due to low-cost labor, vast reserves of raw materials, and complete manufacturing infrastructure. Multinational corporations flocked to China to take advantage of its favorable policies and vast resources.

China for China: Over the years, the Chinese government has shifted its focus to boost domestic demand, promoting consumption-led growth from the original export-oriented model. The rapidly growing middle-class population in China leads to increasing domestic consumption, which itself leads companies to set up relevant product lines and facilities dedicated to supplying to the Chinese market. The rise of protectionism in recent years and geopolitical tensions have also accelerated this shift: Several countries, such as the US, have imposed tariffs on Chinese goods, leading manufacturers to focus more on the domestic market and minimize exports from China.

Asia for Global: a more diversified supply base with expansion to other Asian countries (e.g., Vietnam, Indonesia) to increase supply chain resilience and de-risk the reliance on a China-heavy supply chain. This trend is driven by several factors, including rising COGS and OpEX in China and increasing geopolitical tension, compared with cost advantages, fast-growing consumer demand, and improved manufacturing infrastructure in Southeast Asian countries.

Key actions to consider:

• With the ongoing geopolitical tensions and trade disputes, it is essential for organizations to diversify supply chain sources with strategies such as ‘China plus one.’ Emerging manufacturing hubs in the region, such as Vietnam, Indonesia, and India, should be considered.
• As businesses shift their global supply chains to other countries in Asia, it is crucial to develop local talent. Companies should invest in training programs to upskill the local workforce, enabling them to meet the growing demands of the global marketplace.
• Leaders should collaborate with local partners to navigate the complexities of the new supply chain landscape. Working with local partners can provide valuable insights into regional regulations, cultural nuances, and market conditions.

Materials shortages and price surges

The upcoming year will likely present challenges for accessing critical materials, and the manufacturing industry could also face difficulties due to rising energy costs and the price surge of key inputs. Various aspects of the manufacturing process may be disrupted as raw materials, as well as spare and maintenance parts, become harder to source. Price fluctuations are also expected to continue, especially for materials such as plastics, resin, timber, steel, and fuels.

Key actions to consider:

• Focus on best-selling products and cut risks by limiting time spent on less important product offerings.
• Maintain relationships with a range of suppliers and ensure excess inventory on key goods, removing any redundancies in the supply chain.
• Prepare for disruptions by being mindful of all other supplier options and learning the resulting financial and operational changes.
• Implement analytics tools capable of tracking live data on demand fluctuations to increase the precision of forecasts.
• Make use of tools like Blockchain to increase supply chain visibility, avoid counterfeit items, and remove time-consuming manual processes by using smart contracts.

Location and Product Diversification to Increase Resilience

Global supply chain shifts, material shortages, and price surges will prompt global corporations with manufacturing operations to reevaluate their manufacturing footprint. Organizations may consider friendshoring and nearshoring strategies but could also explore the possibility of shifting their manufacturing processes entirely onshore. Although this shift may take years to complete, it can provide stability in the years to come.

Another factor that could impact manufacturing in 2023 is the growing influence of online retail on product manufacturing. Online platforms often demand customized products to differentiate themselves from their competitors. As a result, organizations will seek out manufacturers that can provide more customized products. In the life sciences industry, for example, precision medicine will gain more acceptance from regulators, healthcare practitioners, and patients. Instead of manufacturing millions of units for each vaccine or drug and transporting these products across the world, corporations may choose to manufacture specific products per patient. This shift will significantly transform the manufacturing footprint and how supply chains operate. Therefore, companies must determine if they need to establish new supply chains entirely or divert production to other markets with existing infrastructures.

Key actions to consider:

• Consider relocating the manufacturing site to increase product competitiveness in the future.
• Evaluate the possibility of sourcing from diverse suppliers and manufacturers based in various countries to safeguard operations against uncertainties in essential manufacturing markets.
• Look into outsourcing manufacturing processes to global entities, or determine if manufacturing should be part of the company’s core identity and performed onshore in the coming years.
• Determine if mass manufacturing aligns with the business goals, or if the customized manufacturing approach is more suitable.

Continuous Investment in Supply Chain Technology

In 2022, organizations spent large amounts of resources on building a digital transformation strategy that is cloud native and adaptable. As inflation and stagnation remain the main threats in 2023, there will likely be an even greater adaptation of technology and digital transformation to mitigate risks. While last year mainly saw organizations improving customer engagement and further integrating the back office through technology, 2023 will bring new developments in supply chain and operational capabilities. We will also witness an increasing implementation of automation in warehouses and general operations, greater transparency through end-to-end supply chain analytics, and improvements in supply chain planning maturity. These trends are further fueled by large technology corporations, which now provide more comprehensive solutions that merge all supply chain applications into one single platform, instead of creating a multitude of separate programs.

Key actions to consider:

• Focus on the technologies that allow the company to maintain operations regardless of circumstances, such as real-time analytics and planning tools.
• Accelerate the organization’s familiarity with data management and ensure colleagues have the technological skills to make decisions based on available information.
• Identify any repetitive actions that can be simplified with automation.

Increased Scrutiny Over Scope 3 Emissions

ESG strategies of most organizations include extensive guidelines when it comes to supply chains and their sustainability. This year, government bodies and other stakeholders are likely to expect more rigorous supervision of scope 3 emissions. There may be expectations for leaders to mitigate even indirect emissions, and ESG fraud or box-ticking exercises such as greenwashing are now on every stakeholder’s radar. Investors are increasingly oriented toward organizations with minimized scope 3 emissions, further increasing pressure on leaders. As a result, investment portfolios of large financial institutions, venture capital, and private equity funds closely monitor all aspects of sustainability in the supply chain.

Key actions to consider:

• Execute an ESG strategy by integrating the goals of every department in the company, including Finance, HR, IT, Operations, and Commercial. This guarantees internal agreement and synchronization across all departments regarding accessing and tracking the same ESG data.
• Collect live operational data along the supply chain to ensure the organization hits its ESG targets.
• Develop comprehensive visibility of the company’s supply chain to trace the movement of merchandise, the companies handling it, and their sustainability qualifications. Use the data to make informed decisions about business partners to lessen scope 3 emissions.

Conclusion

The global occurrences in recent years prove that disruption to supply chains is inevitable. The supply chain trends in this article are essential for companies looking to mitigate risks and regain control in the near future. As we have seen, having sophisticated planning capabilities and agility, enabled by improved end-to-end visibility of supply chains, will be key to future-proofing supply chains and harnessing opportunities. By proactively getting ahead of these trends, companies are setting themselves up for success.

Tsang Ng is a Partner in Strategy & Operations practice in KPMG China, focusing on Supply Chain and operations. He has over twenty-five years of in-house and consulting experience in End-to-End Supply Chain, specifically in industrial manufacturing, automotive, and TMT. Tsang specializes in strategy development and execution supporting supply chain transformation, operation restructuring, and EBITDA improvements. He has worked with a range of multinational manufacturing giants to support their development of China and Asia market strategies and help them realign their global and regional supply chains.

Goldman Gao is a Manager in Strategy & Operations practice at KPMG China. He has over nine years of experience in operations excellence, supply chain transformation, and mergers & acquisitions advisory across manufacturing, consumer, and retail sectors. His key areas of expertise include operational strategy; supply chain and logistics advisory; business process improvement and redesign; and project, change, and risk management.