Efficiency and Effectiveness
In a resource-
constrained world, it makes economic sense to re-evaluate the supply chain configuration

Supply Chain Optimization

The first crucial decision is how to organize the supply chain: which suppliers to work with, where to establish production locations, and how to transport the goods to customers. Traditionally, these choices have been based on criteria like cost, time and quality, with relatively little regard for environmental impact. In a resource-constrained world, economic rationale and ecological logic are getting more aligned, so it makes economic sense to re-evaluate the supply chain configuration, to optimize both financial and environmental performance.

Supply chain management objectivesOnce supply chain management objectives are expanded to include environmental impact and access to scarce resources, one can expect to see different outcomes, as demonstrated by two trends that have started to emerge: ‘reshoring’ and backward integration.

In recent decades, multitudes of companies have engaged in ‘offshoring’: relocation of production processes to other countries, usually to take advantage of lower wages abroad. However, the economics of globalization are changing: the gains from labor arbitrage are shrinking, and the cost of transport is rising. As a result, a new phenomenon is emerging, described under various names, such as ‘reshoring’, ‘backshoring’ and ‘onshoring’: Western companies choosing to keep operations closer to home, to minimize distances and the related transport cost.

From an environmental point of view, short distances are generally preferable, but not always. For example, it can make sense to grow flowers in Kenya and fly them to Europe, because the associated CO2 emissions can be lower than local production in greenhouses. Generally speaking though, it is fair to assume that in a resource-constrained world, reducing the distance traveled ‘from the field to the customer’ will prove to be financially rewarding.

Backward Integration
No production without resources. Increasing scarcity of natural resources stimulates companies to ensure continued supply of raw materials. To this end, some companies conclude long-term contracts with their suppliers. Others go one step further and expand their activities backwards up the supply chain. For example, Toyota partnered with an Australian mining company to develop lithium deposits in Argentina, to secure supply of lithium for the batteries of the Toyota Prius and other (plugin) hybrid vehicle models.