Supply chain diversification: Mitigating the business continuity risk and addressing talent shortages

Asia’s businesses are responding to escalating geopolitical tensions by diversifying their supply chains.

With supply chains and overseas operations facing unforeseen disruptions and regulatory changes arising from geopolitical uncertainties, businesses are increasingly taking the approach of diversifying their supply chains. For instance, four out of five Japanese manufacturing companies had diversified their operations since 2020 with new facilities across Southeast Asia.¹

However, when expanding their procurement networks and set up facilities in new geographies, it is imperative for businesses to first establish an in-depth understanding of local risk dynamics, including regulatory compliance and people risk, to identify emerging threats. Subsequently, businesses should adapt their operating and talent strategies to mitigate these risks and optimise supply chain diversification outcomes.

Build an enterprise-wide risk management approach through holistic supply-value chain mapping

As part of a comprehensive supply chain diversification strategy and prior to setting up operations in a new geography, businesses should conduct supply-value chain mapping to uncover and understand the potential weak points that may be vulnerable to disruption.

A robust mapping exercise should account for potential infrastructure challenges (e.g. reliability of electricity, clean water supply and transportation networks) and the complex regulatory requirements in these new locations (e.g. minimum wage, labour policies), which can evolve and pose significant risks if left unaddressed.

Importantly, supply-value chain mapping can help businesses anticipate and address upstream delays, which can result in reduced quantities and higher prices for inputs — especially commodity inputs such as energy and raw materials. Downstream, businesses can experience fulfilment and delivery delays, increased logistics expenses, and fluctuations or reduction in demand.

In formulating risk management actions, businesses should avoid over-prioritising higher value inputs (e.g. microprocessors) versus lower value inputs (e.g. rubber gaskets), as any disruption to the latter can also result in significant financial and operational impacts.

Beyond supply-value chain mapping, businesses should also assess their political risk exposures to identify geopolitical scenarios that might result in business interruption.

Bridging talent shortages and skills gaps in supply chain diversification

When investing in new locations, it is also vital to calibrate the right talent strategy across the three areas of pay equity, skills availability, and talent mobility.

Pay equity and regulations: With greater emphasis on equity across developing economies in Asia, wage levels are subject to greater scrutiny by both authorities and non-governmental organisations (NGOs). Pay disparities may be subject to new or revised wage or foreign labour legislation. Hence, businesses must tailor their workforce strategy to ensure pay equity and monitor wage trends to contain cost.
Skills gaps and availability: Skills gaps can arise as the local workforce may lack the prior education or experience required to assume operational roles; businesses diversifying their supply chains must account for the cost of bridging these skills gaps with training. To address potential skills availability issues in certain locations, businesses must find solutions to gain access to local talent pools and manage costs to avoid issues such as delays in production or quality issues.
Talent mobility: When diversifying the supply chain, businesses typically need to relocate existing talent to ensure continuity of operations in the new location and to train new workers. With concerns such as climate and extreme weather, geopolitical conflict and unrest, and healthcare availability and accessibility, businesses must calibrate the right incentives and reassurances to convince skilled talent to relocate and ensure they (and their dependents) are able to settle in the new environment.

Diversify your supply chain with confidence

Today, climate, economic and geopolitical risks combine can cause ripple effects that result in prolonged and severe supply chain disruptions, compelling Asia’s businesses to address latent risk exposures such as single-supplier dependencies and geographic concentration. Marsh Asia is committed to helping businesses overcome the complex challenges of supply chain diversification with best-in-class risk assessment, quantification and monitoring solutions with industry-led risk management and risk transfer expertise.

^{1 CSIS. (2022). Diversifying Supply Chains: The Role of Development Assistance and Other Official Finance. https://www.csis.org/analysis/diversifying-supply-chains-role-development-assistance-and-other-official-finance}