The Future of Global Supply Chains: Five Trends

Redesigning of supply chains will continue in the decade ahead. Key drivers of potential changes to global supply chains include transport capacity risks, climate change, geopolitical risks, concerns about sustainability, cyber risk, the high cost of energy, labor shortages, high inflation, and the possibility of new trade barriers. To respond to these challenges, businesses will need supply chains that are resilient (able to absorb and recover from shocks) and agile (capable of correcting course swiftly and effectively without significantly increasing operational costs). In this report we discuss five distinct trends in global supply chains for the next decade that will affect the business landscape.

Executive Summary

The global pandemic’s impact on world trade revealed the need for greater agility and resilience of global supply chains. Existing systems were unprepared for the unprecedented shifts. Current short-term remedies, such as earlier advance orders and higher inventory targets, have increased volatility and amplified the inflationary effects of shortages. Adapting to new conditions will take time, and volatility remains. New demand patterns will continue to emerge in the post-COVID-19 environment. When these intersect with reduced logistics, production, and manpower resources, supply problems—and costs—will increase.

Global production networks are not going to disappear. However, localization of production and sourcing will continue, and in some cases accelerate, driven by the need for increased resilience and supply security. Such reshoring of goods supply chains may prove inflationary. At the same time, China will remain a crucial hub for manufacturing, but supply chains in and around China will change.

Faster development of supply chains in services and services trade, including trade in digital services, means globalization will not recede. And global production networks are not going to disappear. However, we see five distinct trends in global supply chains for the next decade that will affect the business landscape. Each trend carries an implication for what lies ahead.

Executive Summary

Insights for What’s Ahead

Trend #1 Supply chain agility and resilience are inseparable from the drive for sustainability

Sustainable supply chain practices can help companies manage business risks, enhance brand reputation, and manage suppliers more effectively.The link between sustainable supply chain practices and these outcomes has become more critical, given the vulnerabilities in the global economy revealed by the pandemic. Digital tools can help create more visibility of operational practices and associated risks and improve their management.

Trend #2 Global production networks will remain a dominant feature of supply chains, but localization may increase

The current globalization era is not over, but real policy risk and uncertainty could force greater localization. When it comes to supply chains, changes will happen on the margin to accommodate the push in government policy for local sourcing of strategic goods and the sustainability concerns of stakeholders, but these changes have not yet translated into large-scale repatriation of manufacturing networks toward Europe and the US. Though globalization has faced political backlash in recent years, recently deglobalization discussions are also fueled by governmental intervention to incentivize or mandate the reshoring of the production of goods and services for national security or public health security.

Trend #3 China will remain one of the main manufacturing hubs of the global economy

Relocating production facilities away from China to other emerging markets is a longer-term strategy but not a quick fix. The benefits of relocating away from China should be weighed against the advantages of China’s large manufacturing base. So while there may be a desire to diversify production and/or supplier locations to Southeast Asia, there are few immediate alternatives due to limited capacity in those markets. Organizations need to carefully analyze and potentially shift strategic growth opportunities to other emerging economies that may be closer to final consumers. It is important to consider capacity for sourcing inputs, labor, and transport in other markets beyond China before planning major moves.

Services such as IT, business and financial services, and R&D will become increasingly globalized, creating new growth opportunities. Global competition will increase for business and financial services and potentially for new consumer categories, such as telemedicine and digital diagnostics, even though further development of some of these services could require new approaches to accounting and regulation of exported services. It is not clear which market will become the next global hub for services.^[1] The US is the leader in the export of services, particularly in business and financial services, but fast growth in other markets, such as China, India, or Ireland, may challenge US dominance.

As a result of increased globalization of services, a growing pool of high-skilled workers in emerging markets will compete with their higher-earning peers in mature economies and drive down labor costs in the services sector. Companies will likely shift more production and sourcing of services to emerging markets, where a growing pool of young university graduates will compete with skilled workers from mature economies with aging demographics. Over the next decade, high-skilled workers in emerging markets will compete with their peers in mature economies. This opens new opportunities to source talent globally. But this window will eventually close as salaries in emerging markets rise. Demographic constraints, along with rising wages globally, will drive further automation.

Trend #5 More localization of supply chains could add to inflation in the next decade

Major restructuring of supply chains could add to inflation pressure in the next decade. Supply chain disruptions are already surfacing as higher producer prices. Producer prices increased rapidly during 2021, contributing to inflation well above target rates (of around 2 percent) in the Euro Area, the US, and the UK. Emerging markets such as Brazil, Russia, and Turkey also registered higher inflation rates in 2021. Energy costs, increases in container shipping prices, and transportation risks are responsible for raising overall costs for businesses to some extent. Our analysis shows that pressure on prices could increase in the long term if less expensive labor in offshored locations is replaced by local labor at higher cost and this “reshoring” is substantial. Businesses should prepare for high inflation, which could bring greater pricing power and higher profit margins but may also lead to shifts in consumer spending patterns toward necessities. Businesses should consider contingencies to manage inflation risk for input costs including materials and wages. At the same time, businesses should prepare for a potentially higher cost of capital as central banks withdraw monetary policy accommodation to fight inflation.