Why your clients’ companies need to start ‘friendshoring’ their supply chains

Supply chain disruptions can be circumvented if businesses start to engage in ‘friendshoring,’ one risk expert told the RIMS Canada Conference in Halifax.

“Friendshoring is a polite way of saying the only people you can have in your supply chains are companies in countries that you trust,” said Janice Gross Stein, founding director of the University of Toronto’s Munk School of Global Affairs.

“The need to understand your supply chain all the way back — and the need to structure your supply chains so that the really critical components come from friends — is a huge challenge that every single business in this room will face for the next five years,” she said.

Friendshoring poises against another common supply chain strategy: the just-in-time model.

“There’s really good arguments for just-in-time supply chains: [they’re] cheaper, you don’t have the inventory costs, which can be very, very expensive, and you get what you need from the lowest-cost producer anywhere in the world,” said Stein.

But supply chain issues during the pandemic means this strategy is now less favoured by many businesses. Friendshoring, by contrast, lets companies use more trustworthy supply sources, rather than defaulting to the least expensive.

“Just think about that for a minute in terms of risk management,” Stein said. “First of all, you have to know about your supply chain. And you don’t only have to know about your supply chain in approximate [terms], you have to know who’s supplying your suppliers.”

While friendshoring can have political value, it also resonates for the insurance industry and beyond.

“[It is] simply impossible for a country like Canada or the United States to insulate ourselves against the risks that are coming from abroad,” Stein said

For example, in 2018 and 2019, former U.S. President Donald Trump set tariffs and other trade barriers on Chinese technology imports.

“In the technology sector, for example, if you have Chinese suppliers for critical components in technology, that product cannot travel into the United States,” said Stein. “Suddenly, we have to find alternative suppliers, we have to build up the capacity to manage because the United States has imposed tariffs on China, and the export of U.S. technology to China.”

This competition between the two powers highlights the need for businesses to work with their friends, or friendly suppliers, Stein suggested.

“We’re in for a rocky period of 10 years, because there is an accelerating great power conflict between China and the United States,” said Stein. “As that conflict accelerates, each power will expect their closest friends to engage in friendshoring.”

 

Feature image by iStock.com/D3Damon