Janet Yellen Has Called For ‘Friend-Shoring’ Supply Chains. What Does It Mean?

Since the pandemic rattled supply chains, the buzzword for companies has been nearshoring and reshoring. Now, as  companies battle another crisis – the war between Russia and Ukraine – the new solution being proposed to insulate economies from supply chain worries and inflation is “friend-shoring”. 

U.S. Treasury Secretary Janet Yellen first used the term friend-shoring in a speech in April and again this week during a visit to South Korea, touting it as a panacea for supply chain risk caused by the war in Europe and the continuing lockdowns in China to control the spread of COVID-19. 

But what does friend-shoring mean?

According to Yellen, friend-shoring is about “deepening relationships and diversifying U.S. supply chains with a greater number of trusted partners” and in the process lowering the risk for all the partners.

In this effort to build a friendly and trusted global supply chain, the U.S. sees Russia and China as “unreliable countries.”

She reiterated calls for U.S. allies such as South Korea and Japan to boost trade cooperation to ensure the smooth movement of goods.

However, former governor of India’s central bank Raghuram Rajan has argued that friend-shoring goes against free and fair global trade and could leave out poor nations that rely on global trade. Analysts also fear friend-shoring can backfire when countries that feel excluded restrict supplies of goods as a response.

Meanwhile, risk mitigation through reshoring and nearshoring is already happening. 

According to data compiled by Bloomberg, chief executives, in their earnings call with investors and corporate presentations, have been increasingly highlighting plans to move production back home or near to home. In fact, these references have gone up by 1,000% compared to the time before COVID-19.

So as Yellen appeals to “allies and partners to strengthen our collective supply chain resilience,” companies are already preparing.

At least 66.5% of companies cited redundancy and resilience as paramount concerns in their supply chains, more than speed and efficiency, according to a latest survey by Economist Impact, commissioned by GEP.

There is a growing view that organizations that have added extra capacity  and created shorter supply chains will gain market share in the next few years, says the survey report.

Shipping and logistics bottlenecks topped the list (46%) of key factors resulting in supply chain disruptions, followed by labor cost (45%) and raw material costs (43%). These supply bottlenecks – and not just the demand explosion – are also being blamed for the current breakneck inflation in the U.S., the highest since 1981.

A new paper by the Federal Reserve says supply chain disruptions are responsible for “more than half” of the current elevated level of inflation. It says inflationary pressures won’t subside till the time there are labor shortages, production issues and shipping delays.

What is to be done, then?

On the question about the consequences of supply chain disruption for the Economist Impact survey, most executives (49%) said it increased the cost of operations. 

Also, a whopping 75% of the respondents agreed that their companies must make significant changes in order to effectively manage supply chain disruptions in the next 12 months.

Thus, along with pursuing reshoring, near-shoring, friend-shoring and the ‘China Plus One’ and ‘Minus Russia’ strategies, companies will need to invest in building supply chain resiliency through visibility, collaboration and convergence. 

This can be achieved through data-driven supply chain management platforms that offer forecast, capacity, inventory and cost collaboration as well as supplier diversification to manage risk, drive convergence and operationalize resiliency across the supply chain ecosystem. 

Learn how GEP can help your enterprise build supply chain resilience.