news

2021

SUPPLY CHAIN CLUSTERING: WHY IT WORKS

By Daniel Abrego

COVID-19 has led to trade restrictions which have sent us within our borders. Added to this, volatility in demand and markets has led to increased localization and outsourcing has become less desirable. Overall, we are seeing reverse globalization.

This is having a major impact on the way supply networks function: We are seeing the rise of supply chain clustering. Companies are clustering common products and services to offset disruptions and fluctuating demand. Whether they are alike or from different industries, companies are sharing operations and resources and in the process benefiting from lower logistics costs.

Clustering is not a new concept but can ease many of the pressures we are facing from the pandemic. Examples of successful clustering include Wall Street and its concentration of financial institutions or Silicon Valley and the technology industry. As the pandemic evolves in unpredictable ways, belonging to a cluster can provide uninterrupted access, higher visibility in the marketplace, flexible logistics options and lower risks.

 

Reducing costs through clusters:

For a supply network, being close to the final market reduces transportation, warehousing and various distribution costs. It provides a better ability to respond to real-time demand. Efficiency improves as activities and processes are gathered together for greater value. Logistics providers can offer guarantees to their customers that can only come with proximity and familiarity. It also adds flexibility to reach certain markets in a most effective way. One can deliver effectiveness in terms of demand and costs.

A high degree of interrelated clustering leads to greater cost savings. Coordination costs, operations costs, value added services such as special packaging and returns costs, and workforce training costs are reduced because of economies of scale when it comes to buying and sharing IT support, technology, transportation, research, organizational and administrative costs.

One can’t deny that geographical proximity automatically reduces the complexity of logistics and its inherent costs while shortening the lead-time.

Being competitive through cooperation

Collaboration in a cluster does not necessarily mean rivalry. It can be highly productive even with a company you used to view as your competition. Collaboration happens all the time even with high profile companies. Examples are pharmaceutical companies sharing clinical trial data or auto companies using the same engine manufacturers.

When partners are located near each other, they are more flexible and it follows that trust and reliance grow. Information such as data, opportunities, advances in products and services are identified and shared faster. There is a desire for less conflict and for more mutual benefit.

Standardized components/preparations/ingredients that can be produced in common with other companies increases cooperation while reducing costs. It reduces risks inherent with far away suppliers and disruptions from the pandemic. Having this nearby capacity to produce enables your company to deliver to its customers in a timely and winning way.

In addition, sharing cluster information with government agencies, insurance companies and customers/patients yields more data to analyze the products, services and the supply chain for further refinement.

 

Changing the region of the cluster

Clustering benefits a whole region by easing local unemployment to attracting infrastructure development and other companies to the region. Panama’s free trade zones are an example of business partners leveraging shared resources with each other and with government and trade associations, leading to strong relationships. On site, you will find customs offices, secondary packaging facilities, production sharing, data aggregation, manufacturing and other service process interchanges. Not only does this make cost of goods cheaper as companies use the same components and resources but they are more competitive when taken to market. It has transformed Panama’s free trade zones into dynamic hubs which handle every step of the supply chain leading to remarkable long-term performance.

The landscape of business has been changed by COVID-19. It has evolved towards more interconnected entities and dependence on geographic concentrations. Clustering can offers benefits and peace of mind as we shift our focus from companies between countries and global networks to local models of logistics and industrial clusters.

Daniel Abrego is CEO of Intercontinental Logistics Corp. He is an international logistics expert and a business innovator with over 20 years of experience. As a 5PL, his company provides logistics solutions and specializes in intra-hospital logistics as well as pharmaceuticals and medical tools/devices procurement and distribution. Visit www.ilc.com.pa or email tulogistica@ilc.com.pa for more information.