U.S. firms with supply partners in China have borne the brunt of the trade war, suffering worse performance in inventory efficiency and profitability. On average, their days of supply were delayed by 8.21 days, and profitability dropped by 1.29%. “Products nowadays are sophisticated, requiring knowledge, expertise, and materials from all over the world,” Dr. Di Fan, the lead researcher of this study, said. “Any trade barriers can undermine the opportunities of domestic companies to use offshored low-cost production, unique natural resources, and market expansion.”
While diversification has often been advocated as a means to reduce risk, the research discovered that the negative impacts were more severe for firms with high degrees of supply chain diversification. Dr. Di Fan shed light on the unexpected role of diversification, stating, "Contrary to common belief, supply chain diversification not only failed to mitigate the trade war's negative impacts but actually worsened them." He elaborated, "Businesses must approach diversification with caution. What might seem logical can create unexpected challenges."
The research shows that supply chain diversification can inadvertently introduce complexity, reducing a firm's responsiveness to cope with the trade war's shocks. This complexity can hinder coordination among supply chain partners, leading to unforeseen challenges and inefficiencies. The key researcher Dr. Yi Zhou from Monash University explained, "Our findings suggest that a simplified supply chain might be more effective in increasing responsiveness. By streamlining processes and fostering closer coordination among supply chain partners, firms can be better positioned to deal with risk events like trade wars."
The team's comprehensive examination of the U.S.-China trade war adds depth to the understanding of geopolitical risks. It sends a clear message to the business community: strategic thinking and careful consideration of supply chain dynamics are paramount, and a one-size-fits-all approach may not be the solution to geopolitical tensions.
The research has been published in the Journal of Operations Management: https://onlinelibrary.wiley.com/doi/10.1002/joom.1225