The pivotal influence of critical raw materials on manufacturing footprint and supply chain strategy
- Marc Rieke
- Nov 11, 2023
- 9 min read
Updated: Nov 13, 2023
In an era where the robustness of supply chains is under the microscope and the demand for technological innovation is at an all-time high, the significance of critical raw materials has never been more pronounced. These materials, essential for the production of high-tech devices, renewable energy technologies, and electric vehicles, are the linchpins of modern manufacturing strategies. Yet, their scarcity and the complex geopolitical chessboard on which they are procured present a multifaceted challenge for manufacturing companies.
The recent geopolitical shifts, underscored by the US-China trade tensions and the economic reverberations from the Russian geopolitical maneuvers, have cast a spotlight on the fragility of global supply chains. Moreover, the COVID-19 pandemic has served as a stark reminder of the volatility inherent in our interconnected world, exacerbating supply chain disruptions and highlighting the risks of over-reliance on concentrated sources of raw materials.
At PFSC, we have witnessed firsthand the strategic imperative for companies to reassess and fortify their manufacturing footprint strategies in light of these raw material considerations. This article aims to delve into the implications of rare and critical raw materials within the manufacturing footprint discourse and to propose actionable risk mitigation levers tailored to the type of raw materials in question.
Table of content
Understanding Critical Raw Materials
Critical raw materials (CRMs) are the building blocks of innovation in the modern industrial landscape. Defined by their essential role in high-tech applications and their risk of supply shortage, these materials are crucial for a country's economic and industrial resilience. CRMs are not just commodities; they are strategic assets that can dictate the success or failure of key industries, from aerospace to renewable energy sectors.
The European Union's list of CRMs, which has nearly doubled since its inception in 2011, now includes elements like lithium, essential for battery technology, and rare earth elements, vital for permanent magnets used in wind turbines and electric vehicles. The criticality of these materials arises from a confluence of factors: their scarcity, the difficulty in substituting them, and the geopolitical complexities of their supply chains.
Image: Biggest supplier countries of selected CRMs to the EU in year 2020 (Source: EU)
The Role of CRMs in high-tech Manufacturing
Advanced manufacturing sectors are particularly vulnerable to CRM supply disruptions. For instance, the transition to green energy technologies hinges on the availability of materials like cobalt and indium, used in photovoltaic cells, and gallium, germanium, and tellurium, which are key for semiconductor devices. The automotive industry's shift towards electric mobility further amplifies the demand for lithium, nickel, and cobalt.
Supply Chain Vulnerabilities of CRMs
The quest for critical raw materials is not merely an economic challenge; it is a geopolitical conundrum. The supply chains of CRMs are often as complex as the materials are essential, with a significant portion of the global supply originating from geopolitically sensitive regions. This concentration of supply creates a precarious situation for manufacturing sectors reliant on these materials.
Geopolitical Factors and CRM Availability
The dominance of certain countries in the supply of CRMs cannot be overstated. China, for instance, controls a significant share of the global production of rare earth elements, while countries like the Democratic Republic of Congo are key suppliers of cobalt. The Russian Federation is a major player in the supply of palladium and nickel. These geopolitical powerhouses can, therefore, exert considerable influence over global markets and manufacturing strategies.
Supply Chain Vulnerabilities
Europe's manufacturing sector, while advanced and robust, faces vulnerabilities due to its dependence on imports of CRMs. The recent US-China trade disputes and sanctions against Russia have underscored the fragility of relying on a limited number of external sources. Events like the COVID-19 pandemic or the blockage of the Suez canal by container ship “Ever given” further highlighted the risks, as border closures and production halts led to abrupt supply shortages.
The Impact on Manufacturing Footprint Strategy
Manufacturers must now consider the stability and reliability of CRM sources when developing their footprint strategies. The risk of supply chain disruption can lead to increased costs, production delays, and ultimately, a loss of market competitiveness. This necessitates a strategic approach to sourcing CRMs, one that accounts for the geopolitical landscape and seeks to mitigate associated risks.
Navigating Geopolitical Risks
To navigate these geopolitical risks, companies must develop a comprehensive understanding of the CRM supply landscape. This includes monitoring political developments, trade agreements, and regulatory changes that could impact CRM availability. Building a diversified supplier base and considering geopolitical risk assessments in strategic planning are no longer optional but essential.
The Role of Critical Raw Materials in Manufacturing Footprint Strategy
The strategic importance of critical raw materials extends into the realm of production footprint strategy, where the location of production facilities, supply chain design, and sourcing decisions are pivotal. In this landscape, CRMs act as a double-edged sword: they are both a catalyst for innovation and a potential bottleneck for growth and sustainability.
Incorporating CRMs into Footprint Decisions
Manufacturers must consider the availability and stability of CRM supplies when deciding where to establish or expand their operations. Proximity to CRM sources can reduce risks and costs, but it also requires a careful balance with other factors such as market access, export controls, and labor. The decision-making process becomes a complex optimization problem, where CRMs are a critical variable.
Diversifying Supply Sources
Diversification is a key strategy in mitigating the risks associated with CRMs. By spreading sourcing across different geographical and political landscapes, companies can protect themselves against regional disruptions. This strategy may involve developing alternative suppliers, investing in CRM-producing projects, or forming joint ventures with raw material producers.
Localizing Supply Chains
Another approach is the localization of supply chains. By bringing production closer to the source of CRMs or to the end market, companies can reduce the complexity and vulnerability of their supply chains. This shift can also align with sustainability goals, as shorter supply chains typically result in lower carbon footprints.
Risk Mitigation Levers for Critical Raw Materials
In the strategic chess game of global manufacturing, the management of critical raw materials is a proactive move to safeguard against the uncertainties of supply and demand. Companies must employ a variety of risk mitigation levers to ensure a steady supply of these pivotal materials. Here we explore some of the key strategies that can be employed.
Strategic Stockpiling and Material Reserves
Strategic stockpiling acts as a company's insurance policy against supply disruptions. By maintaining a reserve of essential CRMs, manufacturers can dampen the blow of market shortages and geopolitical upheaval. This approach requires thorough and ongoing market analysis to avoid the risks associated with price volatility, unnecessary high cash requirements, and high warehousing costs. While always dependent on the individual client situation, in the past we have recommend in most cases at least a 4-week inventory for all required CRMs and additional levels based on detailed and ongoing analysis on the supply landscape. Although this method requires cost and constant monitoring, it can provide a true competitive advantage in times of disruption and market instability.
Investment in Recycling Technologies
Recycling and reusing CRMs can significantly reduce dependency on volatile international markets. Investment in advanced recycling technologies not only supports a circular economy but also serves as a long-term strategy to secure a supply of materials that are becoming increasingly scarce.
Long-term Supply Agreements and Partnerships
Forging long-term relationships with suppliers can provide more visibility and stability in the supply chain. Contracts that span several years can insulate manufacturers from short-term market fluctuations and secure a predictable supply of CRMs at agreed-upon prices.
Exploration of Alternative Materials and Substitution Strategies
Research and development into alternative materials that can substitute CRMs are vital. While not all CRMs have substitutes, ongoing innovation can lead to new materials that reduce the demand for scarce resources or improve the efficiency of their use.
Political and Economic Alliances for Secure Sourcing
Engaging with political and economic alliances can open doors to more secure CRM sourcing. By actively participating in international dialogues and trade agreements, companies can leverage diplomatic channels to ensure a more stable supply chain.
Case Studies
The strategic management of critical raw materials is not just a theoretical exercise; it is a practical necessity for businesses looking to thrive in a resource-constrained world. This section highlights three case studies that exemplify best practices in CRM management within the manufacturing footprint strategy.
Apple's Closed-Loop Supply Chain Initiative
Apple's ambition to operate a closed-loop supply chain is a testament to its commitment to sustainability and resource efficiency. The tech giant's approach involves meticulous design and manufacturing processes that facilitate the recycling of materials. Their custom-built robots, Daisy and Liam, are designed to disassemble iPhones and recover valuable materials such as rare earth magnets, tungsten, and cobalt. This initiative not only reduces the need for mining but also sets a precedent for electronic manufacturers to follow suit in CRM conservation and management.
BMW's Ethical Sourcing and Lifecycle Management
BMW's proactive measures in securing a sustainable and ethical supply chain for electric vehicle production offer valuable lessons. By entering into direct contracts with suppliers of lithium and cobalt, BMW ensures transparency and ethical practices from the mine to the manufacturing facility. Moreover, the company's investment in battery recycling technologies underscores the importance of end-of-life management for products, ensuring that CRMs are recovered and reused, thus minimizing environmental impact and supply risk.
Innovations in Wind Energy
The wind energy sector's reliance on rare earth elements for turbine production has prompted companies like Siemens and Vestas to innovate. These firms are investing in R&D to either develop turbines that are less dependent on rare earth metals or to use them more efficiently. Siemens, for example, has developed a direct drive turbine that significantly reduces the need for dysprosium and neodymium. Such advancements not only mitigate the risk of CRM scarcity but also drive the industry towards more sustainable practices.
These case studies provide a blueprint for how companies can navigate the complexities of CRMs in their manufacturing strategies. They demonstrate the effectiveness of innovative approaches to sourcing, recycling, and R&D. By adopting similar strategies, companies can not only secure their supply of CRMs but also contribute to a more sustainable and resilient manufacturing ecosystem.
Future Outlook and Strategic Recommendations
As we look toward the horizon of manufacturing footprints and global supply chains, the role of critical raw materials will only magnify. The increasing demand for high-tech products, renewable energy solutions, and electric vehicles will continue to place these materials at the center of strategic planning. In this dynamic landscape, companies must be agile and forward-thinking in their approach to CRM management. Here are our strategic recommendations for future-proofing production footprint strategies in the context of CRMs:
Quantify CRM risk: In the face of CRM supply uncertainties, it's crucial for manufacturing companies to quantify their supply risk, a step often overlooked in strategic planning. We advise conducting a detailed analysis of worst-case scenarios, such as geopolitical tensions or natural disasters, that could lead to CRM shortages, and assessing their potential business impacts and costs. This analysis should include – for example – evaluating production downtime costs or damage claims by clients. By assigning probability levels to these scenarios, companies can develop a quantified risk assessment, leading to informed decisions on the “ROI” of resilience-building measures. For example, in the event of export restrictions due to geopolitical tensions, companies should calculate potential increased costs from alternative sourcing and the impact of production delays. This quantitative approach to CRM risk management enables companies to strategically invest in mitigation measures, ensuring robust and resilient manufacturing and supply chain strategies. Ultimately, this proactive stance helps safeguard against CRM supply disruptions, maintaining operational continuity and competitive advantage.
Strengthen Supply Chain Resilience: Diversification of supply sources, investment in recycling infrastructure, partly localization of CRM relevant production and the development of secondary material markets are key to building a resilient supply chain. Companies must continuously assess their supply chain vulnerabilities and develop contingency plans.
Embrace Technological Innovation: Investing in R&D for material science can yield substitutes for CRMs or more efficient usage methods. Companies should prioritize innovation to reduce reliance on scarce resources and to stay ahead in the market.
Leverage Policy and Industry Collaboration: Active engagement with industry consortia and policy frameworks can provide companies with a voice in shaping the future landscape of CRM sourcing. Collaborative efforts can lead to more stable and sustainable supply chains.
Educate and Influence Stakeholders: A well-informed stakeholder base can drive change. Companies should educate their customers, suppliers, partners, and also internal staff (like R&D departments) about the importance of CRMs and the need for responsible management practices.
By adhering to these strategic recommendations, companies can not only navigate the complexities of today's CRM challenges but also shape the trajectory of their future manufacturing and supply chain strategies. The integration of these strategies will ensure that companies remain resilient, responsible, and competitive in the evolving global marketplace.
Conclusion
The journey through the intricate landscape of critical raw materials reveals a complex web of challenges and opportunities for manufacturing footprint strategies. As we have explored, CRMs are not merely commodities to be procured, but strategic levers that can shape the future of manufacturing. The geopolitical context, supply chain vulnerabilities, and the innovative case studies discussed herein underscore the multifaceted nature of CRMs in the global economy.
We stand at a crossroads where the decisions we make today regarding CRMs will resonate through the supply chains of tomorrow. Companies that anticipate and adapt to the evolving CRM landscape will not only secure their own competitive edge but will also contribute to a more sustainable and resilient industrial ecosystem. The strategic recommendations provided offer a roadmap for navigating the uncertainties of CRM management and for harnessing their potential to drive innovation and growth.
In closing, let us not view CRMs as a hurdle to be overcome, but as a catalyst for progress. By embracing the principles of sustainability, resilience, and strategic foresight, businesses can turn the challenge of CRMs into a cornerstone of their success.
As we navigate the complexities of critical raw materials in our manufacturing strategies, the need for informed, proactive, and collaborative action has never been greater. If this exploration has sparked new ideas, concerns, or questions about your own manufacturing footprint strategy, let's continue the conversation.
I invite you to reach out to us at PFSC, where we specialize in optimizing global production footprints to their fullest potential. Together, we can develop bespoke individual strategies that not only secure your supply of critical raw materials but also enhance your operational resilience and sustainability.
Contact us to schedule a free introductory consultation.