The Frugal Economy, Part 3: Global Value Chains Become Hyper-Local Value Networks

Many US and European companies that previously offshored their
industrial operations to cheaper countries such as China are now relocating
manufacturing back to their home countries.

This phenomenon, known as
nearshoring
or
reshoring,
has taken off massively since 2020 — first, due to COVID-19; but also because of
rising geopolitical friction with China, the global manufacturing hub. A
Kearney study shows that 96 percent of US
CEOs
intend to bring back their manufacturing to the US, or have already taken steps
to do so — up from 78 percent in 2022.

However, simply moving a factory from China or Taiwan to Arizona or
Ohio is not sufficient for US brands to meet the demands and values of US
consumers. In a November 2023
survey by
American Compass and YouGov, 42 percent of US consumers feel that
“manufacturing is important to a healthy, growing, innovative economy” and
clamor for US-made products.

The bad news is that 62 percent prefer to pay higher prices to support US
manufacturing, rather than pay more to combat climate change (38 percent); over
half of US adults surveyed prefer policymakers to focus on enhancing the US
industrial sector, rather than improving the environment.

The survey reveals three competing desires — revitalize left-behind communities,
boost domestic manufacturing, and combat climate change — which respondents find
it challenging to juggle and harmonize.

What if Western firms capitalized on the reshoring trend in the US and Europe to
completely transform manufacturing value chains in order to address their
customers’ three competing aspirations? Brands can achieve that Holy Grail of
balancing economic growth, social cohesion, and environmental stewardship if
they boldly reinvent their outmoded value chains.

Limitations of global value chains

In today’s customer-centric, collaborative and rapidly changing economy, the
traditional value chain —
a set of interconnected activities to develop and bring a product to customers —
faces four major limitations.

The linear value chain fails to engage creative ‘prosumers’

Brands view customers as nothing more than walking wallets. They see buyers as
passive receivers of the value chain’s output — excluding them from actively
participating in R&D, production and marketing. However, empowered by the
internet, social media, digital tools such as 3D printing, creative spaces such
as FabLabs, and decentralized energy
systems,
passive buyers are evolving into active
“prosumers” — spearheading the
Do-It-Yourself (DIY) Maker
movement.

Futurist Alfin Toffler predicted
that this “prosumation” movement will accelerate during the 21st century and
blur the line between production and consumption, compelling businesses to
reconsider their engagement with customers throughout the value chain.

The insular value chain doesn’t favor B2B collaboration

The conventional value chain focuses internally. It outlines a series of
connected activities carried out by a company using exclusively its own
resources — and those of its suppliers and partners — to turn an idea into a
final product or service for the customer. From this perspective, a brand’s
competitive advantage lies in its capability to optimize its own value
chain more
efficiently than rivals.

In the interdependent business environment, however, the concept of competitive
advantage is being replaced by cooperative advantage. Innovative firms strive
to collaborate with other companies, even competitors, to jointly create new and
larger “blue ocean” market
opportunities that are
advantageous for all. Thanks to B2B sharing
platforms,
companies in different sectors can today combine their R&D, manufacturing and
go-to-market resources to co-create greater value for all stakeholders.

The static value chain doesn’t deliver agility and resilience

Using lean manufacturing techniques such as Six
Sigma
and
Kaizen,
businesses have fine-tuned their value chain to achieve efficiency gains. Today,
brands leverage their “lean” value chains to produce and deliver their products
cheaper and quicker. But these well-oiled, static value chains lack the agility
and
resilience
needed to respond to unforeseen market shifts.

Similarly, when cataclysmic events such as pandemics, wars and natural disasters strike,
many businesses find it
challenging
to swiftly adjust their inflexible value chain processes to prevent
disruptions.
In a VUCA (volatile, uncertain, complex, and ambiguous) world, businesses must
collaborate with suppliers and partners to create agile and resilient value
chains
that can respond quickly to supply and demand fluctuations.

The wasteful and complex value chain is unsustainable

From apparel and automotive to food and energy, every industry value chain —
whether globally dispersed or nationally integrated — is notoriously wasteful
and unsustainable. For instance, from the cotton field to the shop, a pair of
jeans travels 1.5 times around the
planet
— which adds up to 65,000 km and the associated emissions. In the US, fresh
produce travels 1,500
miles from farm
to plate. Around 5 percent of the
electricity
generated in the US is lost in transmission and distribution, which is
sufficient to power all seven Central American countries.

The complexity of industry value chains makes them wasteful and unsustainable.
University of Illinois researchers studied 9.5 million food transit
routes in the
US. One food journey follows “corn grown on an Illinois farm to a grain silo
in Iowa, from where it is transported to feed cows in Kansas. After
processing, the meat products then make their way back to Illinois and onto the
shelves of a grocery store in Chicago.”

Likewise, to produce a single passenger car — which is made up of 20,000
parts
— a carmaker must orchestrate a multi-tiered, global value chain of roughly
8,000 suppliers. Sadly, only 13 percent of
companies
have full visibility into their multi-tiered value chain. The more layers in a
value chain, the greater its Scope 3
emissions
(especially upstream
ones)
— which account for up to 90
percent of
many businesses’ total carbon footprint.

Bottom line: firms must stop orchestrating hyper-global value chains that are
inflexible, closed, and unsustainable. Instead, they must build and facilitate
hyper-local value networks that are adaptable and sustainable, and maximize
social impact.

The rise of hyper-local value(s) networks

A hyper-local value network (HYLOVAN) is a dynamic, open ecosystem that
proactively involves a diverse set of stakeholders within a specific area — such
as a city or county — to collaboratively develop customized solutions that
address local market and social requirements.

Each word in HYLOVAN highlights unique features that make the system way more
impactful than a traditional value chain:

“Hyper-local” refers to the fact that a HYLOVAN can have a geographical
range that could be as limited as a neighborhood or as extensive as an entire
city — in the US, it does not extend beyond the county level.

In order to cut supply chain expenses and environmental footprint, a HYLOVAN
primarily obtains its inputs — from raw materials to workforce — from nearby
sources. A large portion of what it produces — such as products and services —
is consumed within the local area, although some can be delivered to nearby
communities using eco-friendly transportation methods. As a result, a HYLOVAN is
intrinsically frugal.

Take Vertical Harvest’s vertical farm in Jackson Hole,
Wyoming: It is three
stories tall and only takes up 1/10 of an acre, yet it is able to grow and
deliver 100,000 pounds of fresh leafy greens year-round to local restaurants and
groceries. On average, Vertical Harvest’s healthy produce only travels 6 miles
from the farm to the consumer — a much shorter distance than fresh food’s
typical 1,500-mile journey in the US.

Vertical Harvest minimizes its carbon footprint but maximizes its social
handprint: 40 percent of its staff are individuals with
disabilities.
The organization is expanding its successful hyper-local food production model
to the state of Maine, where its hydroponic greenhouse will grow annually
over 2 million pounds of fresh
produce
and employ around 50 underserved community members.

Similarly, in early 2023, CarbonCure and
Heirloom — two startups focused on carbon
removal and utilization, conducted a successful pilot
project
where they captured CO2 from the air and stored it permanently in concrete for
use in local construction projects. The whole value chain — the carbon-capture
unit, the concrete batch plant and construction sites — was situated end to end
within the San Francisco Bay Area.

“Value(s)” means a HYLOVAN aims to valorize — unleash the full value of —
physical, natural, intellectual, cultural and social assets that have been
underused or devalued in a local area due to economic or historical factors.
Moreover, a HYLOVAN promotes positive values — such as equity, trust,
sustainability — within a community by embodying them.

For instance, the French postal service La Poste
teamed up with SUEZ — a leading provider of circular
environmental services — to set up Recygo, a joint venture to collect and
recycle office waste. Today, 75,000 postal workers and SUEZ employees collect
65 tons of office waste each
day at over 23,000 sites across France. Recygo recycles the waste and creates
socio-economic value locally. The waste is first sorted at a local center that
employs economically disadvantaged people and then recycled at one of the 84
regional paper mills
situated throughout France.

“Network” refers to the resilient and flexible properties of a HYLOVAN,
which — in contrast with a monolithic, linear value chain — can continuously
adapt and
evolve
to effectively react to shifts in its surroundings. A HYLOVAN can accelerate
innovation, minimize risks and capitalize on new opportunities swiftly by openly
sharing information with all members — facilitating fast and efficient
coordination.

A hyper-local value network engages diverse local stakeholders | Image credit: Navi Radjou

GRDF — France’s top natural gas distributor — has
established a network of Living
Labs
rooted deeply within French territoires (a geographical unit similar to US
counties), with the goal of repositioning local citizens as the focal point of
the energy transition. Conceptualized by MIT scholars, a Living
Lab is an open innovation ecosystem
that draws together diverse community members — residents, entrepreneurs,
companies, non-profits, government entities — to jointly create valuable goods
and services that benefit and improve the public welfare.

In each community, GRDF’s Living Lab applies agile development processes to
engage local partners to iteratively test, learn and deploy disruptive solutions
— such as the development of green gas and agroecology. These solutions are
tailored to maximize sustainable value in the local context but can be
replicated in other places. For example, by generating biomethane
locally using organic
waste from agriculture and food, and then injecting it into GRDF’s distribution
network, communities achieve energy self-sufficiency, lower emissions, enhance
soil health, protect water resources and generate employment opportunities.

As of today, 547 methanization
units
are injecting directly into GRDF’s distribution network. By deploying these
Living Labs across France, GRDF is proactively scaling out its own operating
model
to enable and lead the decentralized production of renewable
gases
— which in turn, will speed up the decarbonatization of local communities. GRDF
projects that by 2050, 73 percent of the gas flowing in France’s distribution
grid could be green gas — most of which can be produced
locally.

US and European brands that want to reshore manufacturing and reindustrialize
their countries need to first revamp their entire value chains. By building and
facilitating hyper-local value networks that are open, adaptable and deeply
rooted in communities, businesses can gain agility and resilience and maximize
sustainable local impact.

Read more about the frugal economy:

This article has been partially adapted from the author’s upcoming book, The
Frugal Economy: A Guide to Building a Better World with
Less
(2024), published by Wiley and Thinkers50.

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Navi Radjou

Navi Radjou is a French-American scholar and advisor on innovation and leadership.

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Published Sep 26, 2024 2pm EDT / 11am PDT / 7pm BST / 8pm CEST