In discussion of post-pandemic supply chains, ‘resiliency’ is the watchword of the moment among both executives and policymakers. One of – if not the – most popular approaches to improving resiliency is to become less dependent on a single source of supply by multi-sourcing. But are companies doing this? In at least one sector – furniture – we are seeing evidence they are.

The pandemic wasn’t the first major, widespread disruption to global supply chains. That occurred, arguably, in 2011 when the March Triple Disaster in Japan was followed eight months later by severe flooding in Thailand. Parts vital to the production of cars, electronics and consumer goods became scarce, raising questions about the viability of relying on a single country, a single company and, in some cases, even a single factory for key components.

That those same sectors – along with many others – were also severely affected by the pandemic perhaps points more to the complexity of their supply chains rather than a failure to learn from the past and address vulnerabilities.

By comparison, furniture supply chains should be simpler, allowing for more flexible multi-sourcing strategies. There are fewer intermediate inputs and less transformation and assembly required than a smartphone or a home speaker system, for example.

A general test of multi-sourcing would be evidence of firms paying a premium to source the same products from alternative locations or two locations simultaneously. Quality being equal, firms should opt for the lower cost. Unless, that is, there are concerns about the reliability of supply. Multi-sourcing, as a strategy, is a form of insurance on supply and the cost of insurance is reflected in the premium firms will pay to secure it given options.

The evidence, from Flexport’s Southeast Asia Sectoral Cost Indices (SEASCI), suggests that test is being met: for the third straight quarter, firms in our sample have demonstrated a willingness to pay higher prices to source furniture either from Vietnam alone or from both Vietnam and China.

The chart below illustrates this. It provides a comparison of the import costs into the US of identical products within the two-digit HS code 94 sourced by the same company in the same quarter from China and Vietnam, with the ratio representing the Chinese cost divided by the Vietnam cost. The axis values are reversed and apparel is included for reference. Any quarter the line rises into the top half of the chart, shaded gray, that signals more firms are using alternative sourcing for furniture or apparel.

Looking back to the start of the data series, which began in Q3 2019, we see that when the pandemic hit in Q1 2020 firms became increasingly willing to pay higher costs. That ebbed in subsequent quarters before bouncing along around the 1.0 line for all of 2021 and into the first quarter of 2022.

The last three quarters, however, have shown a return to the trend seen at the start of the pandemic. While not as strong in Q1 2020, the willingness to pay more was not that far off in Q1 2023.

Yet, it could also prove another of the many temporary phenomena we are seeing on the other side of the pandemic. There is an awful amount of noise in global manufacturing and trade at the moment. Both China’s and Vietnam’s respective overall manufacturing purchasing managers’ indices (PMI), a measure of activity, have been volatile over the past three to four months. This makes it unclear whether the shift to Vietnam or Vietnam and China in furniture is strategic or borne of necessity until China’s output resumes a measure of normalcy now that lockdowns have been lifted.

For now, the evidence seems to be there. We’ll be watching for it to be sustained in the coming quarters, however. Our next reading will be released in July.  

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