The global spread of COVID-19 has exposed weaknesses in the supply chains of countless industries. As factories abroad effectively grind production to a halt, organizations are starting to see the appeal of a manufacturing relocation (reshoring) strategy.
However, manufacturing sourcing relocation doesn’t happen overnight. To ensure organizations are fully equipped with the tools and insights for supply chain diversification, DiCentral spoke with Rosemary Coates, Executive Director at Reshoring Institute, to share supply chain diversification best practices and processes.
Seven Facts To Consider When Diversifying Your Supply Chain
1. Organizations want to diversify their supply chain, but don’t know how.
“The decision to reshore has become front and center for most organizations,” Rosemary Coates says. As manufacturing relocation/ reshoring continues to climb to the forefront of boardroom discussions, organizations need to know how to diversify and how to do it well.
In order to diversify your supply chain, you first need to have clear visibility across your supplier network. For example, Harvard Business Review states that, “in the first few weeks of January 2020, organizations that had mapped their supply chain already knew which parts and raw materials were originating in the Wuhan and Hubei areas [two locations that were heavily affected by COVID] and, as a result, could bypass the frantic hunt for information and fast-track their responses.”
A diverse supply chain doesn’t mean starting from scratch; it means broadening the scope of your supplier base, so that when supply chain disruptions occur, a comprehensive action plan is in place to get the right products to the right people at the right time.
2. If the quality and price were right, most organizations would switch to domestic manufacturing.
According to a 2019 survey conducted by the Reshoring Institute, 97% of surveyed organizations would consider a domestic source for parts if the price and quality were competitive to foreign suppliers. The key challenge, of course, is the costs associated with domestic manufacturing.
“Manufacturing nearby means a company can keep inventory levels low but still get goods to market quickly when demand spikes,” Kellogg Insights says. “But does that benefit outweigh the cost of paying higher wages?” The answer many firms seem to have to that question is “no”, as many organizations have decided on offshoring their manufacturing. However, even if labor wages are lower when you offshore, many companies have “underestimated, or neglected, the costs of the time it takes to transport goods,” which is a reality that the COVID crisis is making more apparent than ever.
The global supply chain disruption that COVID-19 has triggered is, as Coates said, forcing organizations to sit up, take notice, and to start “trying to figure out what to do next in terms of strategy.” Supply chain management strategies of the past may no longer be optimal, and now organizations need to chart an alternative course.
3. Organizations should secure inventory levels prior to reshoring.
Organizations that develop a manufacturing relocation strategy must start securing inventory levels before employing a reshoring strategy. Disruptions can force factories to shut down production, thereby restricting the capacity to produce materials for new orders. When relocating manufacturing, organizations must make a plan for how they’re going to meet consumer demand in the interim.
There are risks of keeping an extensive backlog of inventory—especially since not all products can be stored indefinitely. However, the additional inventory can help “cushion the blow” of a supply chain disruption or relocation, especially for organizations that work with third-party logistics partners that can provide services to help scale inventory.
4. Organizations must prepare for additional tariffs.
Relocating manufacturing plants can also mean having to deal with new tariffs—Coates specifically mentions the 301 and 232 tariffs as having the kind of “double-whammy” effect on organizations, forcing them to start seriously thinking about relocation strategies.
One way to define these two tariffs is this: section 301 is country-specific, whereas section 232 is product-specific. Tariff 232 specifically targets the commodities of aluminum and steel; therefore, your costs for such products may be higher regardless of the country from which you are importing.
Tariff 301, only applies to China right now and is meant to, as Coates says, “strengthen U.S. manufacturing.” Unfortunately, she continues, “it doesn't work that way anymore, [because] putting a tax on imports doesn't necessarily make U.S. manufacturing more competitive.” Instead, these tariffs will often penalize organizations, forcing them to spend more on materials when purchasing parts from overseas.
In some cases, manufacturers can pass extra tariff expenses to the consumer —especially when relocating to the U.S., as 60% of Americans said they are willing to pay 10% more for products made in the country. This may not always be an option however, as contracts in place may keep manufacturers locked into a specific cost structure.
5. Supply chain redevelopment should start sooner rather than later.
Supply chains don't diversify overnight; they grow and mature over time with management investment. However, this doesn’t mean organizations shouldn’t start building a supply chain disruption management strategy. According to ScienceDirect, “Temporary sourcing diversification might be a desirable response strategy to catastrophic supply chain disruption.”
Organizations should establish an appropriate timeline around the manufacturing relocation process. Coates estimates that “It takes 12 to 18 months to redevelop a supply chain in America,” further accentuating the need for organizations to secure inventory before and during the transitional period. Once the supply chain has been reestablished, organizations can expedite manufacturing times by sharing the load across multiple outlets, which will help cut costs and get the product into consumers’ hands faster than ever.
6. Leaving Chinese manufacturing isn’t easy.
Organizations may still need to rely on China for specific materials . According to Coates, “some things are only produced in one country, particularly China. They've had a firm hold on our manufacturing for the last 10 or 15 years, and they've developed products and processes that don't exist anywhere else.”
If you do decide to relocate parts of your manufacturing away from China, you’re going to have to do so carefully. Manufacturers that rely on a particular material that is solely manufactured in China may not be able to completely move manufacturing out of China.
When outsourcing manufacturing to China, one of the most significant expenses is the hiring of local employees, many of whom may be working on one-to-two year employment contracts. Organizations that plan to leave manufacturing sites in China may be required to buy out those contracts or pay those employees through the life of the contract.
Larger factories may also require departing manufacturers to apply for a permit to leave China, which can be a lengthy process with no hard guarantees. Organizations that ignore the request for this permit could risk being blacklisted by China, which will prevent any future contracts with Chinese factories.
7. Organizations must reevaluate their total cost of ownership (TCO).
Supply chain relocation and diversification, by necessity, involve broadening the scope of suppliers (and locations). While this can lead to a host of benefits, it also carries the risk of complicating supplier relationship management strategies if those strategies weren’t designed to handle the stress of multiple suppliers.
For organizations that have traditionally only worked with a single supplier, the need to interact with and manage two, three, or more suppliers could stretch resources too thin and strain abilities to maintain communication levels they’ve developed with their original suppliers. This could result in subpar products, manufacturing delays, and other preventable roadblocks that will negatively affect the bottom line.
When initiating new manufacturer relationships, be proactive and plan for major contingencies. According to Industry Week, “Sometimes emergencies will occur, especially in complex, multiparty supply chains. Agree ahead of time how emergencies will be handled and analyze why they occur, so that the number [and severity] of emergencies is minimized.” Having an emergency response plan prepared enables organizations to manage future disruptions and, consequently, save money that can be reinvested elsewhere.
When evaluating TCO, organizations must also consider whether new manufacturing sites will require additional investments in automation to offset the costs of reshoring, such as:
- Supply chain automation
- 3D printing capabilities
- Internet of Things (IoT)
According to Coates, these essential tools can “reduce the cost to manufacture” and “improve productivity in a way that makes the overall cost effect go down.”
Manufacturers relocating to the U.S., who also sell to U.S.-based consumers, will likely see a decrease in logistics costs. The cost of labor may be higher for domestic manufacturers, “but companies save on shipping,” according to Kellogg Insight. “They are also able to keep inventories low while offering rapid delivery.” This can go a long way towards recouping the additional expenses encountered during the manufacturing relocation process.
The bottom line is every customer and manufacturing site is different. So, TCO models must be modified and specific to each organization
When it comes to manufacturing relocation strategies, diversity is always the key.