Is it Time to Reshore Your Manufacturing Operations?
Published on 3 November 2020
Ever since the global pandemic hit the world’s manufacturing sector where it hurts, many companies are starting to view reshoring, onshoring, and nearshoring of their production capabilities as a way to steel themselves against the next potential disruption.
Reshoring and onshoring find companies moving production into their own countries, and nearshoring is the repositioning of those activities to countries that are nearer to the company’s home base. An American firm that relied heavily on Chinese production, for instance, may now be looking to Mexico as a potential nearshoring candidate.
All three strategies are coming up on manufacturers’ radar screens right now. According to a recent Deloitte survey, 83% of companies are diversifying production in order to meet new customer demands (up from 28% prior to the COVID crisis). As part of these efforts, organizations are adapting their operations quickly to respond to the impacts. One such adaptation involves repositioning manufacturing operations closer to home.
“Supply chain resilience strategies that localize critical industries and their component supply chains could not only alleviate the weaknesses uncovered during the COVID-19 pandemic,” Brookings Institute points out, “but also increase employment growth across historically well-paying industries and provide economic development opportunities for U.S. regions with the economic fundamentals conducive to advanced manufacturing.”
The Backbone of the U.S. Economy
Long considered the backbone of the U.S. economy, domestic manufacturing has slowly dwindled as companies offshored production in order to minimize costs and maximize shareholders’ profits. “Since then, wage increases in offshoring countries rose consistently, driving the profits down, making the reason for offshoring less clear,” Gray points out in Reshoring in the COVID-19 Storm.
“Reshoring, bringing manufacturing back to the United States, began to make more sense as companies weighed the Total Cost of Ownership (TCO), which is defined as all the costs of manufacturing a product from beginning to end,” it continues, “especially escalating labor costs, tariffs, quality issues, and unstable supply chains.”
Right now, manufacturers are also coming to terms with numerous other issues that weren’t prevalent during the booming economy of the last 10+ years, including:
- Shocks to consumer demand, both in the volume and the variety of manufactured goods consumed.
- Shocks to workforce presence, composition, and location.
- Significant supply chain fragility, with inventory shortages affecting production and stockouts impacting sales.
5 Reasons to Reshore
Manufacturers have undertaken several initiatives to meet the challenges brought about by COVID-19. They’re developing more responsive plans, for example, and increasing visibility up and down the supply chain to capture the critical hidden links, many of which remain located overseas. They’re also diversifying their supply chains to become nimbler and, as part of this push, reshoring key manufacturing activities. Here are five reasons why:
- A lot of manufacturing takes place overseas. For the past 20 years, manufacturers have focused on offshoring the parts of their production that couldn’t be performed cost-effectively in North America.
- The pandemic was a shock to the system. The pandemic has changed the terms of the cost-benefit equation (as have wage increases in China), punishing those with long supply chains and pushing many manufacturers to bring production back to North American shores, with Mexico comparing favorably when factoring in higher productivity and faster shipping times to key markets in the U.S. and Canada.
- The shockwaves haven’t ended yet. As Supply Chain Management Review notes, “due to the anxieties surrounding general travel, widespread shortages of medical supplies and other assets, and sudden restrictions placed on suppliers across the world, reshoring is now on the lips of supply chain experts and some of the largest manufacturers both in the U.S. and abroad.”
- Labor isn’t getting any cheaper. Additional reasons for reshoring include rising labor and transportation costs, the need for shorter lead times as an alternative to holding more inventory in the wake of the pandemic, and finally, the desire to avoid offshore risks, specifically a tariff war between the U.S. and China.
- Reshoring can be both cost- and time-effective. As McKinsey notes, the rationale for reshoring succeeds purely on economic terms with, “certain industrial companies [finding] that shifting component-production locations can result in a 20 percent decrease in cost, as well as reductions in logistics and trade risks. Alternatively, the same parts can be manufactured domestically with only a 5 percent cost increase by leveraging Industry 4.0.” As Supply Chain Management Review reports, “while the decision to reshore will hinge on cost for many organizations, emerging data shows that reshoring can actually create cost efficiencies. According to the Reshoring Initiative, factors like lower transportation costs and quicker inventory turns can offset higher labor costs to make reshoring less expensive overall.”
A Good Starting Point
Reshoring is not as easy as flicking a switch. In the wake of relocation to Asia, for example, many of the domestic manufacturing capabilities up and down the supply chain have atrophied. It’s also important to manage expectations, with “experts [cautioning] that local suppliers do not inherently eliminate risk.” In Supply Chain Dive, PwC’s Mark Hermans points out that “more nearshoring does not necessarily mean that the supply chain is more resilient. It's still a single point of failure.”
Effectively reshoring production is possible, and it can take one of three forms, with additional levels of complexity and longer timeframes required as you work down this list:
- Working with an existing offshore partner to bring manufacturing closer to North America
- Choosing a local manufacturing partner
- Bringing production back inhouse
- Automate your inventory management
Technology has a role to play in enabling organizations to reshore production. As Supply Chain Management Review reports, “for businesses that decide to migrate their operations, effective inventory management and supply chain tools will be key for success. These include new tracking and authentication advancements, which make visibility across the supply chain more accurate than ever.”
Effective inventory management starts with robust warehouse management systems. Solutions exist today that can ensure any warehouse or distribution center operates at peak efficiency, 24 hours a day, seven days a week. Creating virtual models for facilities and testing them without any impact on ongoing operations is just one example, of how operators can ensure their path to success. From Warehouse Management Systems (WMS) and Transportation Management Systems (TMS) to Manufacturing Execution Systems (MES) and more, software platforms can deliver a wide range of benefits that ultimately flow to the warehouse operator’s bottom line.
Generix Group North America provides a series of solutions within our Supply Chain Hub product suite to create efficiencies across an entire supply chain. Our solutions are in use around the world and our experience is second-to-none. We invite you to reach out to us here to learn more.