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Will Reshoring Solve Supply Chain Woes?

August 2, 2022

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Current supply chain snarls, often associated with overseas factories and logjammed ports, have made manufacturing reshoring a hot topic. The staff at Manufacturing.net asserts, “As manufacturers face complex supply chain challenges due to COVID-19, trade wars, and political and social unrest, reinvesting in near-shoring or reshoring operations can help build resilience and agility amid the turmoil.”[1] On the other hand, Lora Cecere (@lcecere), founder and CEO of Supply Chain Insights, cautions that the answer to whether reshoring will solve supply chain challenges is not that easy. She explains, “When I get this question, I swallow hard. It is such a simplistic view of the world. My answer, ‘The decisions are not that simple. Asset relocation takes time. The availability of capacity in industries like the semiconductor industry is tight. Building a fab (manufacturing site) takes two-to-four years and requires the availability of water and trained labor.'”[2] Few of life’s decisions are matters of black and white. The decision to reshore (or near-shore) is no different.

 

Benefits of reshoring and near-shoring

 

Supply chain professionals are quick to acknowledge that the further you extend a value chain the more complex it becomes. Environmentalists are also quick to point out that extended value chains increase both transportation and environmental costs of doing business. Hence, reducing those costs are some of the most persuasive arguments being made for reshoring and near-shoring. Another argument gaining traction is that reshored or near-shored manufacturing makes supply chains more resilient. Finally, there is the important fact that reshoring means more good-paying jobs are made available to boost the national economy (if workers can be found to fill them). Journalist Rob Spiegel (@RobSpiegel1) reports, “According to the Reshoring Initiative, the pandemic spurred a national push to strengthen the domestic supply chain, especially for essential products. This has been driving reshoring numbers higher. … Reshoring and foreign direct investment job announcements for 2021 were projected to be over 220,000 — 38% above 2020, which already scored the highest yearly rate recorded to date.”[3]

 

Rosemary Coates (@Rosemary_Coates), Executive Director of the Reshoring Institute, believes the current supply chain mess will force many manufacturers to rethink their reshoring/near-shoring strategies. She explains, “Manufacturers across America showed remarkable resiliency and creativity in responding to … severe global supply chain issues. Many of our clients are now actively seeking domestic suppliers, investing in expanding their U.S. manufacturing capability, and increasing their inventory positions. This has created enormous new opportunities for U.S. suppliers and improved order cycle times for U.S. consumers.”[4] She suggests there are several questions companies should consider when developing a reshoring/near-shoring strategy. Those questions include: Why is now the time to bring manufacturing back to America? Do Americans prefer goods manufactured in the U.S. and are they willing to pay more for these goods? What jobs do we want to come back and what jobs should stay in low-cost countries? How will manufacturing affect local economies?

 

Challenges related to reshoring and near-shoring

 

As Cecere noted above, the decision to reshore or near-shore shouldn’t be taken lightly. And, once the decision is made, it can take years and a good deal of money to make them a reality. There is also the fact that many of the consumers U.S. companies would like as customers live and work in the countries where they now have factories. That means a company wanting to do business in China would likely maintain manufacturing facilities in China, even if they reshore some manufacturing to the U.S. for domestic consumption. Rather than simplify the value chain, this multi-location strategy can make things more complex. Add to that the fact that many proponents of reshoring are supporting the effort for geopolitical reasons. Aaron L. Friedberg (@AaronFriedberg), a Professor of Politics and International Affairs at Princeton University, reflected growing sentiment when he wrote, “U.S. strategy needs reglobalization to snatch critical power away from China.”[5]

 

Anne Hoecker, Shu Li, and Jue Wang, executives at Bain & Company, assert, “Escalating tensions between the U.S. and China have accelerated the unraveling of globalization more quickly than many predicted even a year ago. The Covid-19 pandemic, the anti-China sentiment that followed, and the increasingly tense political climate have raised the stakes. Now, it’s clear the world isn’t going back to globalization — it’s headed toward decoupling.”[6] They conclude, “Ultimately, the right answer to navigating this new world depends on the company and its industry, and must be graded against what the U.S. and Chinese governments are likely to allow. The complexities are high, but the prize is continued access to a large, global technology market.”

 

Cecere appears to agree with that sentiment. She writes, “This is not a question of near-shoring or reshoring. Instead, supply chain leaders need to focus on the minimization of waste, and the alignment of signals. Prepare for a slog. The answers lie in investments in supplier development teams, the simplification of the bill of materials and product platforms, and analytics to forecast requirements based on consumption. The question of near-shoring or reshoring is really a question for labor-intensive industries like apparel. But, even then, the relocation of capacity is not a snap of the fingers. The answer lies in network design, demand sensing, and the simplification of product platforms.”

 

Concluding Thoughts

 

Christopher Tang (@christangucla), a distinguished professor and the holder of the Carter Chair in Business Administration at the UCLA Anderson School of Management, believes the debate about reshoring and near-shoring may be moot. He predicts, “Most global supply chains are going to end.”[7] At the same, he doesn’t believe reshoring is the right answer. “Building domestic supply chains in the U.S. can be time-consuming and cost-ineffective,” he explains. He suggests near-shoring (i.e., creating regional supply chains) is a better solution to today’s supply chain woes. He explains, “Ultimately, a U.S.-Canada-Mexico supply chain can monitor and respond to changing needs quickly and accurately. To ensure financial sustainability, such regional supply chains must be agile and flexible. They must be able to produce certain ordinary products in normal times, but also pivot quicky to produce critical products within the same category during a crisis. … The current crisis exposed the vulnerability of global supply chains, but it presents an excellent opportunity for developing regional supply chains that are more resilient. It’s about time.”

 

Despite all the talk about reshoring and near-shoring, a 2021 report by The Economist Intelligence Unit (EIU) indicates most manufacturers are being cautious. The report concludes, “North America will not see significant supply chain reshoring in the next few years, despite policymakers’ optimistic outlook for developing a more self-sustaining supply chain. … Expectations for developing a North American alternative to Asia-based supply chains are overblown.”[8] A cautious approach is certainly justified. Nevertheless, I agree with Professor Tang that regionalized supply chains make a lot of sense and should be fostered.

 

Footnotes
[1] Staff, “Rethinking the Supply Chain: Near-Shoring and Reshoring to Reduce Risk,” Manufacturing.net, 20 April 2021.
[2] Lora Cecere, “Pushing the Supply Chain Reset Button,” Supply Chain Shaman, 30 June 2022.
[3] Rob Spiegel, “Ready for More Quality US Jobs? See how Reshoring Is Helping,” DesignNews, 1 November 2021.
[4] Adrienne Zepeda, “Why Reshoring is the Right Path Out of the Supply Chain Crisis,” DesignNews, 24 March 2022.
[5] Lizzie O’Leary, “The Modern Supply Chain Is Snapping,” The Atlantic, 19 March 2020.
[6] Anne Hoecker, Shu Li, and Jue Wang, “Preparing for US-China Decoupling,” IndustryWeek, 9 November 2020.
[7] Christopher Tang, “It’s About Time to Build Regional Supply Chains,” IndustryWeek, 30 March 2022.
[8] Staff, “Report reveals no rush to ‘reshore’,” Supply Chain Quarterly, 21 June 2021.

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