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Why Covid-19 is Driving an Onshoring Movement in Manufacturing

By KC Peterson, Contributor | September 16, 2020

It wasn't too long ago when Americans thought trade disputes were the biggest threat to U.S. supply chains. Then Covid-19 hit, causing a wave of instability to ripple through global supply chains. It has some companies rethinking the value of offshore production, especially those in industries that rely heavily on offshore manufacturing such as pharmaceuticals and automobiles.

The auto industry felt the crunch fast and early. One source interviewed by MarketWatch likened it to a "supply chain twilight zone." In the same article, a union representative at the GM factory in Flint, Michigan—one of the automaker's biggest plants and a key producer of Silverado and Sierra pickups—said the company chartered a jet to pick up parts in China.

GM's workaround epitomizes the complexity of the global supply chain and the effects and costs of risk that come with it.

Chain Reaction

There's no question Covid-19 brings risk mitigation to the forefront for many companies, says Morris Cohen, an expert on global supply chains and co-director of the Wharton School's Fishman-Davidson Center for Service and Operations Management at the University of Pennsylvania.

“Many woke up a few months ago and [realized] maybe we've overemphasized the efficiency side and the optimization of supply chain," says Cohen. “This trade-off between efficiency and risk is now being re-evaluated—I'd say by just about every company—and as a function of that, raising the obvious question of how and where you produce your products and source your inputs."

20% of the companies said they were planning to reshore or near shore some operations.

Recent disruptions are creating new ways of thinking about the risks of globalization and, as a consequence, generating interest in bringing some offshore manufacturing back home.

In a survey from the Institute for Supply Management released in July, 77% of respondents saw extended lead times for Chinese-sourced raw materials or components, also known as inputs, when compared to the end of 2019. European and North American inputs are also delayed. In response to these holdups, 20% of the companies surveyed said they were planning, or had already started, to reshore or near shore some operations. Meanwhile, 64% of manufacturers say they are “likely to bring manufacturing production and sourcing back to North America" according to another survey in May by product sourcing and supplier network Thomas. ​

Truth be told, the onshoring movement was already gaining steam before the global pandemic. Covid-19 may simply be a dramatic turning point.

A Decade of Disruption

According to consultancy firm Kearney's most recent Reshoring Index, the trade war between the U.S. and China spurred a “dramatic shift away from Asian low-cost countries." Last year, U.S. companies cut back on sourcing from 14 traditional Asian trading partners, and U.S. imports from China declined by 17%. Manufacturing companies like Williams-Sonoma and Stanley Black & Decker responded to the growing list of tariffs imposed on Chinese products by opening new facilities in the U.S.

The trade dispute between the U.S. and China is one in a long string of events that highlighted vulnerabilities in global supply chains, propelling the onshoring movement forward.

Covid-19 is acting as a wake-up call to reduce its reliance on imported pharmaceuticals and medical supplies.

Tobias Schoenherr, co-editor-in-chief of the International Journal of Operations and Production Management and a professor of purchasing and supply management at Michigan State University, points to several key disasters predating Covid-19 that influenced the shift. Among them are the 2008 recession and 2010-2011 natural disasters like Iceland's volcano eruption, Japan's earthquake and tsunami, and Thailand's floods—all of which threw automobile supply chains into disarray.

“Most of these incidents are relatively easy [for supply chains] to overcome. Most of them are isolated," says Schoenherr. But, he adds, these disasters highlight the risks of using single sources, especially when they are overseas.

Covid-19 is acting as a “wake-up call" for the country to reduce its reliance on imported pharmaceuticals and medical supplies, Senior U.S. Trade Advisor Peter Navarro told the U.K.'s Financial Times in February. Currently, just 28% of the manufacturing facilities responsible for producing active ingredients in U.S. medicines are domestically-based, according to the Food and Drug Administration. “If we have learned anything from the coronavirus and swine flu H1N1 epidemic of 2009, it's that we cannot necessarily depend on other countries, even close allies, to supply us with needed items, from face masks to vaccines," Navarro told the Financial Times.

Coming Back Home

The onshoring movement was politicized by some as a demonstration of patriotism and an investment in domestic jobs—but that's not necessarily the case. In the U.S. and abroad, Industry 4.0 technologies such as artificial intelligence and robotics reduce the cost and time of manufacturing, and can even make customizable products at scale.

Schoenherr says economics are the primary motivating factor. He personally surveyed 300 companies considering or actively pursuing onshoring about what was drawing them back. Many pointed to decreasing labor cost advantages overseas. “As the margins have started to decrease, companies are taking a closer look at the total landed cost. So not only capturing the cost of labor, the cost of manufacturing, but also the cost of logistics, the cost of time delays," he says. In short, for some businesses decreasing savings are no longer worth increasing risks.

Onshoring allows companies to be more agile and respond to consumer demands faster.

But onshoring isn't only about risk mitigation. Proponents argue that domestic production gives better control of intellectual property, boosts product quality, reduces shipping costs, increases flexibility, and shortens lead times. Schoenherr says shortened lead times and better quality products are a critical response to consumer demand. We want things quicker and we don't accept bad quality anymore. “If the slightest thing is wrong, we go onto social media and make that public," he says. “On top of that is flexibility … next-day free shipping promoted by Amazon [means] there's a lot of pressure on companies."

Onshoring allows companies to be more agile and respond to consumer demands faster, but Schoenherr adds that for some types of industries and customers, faster isn't always the ultimate deciding factor. Some consumers are fine waiting a month for product delivery for the sort of day-to-day household products like new plates or towels – items where customization rarely enters into the equation.

The Onshore-Offshore Dance

The global supply chain is highly complex. Hyper-specialized suppliers across the globe often rely on their own suppliers. One kink in the chain and production can come to a grinding halt. Obstacles remain even now, more than half a year after the pandemic began.

Companies based in the U.S. are increasingly finding themselves at a critical crossroads. On one hand, offshore labor in some countries is still less expensive than onshoring. As Kearney's Reshoring Index notes, the China-U.S. trade dispute may be driving some manufacturers back to American soil. Others, though, simply moved to other Asian low-cost countries. In fact, Kearney reports that Vietnam absorbed 46% of the $31 billion of U.S. imports that moved away from China.

It's all part of a wider dance, says Cohen of the Wharton School—a constant re-evaluation and re-balancing of costs, partnerships, risks, resilience, technology, and labor. There are always trade-offs, but Covid-19 introduced the wild card no one saw coming.

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