Resilience: Business case arguments for keeping manufacturing operations and related resources as local as possible are winning the day

 

January, 2024- Supply chain. It’s such a vast entity that encompasses a wide range of activities and is moved by geopolitical events, world health, product shortages, skilled worker availability, logistics and so much more. Here is a quick summary of what this article tackles:

1. The federal government has helped ease supply chain constraints through legislation and policy decisions.

2. Over 250 industry professionals and academics met in Indiana to discuss building a resilient U.S. infrastructure for digital, physical and sustainable manufacturing and operations (M&O).

3. An automotive industry leader talks about supply chains going “beyond procurement.”

4. Key findings of a Manufacturing Institute report indicate that American workers might cost more but the skills of the U.S. labor force are actually well worth it. Other international cost comparisons, such as real estate and taxes, also favor the U.S. as a place to establish manufacturing operations.

5. Reshoring is an obvious direct and effective way to shorten the supply chain and serves as a risk aversion strategy.

READY, SET, GO!

On Nov. 27, President Joe Biden remarked that on Thanksgiving 2021, “100 container ships were waiting to dock,” stretching far out into the ocean. “This year, there were less than 10.”

Before the pandemic, said Biden, “supply chains weren’t something most Americans thought about or talked about. But after years of delay in parts and products, everyone knows why supply chains are so important.”

Today, “our supply chains are stronger than ever, with backlogs, bottlenecks and [freight] rates at a 25-year low.”

The administration launched a Council on Supply Chain Resilience “to ensure that our supply chains remain secure, diversified, resilient.” In early November, the president signed a supply chain agreement with 13 countries in the Indo-Pacific. “This agreement is going to help us identify supply chain bottlenecks before they become the kind of full-scale disruptions we saw during the pandemic,” said Biden.

 

   Supply chain management has become a key element of corporate strategy, one that drives decision making

PURSUING EXCELLENCE

More than 250 representatives from industry, government, academia and professional societies gathered in person and online Nov. 7 for Purdue University’s inaugural national summit focusing on resilience through excellence in manufacturing and operations.

“Reshoring, retooling and retraining for advanced manufacturing in the U.S. has become essential and urgent, and there’s no better place to accomplish the mission than the Midwest,” Purdue President Mung Chiang said.

“Major supply chain gaps the nation experienced over and over, when coupled with manufacturing globalization, have jeopardized America’s ability to provide resilient commerce, defense and a high quality of life for all Americans,” said Ajay Malshe, a mechanical engineering professor. “Any supply chain is only as good as its weakest link. We need all physical, digital, sustainable maintenance and operations tools, and a skilled workforce, to make those links strong [enough to succeed] when the next national and global crises challenge us.”

According to Stephan Biller, an industrial engineering and business professor at Purdue, “We need to focus on innovation and workforce development to achieve resiliency in M&O that is digitally enabled and sustainable,” including for small and midsize manufacturers, so they can digitalize assets and participate in the ongoing artificial intelligence revolution.

DECISION DRIVER

In his Hot Topics blog posted Nov. 17, Alan Amici, president and CEO of the Center for Automotive Research, remarked that supply chain management “has become a key element of corporate strategy. Much more than a component of operations, it now drives strategic decision making.”

For automakers, this means “substantial investments are underway in crucial mineral mining for battery production and new technology for component castings. For energy providers like ExxonMobil, investment in lithium processing signals a shift from drilling to mining. While this shift may not necessarily signify a revival of Henry Ford’s Rouge Plant’s vertical integration,” he said, “it undeniably underscores that supply chain management is now far beyond a mere procurement function.”

YOU GET WHAT YOU PAY FOR 

KMPG conducted a cost-benefit analysis in conjunction with the Manufacturing Institute. The report, “Cost of Manufacturing Operations Around the Globe,” released in January 2023, found that yes, manufacturers in the United States “face higher primary costs relative to other countries, particularly labor costs.” This is reflected in a Primary Cost score of 3.40, which is 15.7 percent higher than the average score of the other manufacturing locations included in the study and translates to a ranking of 14 out of a total of 17 on the Primary Cost Index.

“However, strong performance on Secondary Costs for the U.S.—such as the quality of labor and superior business conditions—results in the U.S. being ranked fifth on the overall Cost of Doing Business Index.

“Labor quality is a differentiating factor for the U.S.,” KMPG’s researchers reported. “Examining the results from a labor market perspective, the U.S.’s strength in labor quality allows it to be a strong competitive contender.”

In terms of real estate costs and cost of capital, the United States is relatively competitive compared to Southeast Asian nations. Among these countries, only India, Malaysia and China had lower average costs for industrial property than the U.S., while only Taiwan had a lower interest rate.

“The U.S. compares less favorably to the Southeast Asian nations on the measures of utility costs and corporate tax rates. The U.S. is tied with Malaysia for the highest electricity costs among these countries, significantly higher than the average rate paid by Chinese electricity users.”

In terms of corporate tax rates among this group, only India and Mexico have higher statutory tax rates, at 30 percent compared to 27 percent for the U.S. With respect to Secondary Cost factors, “the U.S. clearly is in a strong position. The U.S. scores are among the top three on almost all of the metrics, including quality of labor, transport infrastructure, and ease of doing business.”

TOP FACTORS FOR RESHORING

1. Government incentives

2. Good local supply chain

3. Proximity to customers/market

4. Skilled workforce availability & training

5. Infrastructure

6. Supply chain interruption risk

7. Manufacturing/engineering R&D

8. Underutilized capacity

9. Lead times

10. Image/brand

11. Impact on domestic economy

12. Higher productivity

13. Automation/technology

14. Green considerations

15. Government policy, subsidies

16. Customization/flexibility

17. Raw materials cost

18. Better control of process/ delivery/factory

19. Business process improvement techniques

20. Additive manufacturing

    Twenty to 30 percent of what is now imported from China can be sourced domestically at equal or greater profitability. 

HOMEBOUND

The Reshoring Initiative, in its first-half 2023 report, found that the cumulative number of jobs brought back since U.S. manufacturing’s low point in 2010 was anticipated to be near 2 million by the end of 2023, or about 40 percent of the jobs lost to offshoring.

“To put [2023 job creation] announcement rates into perspective, it took 11 years to return the first 1 million jobs and only three years to return the second million.”

Reshoring continues to outpace foreign direct investment, 59 percent to 41 percent— indicating that the country and domestic companies “are finally recognizing the value of local production.”

To underscore that point, during the first 10 months of 2023, the amount of spending on manufacturing facilities in the U.S. (not seasonally adjusted) totaled $159 billion, 72 percent higher than the $92.4 billion spend in the same 2022 period, according to the Census Bureau.

“Geopolitical disruptions are driving companies to reevaluate supply chain priorities,” the Reshoring Initiative said in its report. “COVID shutdowns, the war in Ukraine, the Israeli/Hamas conflict and increasing tension over Taiwan show that it is past time for companies to evaluate reshoring and near-shoring as insurance against catastrophic disruptions.”

Geopolitical risk is defined as the probability in one year of a major disruption in trade, resulting in the cessation of imports from that country to the U.S. as a result of an adverse geopolitical event.

Data gathered from users of the Reshoring Initiative’s Total Cost of Ownership Estimator (an online tool) shows that 20 to 30 percent “of what is now imported from China can be sourced domestically at equal or greater profitability.”

The majority of metals manufacturers throughout North America have anticipated and witnessed the reshoring activities undertaken by their global manufacturing customers and are prepared to deliver. Service centers are breaking ground all over the continent (MM, November 2023) while producers are building carbon-neutral technologies (MM, August 2023). In the words of the great American singer- songwriter John Denver, “It’s good to be back home again.”

More Supply Chain Report