COVID-19 Factors Accelerating Reshoring
The COVID-19 pandemic has caused chaos in tightly interconnected global supply chains. In response, companies are rethinking, shifting, shortening and reshoring supply chains. The April Thomas Industrial Survey revealed that manufacturers are likely to bring production and sourcing back to North America (64%, a 10% increase from March 2020). Sourcing activity for castings on Thomasnet.com is up 44% year over year and up 41% over last quarter averages. Twenty five percent of companies are considering expanding automation. In other cases, importers are forgoing slightly higher short-term margins to minimize medium term risk and embrace a more resilient and flexible local supply chain model. The COVID-19 pandemic is shifting priorities and having a dramatic impact on reshoring.
Connecticut-based FCP Euro, a midsize automotive parts retailer typically imports and sells parts from the EU. Due to an expected four- to six-month delay from Europe, the company is shifting some of its supply chain to domestic suppliers. Scott Drozd, CEO of FCP Euro, said he shifted 40% of his higher-margin stock-n-ship supply chain to a more flexible and reliable just-in-time local model. FCP Euro reshored for resiliency.
Atlanta-based G95 Inc., a manufacturer of outerwear with built-in filtration technology, reshored its entire supply chain from China to a Grand Rapids contract manufacturer amid the coronavirus outbreak. The disruption caused by the coronavirus outbreak in China left the company with over 1,000 unfilled orders. Carlton Solle, owner of G95, said, “As a business, if you don’t have anything to sell, you’re not a business, and you’re out of business pretty quick.”
Companies with local supply chains did better during the COVID-19 disruption
Current conditions are bringing an end to unconditional globalization. The coronavirus pandemic revealed the vulnerabilities of hyper-connected global supply chains and companies with local supply chains faired better against the disruption. For example, toolmaker Stanley Black & Decker recently shifted production of its Craftsman tools from China to Texas. It reported no increase in costs and “much less impact from the coronavirus than would have been the case if it had remained in China.”
In an interview with CNBC, John Quincey, CEO of Coca-Cola, said plant shutdowns were limited to “just a couple of places.” He credited the good outcome to local production of Coke’s soft drinks. “The drinks in the U.S. are made in the U.S. The drinks in Germany are made in Germany,” he said. “The local supply chain is then able to work designated as part of the food system, so an essential service, to allow to run the production systems and distribution.”
Unilever has upwards of 200 factories worldwide and kept running at about 85% capacity. Unilever CFO Graeme Pitkethly said, “Most of our supply chain is local, it’s very flexible, and generally speaking, the vast majority of the products we sell in a country we supply in that country.”
Robert O. Martichenko, CEO of the LeanCor Supply Chain Group, wrote, “A ‘new normal’ will be the outcome of the crisis, which will include how we think, plan, execute, and improve our supply chains relative to a healthcare crisis.”
The supply chain ecosystems for essential products will be razor-focused on flexibility, shortened lead times and stability.
According to the Department of Commerce, 97% of all antibiotics in the U.S. come from China. U.S. manufacturers source 80% of their active pharmaceutical ingredients (APIs) overseas, primarily from China. China is also the chief supplier of APIs for producers in other countries. The FDA has reported shortages of some drugs due to the disruption caused by the coronavirus.
Richmond, VA-based pharmaceutical start-up Phlow plans to help shore-up the U.S. generic drug supply. Six million dollars in government funding will help “secure a supply of medicines and Active Pharmaceutical Ingredients (API) at risk of shortage during the current Coronavirus Pandemic.”
Recently the Trump Administration awarded Phlow a contract worth up to $812 million to boost U.S. production of coronavirus drugs. Phlow will use “different manufacturing methods that allow the U.S. to not rely on importing foreign medicines.”
Honeywell is adding manufacturing capabilities to produce N95 face masks. Once its Phoenix and Rhode Island facilities are fully operational, they will produce upwards of 20 million masks per month and create more than 1,000 new U.S. jobs.
Reuters reported in May that Washington is in talks with chipmakers about building U.S. factories due to national security concerns. A letter from the Intel CEO said, “We currently think it is in the best interest of the United States and of Intel to explore how Intel could operate a commercial U.S. foundry to supply a broad range of microelectronics.”
In addition, Taiwan Semiconductor Manufacturing Company (TSMC) plans to build a $12 billion semiconductor factory in Arizona that will create 1,600 high-tech jobs.
Studies Show Americans Ready to Decouple From China
Recent studies show American attitudes are changing. According to a McLaughlin & Associates study, 75% of Americans felt that the U.S. should end its dependence on China for medical imports including PPE and pharmaceuticals. A recent Harris poll revealed that Americans thought companies should “pull back from manufacturing in China” (71%), and are in favor of tough U.S.-China trade policies (69%).
Using TCO for Sourcing
Now is an especially good time for companies to reevaluate the choice of domestic vs. offshore production. To help quantify those costs, the Reshoring Initiative website provides tools to help companies decide objectively whether their overhead will come down more than their manufacturing cost goes up when sourcing locally.
The free online Total Cost of Ownership Estimator® will more accurately determine the real profit and loss impact of reshoring or offshoring. After doing the math, most companies will decide to bring some work back.
Reshoring Initiative’s Import Substitution Program can help foundries identify and sell to the largest importers of relevant castings. It is currently working with a molder and a forging shop.
See if reshoring makes economic sense for your company or your customers. Companies are more receptive now because of the crisis and the publicity regarding supply chain dependency. The Reshoring Initiative’s resources can be found on the website (www.ReshoreNow.org).
Click here to see the article in the June 2020 digital edition.