The pandemic disruptions to supply chains have led to companies rethinking their globalized supply chains. The trend is to move towards onshoring and reshoring, but this strategy has risks. Do the benefits outweigh the risks? - BY Kim Persaud

The COVID-19 pandemic triggered long-term changes in all industries, forcing supply chain managers to rethink their strategies. Massive disruptions impacted every business dependent on offshore manufacturing and materials sourcing and manufacturers and retailers shipping the goods and materials. If one lesson is extracted from such pandemic events as factory shutdowns and backed-up ports, it is that minimizing supply chain disruption risks calls for re-evaluating supply chain strategies. Globalization made sense at one time, but the pandemic has demonstrated the associated extreme risks. Moving suppliers closer to home enables more control over distribution networks, increases the ability to maintain oversight over production and quality, reduces logistics costs, and improves inventory management. However, onshoring and nearshoring strategies must be thoughtful, because of the challenges and new risks of making significant supply chain changes.

Resilience, Robustness, or Both?

Global supply chains are not disappearing, even with offshoring and nearshoring trends. Some materials are only available in foreign countries, a particular issue in the technology and electric vehicle industries. There is also the matter of lower labor costs, which is exactly what drove some companies to globalize their manufacturing in the first place. Though the wage gap has narrowed in some areas, it still exists. Bringing manufacturing home may lead to higher costs and prices, affecting competition. It can also be enormously expensive to build new manufacturing plants locally or regionally if unable to find domestic suppliers who can supply the materials and finished goods.

Sébastien Miroudot defines resilience as “the ability to return to normal operations over an acceptable period of time, post disruption.” Robustness is having the capability to maintain operations during an emergency. This principle supports a supply chain with production facilities in different geographic locations, so that operations can continue (or quickly resume) no matter what conditions exist.

Driven by the pandemic events and one of the challenges for supply chain managers as they consider onshoring or reshoring, the interesting point that Miroudot makes is that in some situations, robustness matters more than resilience, such as when the distribution of critical medical supplies was crucial during the pandemic. Resilience and robustness require different strategies. Even with different suppliers, fully localizing a supply chain still presents the risk of disruption should a disaster occur locally. Resilience is built through product management, such as standardized inputs that are easily replaced, designing a supply chain with places and suppliers less subject to risk, and resilience monitoring, which assesses the time it takes a supplier to recover.

Keeping it Real

Richard Howells, Vice President, Solution Management for ERP, Finance and Digital Supply Chain at SAP and Industry 4.0 at SAP and Stephanie Overby, Independent Journalist writing on technology, business, and society, discuss what they call the five realities that should be understood when strategizing for nearshoring and onshoring.

According to Howells and Overby, the first reality is that most global supply chain managers will not bring everything home but will focus on diversifying their supply chains instead. This can be a blend of global and local suppliers, such as using local contract manufacturing while maintaining overseas suppliers. Honda is building a parallel supply chain outside China for 40% of its production. Inter Parfums is keeping some China-based suppliers but is shifting most contract manufacturing from Europe and China to the U.S. for products sold in the U.S. Also, U.S. suppliers now provide approximately 70% of its glass, pumps, and metal.

A second consideration is the cost of switching suppliers and locations. All costs should be considered. Landed costs include production, transportation, crating, customs duties, handling, insurance, currency conversion, etc. The costs often overlooked are those related to adding a new supplier to an existing supplier network. For example, costs are associated with redesigning the supply chain, onboarding and offboarding suppliers, developing an inventory stock adequate for the transition period, and validating the new supplier's capabilities and performance.

While developing onshoring and nearshoring strategies, do not assume all products should be produced locally. As mentioned earlier, some items are unavailable in the U.S., such as some critical minerals for technology components. Business leaders must also consider whether a supportive infrastructure and trained workers are available locally.

Finally, Howells and Overby highlight the need for digital integration to make the restructuring of the supply chain work. They write, “Companies need to help their suppliers help them – whether they’re located in the same time zone or halfway around the world. A crucial element of the solution is sharing data related to demand trends and supply constraints and building closer relationships within an entire business network – not just the big tier-one suppliers (partners that a company directly conducts business with, including contracted manufacturing facilities or production partners).”

Promises Kept

Many large companies have announced an intention to take steps towards onshoring or reshoring, including Apple, Inc., General Electric, Ford Motor Company, Walmart, Baxter International, Tesla and many others. What about small to medium-sized businesses, many of which are diverse-owned enterprises? The professionals at The ESG Report address the impact of reshoring on SMES. Although some SMEs have global supply chains, many are only local suppliers. The impact of multinational companies reshoring or onshoring their manufacturing and other product sources on local, regional, and diverse suppliers can be significant, especially from an ESG perspective if the reshoring or onshoring is ESG-focused. It can increase job opportunities, reduce greenhouse gas emissions, support SME growth, increase the economic well-being of communities, and increase access to innovative, quality goods. These are all promises many companies have made, and now they have opportunities to ensure they are kept as they rebuild supply chains.

Maintaining a Balanced Approach to Localizing Supply Chains

The COVID-19 pandemic has permanently altered supply chains, leading companies to re-evaluate their dependency on overseas manufacturing and materials sourcing. The move towards localized supply chains will likely continue, but will be gradual. The challenge is knowing how resilience and robustness must be balanced when developing onshoring or nearshoring supply chain strategies. Minimizing risk is one primary driver, but redesigning supply chains creates new risks associated with costs, talent availability, technology, efficiency, and meeting customer expectations. The fact that government regulations continually change, creating trade uncertainties, is a whole discussion on its own. However, there are also benefits associated with developing domestic supply chains, including taking action on ESG commitments and giving more diverse SMEs opportunities.