For many companies, the supply chain nightmares that have emerged along with COVID-19 have injected new life into considering whether offshoring was such a good idea after all.
Although things like natural disasters, regional upheavals, and geopolitical concerns have always contributed to challenges associated with the global supply chain, the far-reaching impacts of the pandemic have created an unprecedented degree of disruption in numerous industries.
In that context, the current reality for businesses and the customers they serve is that products manufactured in the far reaches of the world may be stuck in either an unmade or unfinished state due to pandemic-related factors—or in a finished state and languishing in a container somewhere along a sluggish and unpredictable supply chain that is creating a logistical mess.
Here, we’ll take a look at some of the factors that influence reshoring dynamics—including what role automation might play in helping companies decide.
Just Bring it Home
In light of current challenges, those not familiar with supply chain intricacies may wonder, “Why not just bring it all home?”
While that sounds good in theory, it’s typically much more complex than that.
In this SupplyChainBrain video, Omer Abdullah, founder and managing director of The Smart Cube, discusses the “subtleties and complexities” involved for companies who are trying to decide whether manufacturing should be shifted from Asia back to the U.S.
As Abdullah notes in the video, one important factor to include when considering whether reshoring makes sense is total cost of ownership (TCO).
Assessing Total Cost of Ownership
TCO is used in a variety of business contexts, as Gartner describes: “The concept of total cost of ownership (TCO) refers to capturing all associated costs incurred by a buying organization when purchasing goods or services from external providers.”
TCO has been a big driver of globalization in the past, when lower prices for both raw materials and labor could be found overseas. However, taking a myopic view of TCO can have some major ramifications—which have been forced into the spotlight by the pandemic.
As Gartner says, “While unit price is important, there are multiple costs incurred when sourcing from external suppliers that are often overlooked by leaders in sourcing and procurement. It is too easy, and often a mistake, to focus exclusively on negotiating with suppliers for a lower cost. While this may lead to short-term savings, it can also result in an overall cost increase due to added supply chain complexity and other ‘hidden’ costs. For example, U.S. buyers shifting supplier production from a local manufacturing site to Asia may report cost savings, yet fail to account for additional logistics costs in expedited freight needed to cover demand fluctuations.”
Those words were published in 2018, long before the current state of supply chain chaos sent shipping costs through the roof.
In June, Thomas published the State of North American Manufacturing 2021 Annual Report, which explored the long-term impacts of the pandemic.
One key finding of the report?
“83% of manufacturers are planning to add North American suppliers to their supply chains within a year, a significant increase from 54% in March 2020,” wrote Cathy Ma for Thomas.
In her summary of the report, Ma noted, “While the report reveals numerous shifts in domestic sourcing trends and supply chain demands, the key takeaway is the industry’s growing prioritization of reshoring in the aftermath of the COVID-19 pandemic.”
A Supply Chain Dive summary of the report highlighted the important role TCO will play in deciding whether reshoring is the right move:
“Total cost of ownership is the top factor manufacturers consider when making reshoring decisions.”
“Of the 337 qualified respondents surveyed by Thomas for the report, 23% said total cost of ownership outweighed proximity to market, demand for U.S.-made products and exposure to shipping disruptions, as the most important metric to consider when deciding to reshore an element of their supply chain.”
Ma included TCO in her summary, too: “The supply chain disruptions brought on by the pandemic have become a wake-up call for businesses to look beyond cost-saving and just-in-time inventory management. 94% of the manufacturers surveyed listed ‘Availability’ and ‘Lead Times’ as the most important factors when vetting new suppliers, instead of the generally anticipated answer ‘Price per Unit.’”
Reshoring, Automation, and TCO
For most companies, labor costs are a key consideration, and the major gap between those in the U.S. vs Asia have been one key driver for setting up operations overseas.
However, with skyrocketing logistical costs now tipping the scale on the TCO equation, reshoring makes more sense than ever—if companies can find a way to do so in a cost-effective way.
In this context, automating appropriate labor intensive services may help to address high domestic labor costs. While some may fear that automation will lead to a loss of U.S. jobs, as one expert points out, if automation isn’t embraced, those jobs will continue to be lost to overseas locations.
Quoted in an Automation World post, Harry Moser, founder and president of the Reshoring Initiative said, “If we don’t invest in automation, we don’t increase our competitiveness. Some people are afraid of automation because they’ll lose their jobs. But, throw away that statement, because the U.S. will lose more jobs to Chinese automation if we don’t automate than we will to U.S. automation if we do. Since we are competing, you have to automate the best you can just to stay even.”
Douglas Gastich, an executive with BlueVolt, expressed a similar sentiment in his post for Industry Week: “I believe cobots can make U.S. manufacturers competitive enough to bring manufacturing back to the U.S. and scale operations. While that shift won’t bring back all the factory jobs lost to China and other countries, it’s bound to create construction, support and maintenance roles that wouldn’t otherwise exist.”
In a Robotics Business Review post, one analyst described the important role of robotics and automation in reshoring efforts, noting that “…robotics and artificial intelligence are likely to be the x-factors that tip the scales in favor of onshoring.”
And TCO is a big part of the equation: “Over time, these economics are likely to only become more attractive as the cost of robotics falls and labor costs continue to rise. Over the last 30 years, the average robot price has fallen by more than 50% in real terms while labor costs have increased over 100%.”
Predicting the Future
While predicting the future supply chain may be a daunting task, this Financial Times video offers a peak into what 2050 could potentially look like if reshoring trends and predictions become reality—The Future of Shipping: Robotics and Reshoring.