Realigning the Supply Chain
For the past 20 years, manufacturing moved operations from the U.S. to East Asia to take advantage of cheap labor. This approach dominated manufacturers’ strategy, paving the way for a status quo where low-skilled and large-scale manufacturing was done in China. But COVID-19 — coupled with rising wages in East Asia, trade tensions, and a tariff war between the U.S. and China — undermined the business logic of a long, extended supply chain with all of its potential chokepoints along the way.
Today, the status quo is no longer tenable: The impact on the supply chain of a tanker running aground in the Suez Canal and bringing shipping to a halt is no longer a “what if” scenario.
Companies with operations abroad are looking to shore up their logistics and move operations closer to the U.S. And it’s not just U.S. companies making these calculations. Increasingly, foreign companies are building plants in the U.S. and in nearby countries to be closer to the world’s biggest economy — and to position themselves strategically for growth.
A “Goldilocks” Scenario for the Economy
The pandemic — and the lockdown — produced one of the sharpest declines in U.S. economic activity since the Great Depression. But because the recession was driven by an exogamous event, rather than arising from internal factors (such as inflation, overleveraged consumers, a real estate bubble), the economy has proven resilient. Given the pain that the pandemic inflicted on the U.S., the fundamentals of the economy remain relatively healthy. More importantly, growth is about to become the name of the game in the United States.
By Memorial Day, a large portion of the adult population within the U.S. will be vaccinated. It’s possible that by summer, herd immunity will be achieved. That’s not to say that precautions will not remain. But the worst in all likelihood is behind us. Companies that succeeded in battening down the hatches and survived the pandemic are seeing the light at the end of the tunnel. Stimulus checks have hit bank accounts, people are getting vaccinated, weather is improving, and the fundamentals of the economy are showing strength.
It is possible that we will have a Goldilocks moment — fast and sustained growth, inflation that moves up gently (but not too much) and interest rates that rise (but not too much). Jamie Dimon, Chairman and CEO, JPMorgan Chase, annual letter to shareholders 2020 Along with the recently passed COVID-19 relief package, the Biden administration is looking to push through an infrastructure bill to repair roads and bridges, bring high-speed Internet service across the country, and seed innovative areas for growth. Moreover, the Federal Reserve has indicated that it holds steady on monetary policy, allowing the economy to run hotter than usual to repair the damage from the sharp downturn. These macro issues matter greatly. Companies that have survived the tumultuous year and are stable are asking themselves, how do they make sure they don’t put themselves in a position where, if another external black swan event hits, it takes down their business? How can they build resilience — and, conversely, how do they act strategically and take the next step toward fueling growth?
Take a Strategic Approach
The most difficult competitor firms face is not necessarily other companies — their most difficult opponent is the status quo, inertia, and resistance to change. And there’s good reason for that: redoing and restructuring the supply chain is a big undertaking. It’s no small matter moving an operation and contemplating things you haven’t had to contemplate for 20 years. (See Case Study.)
That’s why it is important to revisit your strategy toward the supply chain and undertake an analysis to evaluate the possibility of nearshoring and/or onshoring your business. By moving your base of operations closer, you mitigate risk. You can reduce potential chokepoints, exert better control over operations, and eliminate logistics issues. You also remove another source of uncertainty: becoming the victim of a tariff war and trade tensions arising from currency manipulation or rising costs of labor.
Secondly, if you decide to onshore operations to the U.S., the analysis will give you a framework for those actions/considerations to keep in mind as you search for a new site. In selecting a site, it’s key to understand your supply chain, what you’re making, and what region might make sense, and then understanding which site characteristics are important for the company’s project.
Knowing what the site actually entails and being able to move on it quickly — rather than waiting for an understanding of the geotechnical aspects — can eliminate or mitigate uncertainty. Has the site been certified and is it ready for development? Has surveying, mapping, and platting been done upfront by the state or community so that the project is made easier? All these things simplify and speed up the development process.
Onshoring: Risks of Going It Alone
We’ve talked about the risks of maintaining operations far away and of the benefits of bringing things back home. But there is also another risk companies face in onshoring and site selection: the tendency of companies to do the analysis in-house.
Organizations often take the view that no one knows their product, systems, and processes as well as they do and that they’re best able to analyze whether relocating, nearshoring, or onshoring is right for the company.
While that may be true, few companies have the resources to dedicate to analyzing the many options. The same team being asked to evaluate complex strategic decisions have other day-job responsibilities. It’s very difficult to pull that off while minding the shop on a day-to-day basis. As a result, companies underestimate the difficulties of onshoring and site selection and decide to move forward or, conversely, they pass on the opportunity, when they should go forward with it. It’s usually advisable to engage short-term external support for a long-term solution, rather than pulling the team from the day job, i.e., what they’re trying to do with internal resources.
The COVID-19 pandemic was a disruptive and transformative experience for companies, especially manufacturers and their supply chain, exposing organizations to risks that few had considered prior to the pandemic. Consequently, the long-held argument among businesses of basing manufacturing in China and Asia to leverage its pool of cheap labor is no longer as compelling as it once was — as witnessed in shortages of vitally needed PPE supplies at the onset of the pandemic. The solution is to bring some of that manufacturing back to the U.S. and to countries that are nearer and more stable.
Companies are taking a long, hard look at their supply chain and logistics, and rethinking where they do business to lay the groundwork for the post-pandemic surge in growth — and mitigate their exposure to disruption. In making these plans, the issues of place and overarching business ecosystem have never been more important. It’s critical to consider a number of key factors in scouting sites and planning facilities — factors such as a deep pool of trained and qualified labor.
Undertaking the analysis will provide you with a clearer view as to what to consider in the months to come to position your company for growth. It’s both an opportunity for resilience as much as it is to make decisions that will help you grow in the coming years.
A Case Study in Becoming an Omnichannel Player
A publicly traded home-improvement products manufacturer historically sold its products to big-box retailers, distributors, and specialty retailers. Given the backdrop of a predictable demand landscape, the manufacturer set up operations offshore in the Far East.
Suddenly, however, COVID-19 hit, and the demand landscape and the manufacturer’s business model underwent a paradigm shift. People are spending much more time around the house as a result of the pandemic; they’re making improvements to their homes; and they’re buying a lot more of these products. Meanwhile, the manufacturer’s big-box retailers and specialty distributor customers are changing their approach to order fulfillment from the standpoint that orders are now coming from almost anyone, at nearly any time, and can be fulfilled from almost anywhere. And they’re turning to the manufacturer to fulfill those orders directly.
That’s placed pressure on the organization to figure out how to become an omnichannel player: They’re asking themselves, “How do we fulfill orders that look like they’re shipping from the big-box or specialty retailer, but are actually coming directly from us? We’re drop shipping for somebody else.”
The company was not structured for it. It lacked the systems, the supply base, and the ability to package, label, ship, and track was nonexistent.
The company has put in a patchwork of temporary fixes to meet needs, but it’s inadequate for the long term. More importantly, they recognize that business will not go back to the way it was. It’s likely that their big-box retailers and specialty shops will continue to rely on them to drop-ship orders direct for them.
The company approached Baker Tilly to work with them to help them assess their current capability to respond to their customers’ needs. Based on the gaps, what should their ideal omnichannel design look like? How should it be designed, simulated, and then launched?