Recent disruptions in supply chains, caused by the Covid-19 pandemic, tariffs and ongoing trade disputes, have exposed the weaknesses and risks inherent in global supply chains. As a result, manufacturers are reexamining how they source, where they buy and how they manufacture.
Many companies that utilize complex global supply chains are realizing that their least expensive supply or manufacturing strategies bear the highest risk. International businesses have become extremely adept at developing global supply chains that consider variables such as long lead times, currency fluctuations and predictable interruptions (such as national holidays). However, less predictable disruptors – including the Covid-19 pandemic, tariffs and natural disasters – are causing businesses to reevaluate their cost versus risk formulas.
Total Landed Cost
The key to analyzing the cost versus risk balance is a company’s ability to calculate and measure costs correctly. The total landed cost model is the benchmark most businesses use to evaluate total cost in a supply chain to the point where a product arrives at a buyer’s doorstep. It includes the original cost of producing a product, plus transportation costs, customs, duties, taxes, tariffs, insurance, currency conversion, etc. Many businesses have begun taking a closer look at this math and are increasingly factoring in some of the less predictable risks in their total cost calculations.
When companies consider reshoring, they often realize a higher cost to produce in the US, but a reduction in other costs such as cost of inventory, travel, international property, duty freight, tariffs, etc. Deeper exploration of these elements should be part of your company’s supply chain analysis. The most desirable situation is to reshore the products where the savings on overhead and risk is greater than the increased manufacturing cost.
Challenges to Reshoring
Unfortunately, reshoring products is not as simple as flipping a switch. Challenges involved with moving manufacturing back to the US include:
- Unwinding contracts with current foreign suppliers
- Lack of skilled workers in the US labor market
- Premiums that will be paid to hire skilled workers (when you do find them)
- Costs to train lesser-skilled workers
- Capital expenditures required to invest in automation and new technologies
CSH is not necessarily advocating for manufacturers to reshore production to the US – we believe what’s best for one company might not be right for another. If reshoring is not possible, even a broader spread of supplying countries would help to mitigate risk of interruption as those who have relied too heavily on China have recently experienced. In any case, we recommend that manufacturers and others sharpen their pencils and reevaluate their cost vs. risk calculations. When businesses factor in the everyday challenges of an offshore supply chain, the resources to maintain it, and worse, the cost of interruption, more and more manufacturers are taking a long, hard look at their current strategy.
Clark Schaefer Hackett has operations and supply chain experts who can help you analyze your cost/risk calculations and discuss the logistics of moving production to the US. Additionally, we have workforce professionals who take a hands-on approach to training, educating and equipping frontline leaders and workers with the tools and technology they need. Contact us to learn more.