Supply chain organizations in many nations have long pursued outsourcing as a key business strategy. Manufacturing their products in countries with low labor costs, primarily China, resulted in reduced costs for both the companies and their consumers. However, this also came with some trade-offs. For starters, outsourcing lengthens supply chains and transportation timelines. And operating in different countries and time zones, speaking different languages, and practicing different cultures all serve to create communication lags and barriers. In addition, quality is sometimes inconsistent or inferior to domestic production. Plus, outsourcing takes away jobs from local production workers, which often pushes these people into service roles and reduces wages compared to more lucrative supply chain careers.
Many industry and government leaders decided that the cost savings, as well as the increased trade among nations, outweighed these negatives. Not to mention the fact that the business flowing into developing countries improved wages and working conditions, making workers there more able to afford goods and services from other countries. For several decades, globalization seemed to have the desired effect. China became a major manufacturing country; Russia, a prime source for raw materials and energy products. Both appeared to be receptive to becoming a part of the global community.
Yet the advent of international outsourcing also complicated supply chain management. Information systems had to be established to coordinate transition points. Supply chains had to be segmented into separate pieces as products moved through changing hands. Building these systems was a challenge, and third-party logistics providers abounded. Supply chain transparency became a theme that spawned new techniques such as supply chain control towers and digital twins. A minor complication was that outsourcing conflicted with just-in-time and lean manufacturing. Both of these approaches stressed the need to operate with minimum inventories by building tightly coupled supply chains. However, this became more difficult as supply chains spread throughout the world.
Even while the outsourcing movement was moving ahead aggressively, some began to question its economic feasibility. Critics posed the need to develop a total cost analysis that incorporated not only the purchase cost, but also the increased investment; the higher cost of transportation, distribution and inventory; and the growing risk of disruption. While this approach seemed logical, few importing companies considered it necessary as long as goods were flowing relatively smoothly.
Recently, supply chain decision-makers have been rethinking their outsourcing practices. COVID-19 disrupted networks everywhere; the U.S.-China trade war is increasing political tensions; Russia’s invasion of Ukraine led to an energy crisis; political unrest continues in the Middle East, Iran and Afghanistan; and communistic tendencies in China and Russia are escalating. Further, the more supply chain partners a business has, the greater its cybersecurity risk. All of these factors have contributed to globalization losing its appeal.
There are also environmental, social and governance (ESG) issues to consider, as longer trade routes contribute to global warming, and having more tiers of suppliers increases the likelihood of employee exploitation. This creates serious ethical, resource allocation and financial considerations for organizations.
With today’s keen focus on supply chain resilience over simply lowering costs, supply chain disruptions are no longer considered just an inconvenience; they’re potential disasters. The Reshoring Initiative posits that reshoring is the fastest and most efficient way to strengthen any economy because it:
- Helps balance trade and budget deficits
- Reduces unemployment by creating productive jobs
- Lessens income inequality
- Attracts skilled workers to manufacturing by demonstrating that it is a growth career
- Supports the broad industrial capability required for national defense.
Roadblocks to resilience
Although reducing dependence on foreign suppliers sounds logical and even patriotic, it requires a major shift in the way companies operate. Many business leaders have spent most of their careers outsourcing and have little experience reversing it. Now instead of managing suppliers, they need to build and manage their own manufacturing operations.
Another major obstacle is lack of capacity to make products. Companies require resources and funds to invest in domestic facilities. Sometimes, they need to appeal to the government for financial help. Furthermore, as manufacturing moved offshore, many traditional manufacturing towns broke up, and the workforce dispersed both geographically and into other industries. This means that there may not be professionals with the skills and knowledge to make certain products. In fact, in the United States alone since 2002:
- The tool and die and jig fixtures industry lost 46% of its workforce
- The industrial mold manufacturing industry lost 45% of its workers
- The nonferrous foundry industry lost 37% of its workers
- The ferrous, iron and steel foundries industry lost 34% of its workforce
- The cutting tool and accessories industry lost 27% of its workers
- Machine shops lost 21% of their employees
- The forging and stamping industry lost 17% of its workforce.
Many of the old manufacturing facilities have been converted to apartments and stores, forcing reshoring companies to rebuild their manufacturing operations from scratch. However, this also gives them a valuable opportunity to integrate some of the latest technology, including robotics and additive manufacturing.
A number of industries, some critical to national security, are at risk. The most visible of which is the semiconductor, or microchip, industry. Demand for chips has grown tremendously. At the beginning of the pandemic, many people bought laptops, gaming consoles and other electronics, causing demand to skyrocket. This is exacerbated by increasing digitization of automobiles, which can contain thousands of chips; more smart appliances; and the expanded use of the internet of things. In the United States, the government is encouraging more investment in domestic production with the CHIPS and Science Act, which was signed into law in August 2022. The legislation provides $52 billion to strengthen semiconductor manufacturing, including $39 billion for manufacturing incentives, $13.2 billion for research and development and workforce training, and $500 million for international information communications technology security and semiconductor supply chain activities.
As a result, several companies have announced investments in U.S. manufacturing. Taiwan Semiconductor Manufacturing Company committed at least $12 billion to build a semiconductor fabrication plant in Arizona, with production expected to begin in 2024. Intel plans to build a $20 billion semiconductor manufacturing plant in Ohio. And Micron announced plans invest up to $100 billion in a massive semiconductor factory in upstate New York. Despite these ambitious announcements, it’s unlikely the United States will become completely independent of foreign suppliers.
Another industry that has been heavily dependent on foreign suppliers is telecommunications, especially mobile phones. For instance, Apple had outsourced almost all of the production of its mobile phones to China. At one point, its giant factory in Zhengzhou, China, had as many as 300,000 workers making iPhones and other Apple products. This location alone produced about 85% of the Pro lineup of iPhones. However, the COVID-19 outbreak and employee protests about wages and working conditions caused severe production disruptions.
The medical supply industry is another serious problem. China has been a major supplier of masks, latex gloves and surgical gowns, along with some drugs and the key components in many medical devices. But frequent lockdowns stymied production, resulting in life-threatening shortages. According to the Council on Foreign Relations, before the pandemic, Chinese pharmaceutical companies provided more than 90% of America’s antibiotics, ibuprofen and hydrocortisone, along with much of its acetaminophen and heparin. Gartner analyst Salil Joshi explains the problem is more than just about outsourcing: The medical supply chain function has too often been considered transactional, with few businesses investing to make these supply chains resilient. Data, systems and collaboration with suppliers must become priorities. Per the American Hospital Association, “It has become increasingly clear that the level of fragility across our national medical supply chain is unsustainable and poses significant risk to hospitals and health systems, as well as the patients and communities they serve. To mitigate these challenges, investment aimed at strengthening the supply chain is crucial.”
Creating resilient supply chains remains a challenge for most businesses. One of the main stumbling blocks is deciding how much to invest in resilience-building programs. Without a clear financial case, such investments often fail to materialize, or companies compromise with half-hearted efforts that don’t achieve their resilience objectives. While it’s easy to measure out-of-pocket costs for a product, it’s more difficult to measure the cost of disruptions and the savings that could result from increased resilience measures.
Choosing between outsourcing and reshoring, or globalization and localization, also is a geopolitical issue. Governments are largely on the side of reshoring and present it as a security consideration, such as in the case of microchips for military applications or medical supplies in advance of the next pandemic. Russia’s invasion of Ukraine has prompted European countries to seek new energy sources and other countries to seek other food sources. Carried to the extreme, this would mean that every country should have only domestic sources for the goods they need. Globalization, or free trade, would end. However, it’s unlikely that even the most extreme politician would be willing to take this position.
Businesses must adopt a more balanced perspective. Does a decision to reshore mean giving up the opportunity to sell goods and services to those countries? While consumers in those nations may be willing to buy, would the government allow it? Would these governments also impose sanctions or restrict the inflow of goods from countries that stopped buying from local companies? With these questions in mind, the CEOs of multinational companies face a challenging future.
Perhaps there’s a compromise. Not everyone wants to bring all goods that are presently offshored back within local borders. Some are advocating a more temperate response or finding suppliers that are more acceptable, both to governments and businesses. For example nearshoring and friendsourcing suggest finding suppliers that are in nearby countries that are more aligned with domestic interests. Although this sounds reasonable, there may be ESG complications and disputes between federal and local governments.
In her book “Homecoming: The Path to Prosperity in a Post-Global World,” Rana Foroohar offers this analysis of the situation: “We are entering a new era of localization. This doesn’t mean that all things global will fade. Quite the contrary. Ideas and information will still flow across borders, perhaps even faster, as the world economy becomes more digital. … There will be a rethink of trade rules, labor rights, and how to figure the costs and benefits of economic growth into the data that policy makers use to shape our world. Business won’t be just about shareholders, but also about stakeholders. … All these seismic economic transformations are just getting started. There is no going back.”